PAIRS TRADE - Buy Baker Hughes, Sell Short Goldcorp

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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