Market neutral investing is a stock market trading technique that seeks to profit from buying both bullish stocks and shorting bearish stocks at the same time. In other words, you aren't 100% long or 100% short, but using a market neutral strategy you are in both long and short positions and hoping that your shorted stocks will go down in price while your long stocks will go up in price. However, you don't just buy $50,000 in a long stock and short $50,000 of another stock, but somehow pick the quantities so that various investment risks cancel out.
Hedge funds specialize in creating market neutral strategies. Regardless of market swings up or down, and regardless of whipsawing volatility, they create market neutral portfolios designed to take advantage of any way the market turns.
If the market goes up and their risks are balanced, their short positions will go up less than the market does and their long positions will go up more than the market does. That spread differential creates a profit. If the market drops, their judiciously selected short positions will drop faster/more in price proportionately than the market, and their long positions will hold steady or drop less. Once again, they hope to make money from the spread differential and thus they don't worry about market volatility anymore.
Buy-and-hold investing is not the target of market neutral strategies. Market neutral funds shoot for absolute returns as opposed to relative returns. Fund managers want relative returns, so they're fond of saying things like "the market fell 12% this year and we only fell 8% so we did better." A market neutral manager wants to say something like "the market dropped 12% this year but we made 10%."
If your risks are balanced and you take equally weighted longs and shorts, with a market neutral strategy you don't worry about wild market swings at all. At worst your portfolio return is zero because your longs and shorts balance out, whereas if you select them correctly you make a large differential.
There is no single one way to create a market neutral strategy. Hence many market neutral stratgeis and investing styles are possible. However, you can create a market neutral strategy on your own by using correctly computed factor seasonals. Here's how ...
For every "good" or "bullish" stock that you decide buy according to the strategy you will sell an equivalent amount of "bad" or "bearish" stock short. In this way you are balancing your portfolio, or hedging it, so that your portfolio's investment performance will not depend on the overall market direction, but on your stock picking abilities. You're betting that your "good" stocks rise and in fact outperform the "bad" stocks that you sold short, which you hope will decline. This is market neutral investing.
In fact, you can even do this and create your own personal big cap hedge fund with big stocks like the Dow Jones Industrials. Here are the traditional times of the year in which these stocks geneally go up or down, though of course we always project this into the future with our orange projection lines, which can radically change the general dates. I'm just showing you that even with the institutional big cap stocks, there are traditional times of the year when each stock tends to go up or down based on its own economic cycle.
Alcoa
Up Jan-May
Down Sept-Nov
In a Bear Market, up Feb-May, Nov-Dec
In a Bull Market, down Feb-Apr, Jun, Sept-Nov
American Express
Up Jan-June
Down Aug-Oct
In a Bear Market, up Apr-Jun
In a Bull Market, down Aug-Oct
Boeing
Up Nov-Jun
Down Sept-Oct
In a Bear Market, up Apr-May
In a Bull Market, down Oct
Bank of America
Up Oct-Aug
Down Aug-Oct
In a Bear Market, up Jan-May, Jul-Aug
In a Bull Market, down Aug-Oct
Citibank
Up Mar-Aug
Down Aug-Oct
In a Bear Market, up Mar-Apr
In a Bull Market, down Jul, Aug-Oct
Caterpillar
Up Jan-May
Down May-Oct
In a Bear Market, up Feb-Apr, Oct-Dec
In a Bull Market, down Jun-Oct
Cisco
Down Jan-Apr
Up Apr-June
Down Sept-Oct
Up Oct-Dec
In a Bear Market, up Apr-Jun, Jul-Aug
In a Bull Market, down Jul
Chevron
Up Nov-May
Up Aug-Oct
Down Oct-Nov
In a Bear Market, up Mar-May, Nov-Dec
In a Bull Market, down Oct-Nov
Dupont
Up Oct-May
Down May-Oct
In a Bear Market, up Feb
In a Bull Market, down May-Jul, Sep-Oct
Disney
Up Oct-Jun
Down Jun-Oct
In a Bear Market, up Nov-Dec
In a Bull Market, down Jun-Jul
General Electric
Up Feb-May
Up Aug-Dec
In a Bear Market, up Apr
In a Bull Market, down Oct
General Motors
Up Jan-May
Down May-Jul
Up Jul-Sept
Down Sept-Dec
In a Bear Market, up Apr
In a Bull Market, down Sep-Oct
Home Depot
Up Jan-Jun
Down Jun-Oct
Up Oct-Dec
In a Bear Market, up Nov-Dec
In a Bull Market, down Mar-Apr, Jun-Jul, Sep-Oct
Hewlett Packard
Up Oct-Jun
Down Jun-Oct
In a Bear Market, up Feb-Apr, May-Jun
In a Bull Market, down Jun-Aug, Sept-Oct
IBM
Up Oct-Feb
Down Aug-Oct
In a Bear Market, up Nov-Dec
In a Bull Market, down Jul
Intel
Up Oct-Feb
Up Apr-Aug
Down Aug-Oct
In a Bear Market, up Apr-May
In a Bull Market, down Feb-Mar, Sept-Oct
Johnson & Johnson
Up Feb-Jun
Up Aug-DEC
In a Bear Market, up Feb-Jun, Aug-Sep, Nov-Dec
In a Bull Market, down Jun-Jul
JP Morgan Chase
Up Jan-Jun
Down Aug-Oct
In a Bear Market, up Nov-Dec
In a Bull Market, down Jul, Aug-Oct
Kraft
Down Jan-Mar
Up Mar-May
Down Jun-Aug
Up Aug-Sep
Down Sep-Oct
Up Nov-Dec
In a Bear Market, up Jan-May, Jul-Sep
In a Bull Market, down Jan-Apr, Jul, Oct
Coca Cola
Up Feb-Aug
Down Aug-Oct
Up Aug-Dec
In a Bear Market, up Feb-Apr, May-Jun, Oct-Nov
In a Bull Market, down Aug-Oct
McDonalds
Up Oct-Jun
In a Bear Market, up Mar-May, Jul, Oct-Dec
In a Bull Market, down Jul-Aug
3M
Up Jan-Jun
Down Jun-Sep
Up Sep-Dec
In a Bear Market, up Mar-Apr
In a Bull Market, down Sep-Oct
Merck
Up Jan-Jul
Up Oct-Dec
In a Bear Market, up Apr-Jun, Oct-Dec
In a Bull Market, down Jul
Microsoft
Up Feb-Jun
Up Aug-Dec
In a Bear Market, up Jun-Jul
In a Bull Market, down Feb, Jul-Aug
Pfizer
Up Sep-May
In a Bear Market, up Jan-Feb, Mar-May, Jul-Aug, Nov-Dec
In a Bull Market, down Jul, Aug-Sep, Nov-Dec
P&G
Up Mar-Dec
In a Bear Market, up Apr-Jul, Oct-Nov
AT&T
Up Mar-Dec
In a Bear Market, up Apr-May, Sep
In a Bull Market, down Jan-Feb
Travelers
Up Aug-Dec
In a Bear Market, up Jan-Feb, Mar-May, Oct-Dec
In a Bull Market, down Feb-Mar, May, Jul
United Technologies
Up Oct-May
Down Sep-Oct
In a Bear Market, up Jan-Mar, Mar-May, Nov-Dec
In a Bull Market, down Sep-Oct
Verizon
Up Mar-Dec
In a Bear Market, up Mar-Apr, Sep
In a Bull Market, down Feb-Mar
Walmart
Up Jan-Jul
In a Bear Market, up Mar-Jul, Oct-Dec
In a Bull Market, down Mar-Apr, Nov-Dec
Exxon
Up Jan-Dec
In a Bear Market, up Mar-Jun, Oct-Dec
You're smart enough to know that you can't just take this list and run with it, but must CONFIRM the price action of a stock to see whether the general tendencies are likely to come though in the immediate future. That's why we create adaptive factor seasonal price projections each and every month with our newsletters.
Remember that you're going to hold positions for less than 3 months in general, a bank CD Certificate of deposit is presently paying about 1.3% per year, and 1.5-2% return on a portolio per month is fantastic, and would give you a 18-24% return if you kept it up all year long. So if you make 1-2% per month from this strategy you're a superstar.
How would you do it? Every month our newsletters give you the orange line factor seasonal price projections of shares, and you can pick the ones that are following their seasonals on the long or short side. Buy some longs, balance them with some shorts, and you have your strategy. Put them in a porfolio so you're not betting it all on one stock, and you become diversified. Add more bells and whistles to add industry groups, and you diversify away risks once again.
Remember, you BUY only if the seasonal expectation is up AND the price has triggered a buy signal on some trend following price triggered system such as a MACD, moving average crossover, trend line break, etc. Or, you can simply use the selection criteria that your buy stock candidate is a top rated stcok according to IBD (Investors Business Daily), VectorVest or some other value rating service.
You can go long an industry by using ETFs, too.
As to the shorts, you find a stock that is heading down according to trend following criteria and the fact that the seasonal projection line is down. You can add the criteria that IBD, VectorVest, ValueLine, FusionIQ or some other system says it's a weak stock, or simply skip the trend following signal and go with the relative strength/valuation rating of these servicesif you're that sure of yourself.
There are lot's of ways to do it. Our point is that many systems out there can separate stocks into STRONG categories and WEAK categories.
Trend following systems can tell you if the stock is already going up or down.
However, those two together are to guarantee of profit. We add the seasonal expectation on top of that to create our own long and short, market neutral hedged portfolio, and then we sleep well at night during all this market volatility.
If the market tanks, our strong shares should hold up and our shorts should do at least as well as the market on the downside, if not more. If it shoots up, our bullish heroes should outperfom the runup and our bearish selections should advance with less pace than the market overal, or just drop. We never bet on any one share to make a killing, but protect ourselves with seevral longs and shorts unless (until) cycles, trendlines, etc. indicate that we should be primarily bullish or bearish overall.
That's playing a market neutral strategy. You can definitely build such a portfolio with the assistance of the Factor Seasonal charts. It doesn't have to be an entire portfolio that is hedged market neutral, but any time you're taking longs and short together, think of it as a mini-market neutral portion of your trading account.
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