“What Goes Up, Must Come Down”

MarketsMuse ETF update is courtesy of a special trade post sent this afternoon to subscribers of “Sight Beyond Sight”, the global macro trade newsletter published by Rareview Macro LLC and authored by Neil Azous.  The trade alert was also posted to Twitter via @RareviewMacro. For those not familiar with the concept of mean reversion, the simplest metaphor that drives the following thesis is “what goes up must come down.”

As highlighted in this morning’s edition of Sight Beyond Sight, the ratio of the iShares U.S. Real Estate ETF (IYR) and Utilities Select Sector SPDR Fund to the SPDR S&P 500 ETF Trust (SPY) is now trading at approximately two standard deviations away from its regression line since US interest rates peaked in September 2013.

A short while ago in the model portfolio, we initiated a new mean reversion strategy in both of these ratios.

Specifically, we are buying $10 million notional each of IYR and XLU, and selling $20 million notional of SPY over the rest of today at VWAP.

Tomorrow, depending upon the results of the US Labor Report, we will add an additional $10 million notional each of IYR and XLU, and sell an additional $20 million notional of SPY in the morning.

Below is a thesis and trade matrix with a pre-defined game plan for gains and losses. Continue reading →