timwest

PAIRS TRADE - Buy Baker Hughes, Sell Short Goldcorp

BATS:BHI   BAKER HUGHES INC
468 10 3
A picture tells a story of thousands of words: You can see how these stocks oscillate together over the days and weeks of the last year but at times they get away from each other.

Lately, all of the excitement about the lift in gold             prices has pushed up the price of Goldcorp ( GG             ) and now it appears to be withering on the vine while Baker Hughes             ( BHI             ) is down and out on the recent slide in crude oil             prices from over 100 down to 90.

This process cuts down on the overall market risk, which you can argue about all day long whether the market is going up or going down, but the individual company risk you take on rises because you have specific risk in having positions in each company. I, personally, am willing to take that risk over the market risk, but that is just my personal taste.

If you go to stockcharts.com and plot the ratio of this relationship, you can see the pair in a different perspective, but this shows that there appears to be good odds that this pair will narrow its spread over the coming days and weeks.

Risk 5%, Upside 8%.

Tuesday, 3:33PM EST October 2, 2012

Technical Tim
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lucky human foot
4 years ago
You think the recent decoupling of oil from gold and spy has an influence on this chart?
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timwest PRO lucky human foot
4 years ago
The recent decoupling is what attracted me to the trade. Sometimes decoupling can only last so long or can only go so far. I laid down a loss limit of 5% to prevent me from staying involved too long or risking too much capital. I think gold will catch up to oil, just my level of thinking. When all the announcements about creating capital can't get gold to rocket, then assets in general are due for a correction. The same situation happened a year ago when I put my first sells on SILVER (SLV) here at Tradingview. There were many calls for QE and fiscal stimulus announced to boost the economy and gold and silver couldn't rally. Then, magically, silver and gold took a pounding. As for this year, the difference is only that it is an election year and perhaps there is some element of manipulation around the oil market and driving down the price ahead of the election. That is purely speculation, but I wonder if you go back and look at Sep-Oct in election years and see if there is a pattern. So, that may explain some of the spread between these markets. I do keep my thoughts on how the markets will maneuver and I hope we can keep catching reasonable returns for the risks we are taking. What are your thoughts?
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timwest PRO lucky human foot
4 years ago
Here is another way to look at this relationship at stockcharts.com http://stockcharts.com/h-sc/ui?s=OIL:GLD&p=D&b=5&g=0&id=p78622979797
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timwest PRO
4 years ago
 
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timwest PRO
4 years ago
This pair is working nicely overall: BHI is the long position, but it is down 1% and losing and GG is the short, but it is adding 5% to the return for a net return of 4% so far. I'm tempted to pull the trade off, if only for the reason that the GG is very oversold after dropping down from a peak near $47 to below $43 now. I could see GG lifting back to 44+ before heading down to the $40 or $41 level. Also, I don't see crude oil lifting from oversold, so I don't like the long side of the trade now. So, very clearly - I'd suggest exiting the overall position at a very nice profit. 12:01PM EST Monday, October 15, 2012
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timwest PRO
4 years ago
EXIT THIS PROFITABLE TRADE: GG 42.96 last (45.49 entry suggested on short position), BHI 44.46 last (44.85 long entry suggested)
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Algokid PRO timwest
4 years ago
Nice ! :)
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