TRADING IDEAS - POSITIVE ON EUROSTOXX 50

This is a new section of the blog where I share my view about possible long term ideas .
With the label "Trading ideas (no model)" I write ideas based on my own judgement and not my models.I can cover all assets I can trade worldwide.
the first idea for this year is a trade bullish on Europe, in particular the index Eurostoxx 50.

Recent move from ECB makes me optimistic on Eurozone equity for the next 4-6 months.
Even in the case of Tsipras victory in Greece, I think equities will be able to contain the short term volatility (buy on dip).

Based on recent history (US & Japan), QE had a good effect on equities at least for few months.
Charts shows the multi year breakout of the index thanks to expectations (realized later) about ECB new monetary policies. Moreover Draghi talked about QE effect to raise equities and real estate (it says like a statistic of past QE, I read it like its target)
If ECB is able to keep rates and € low for other months, we could have positive surprises from European earnings this year for Q1 & Q2 season. I am not sure we'll be able to beat deflation, but in the middle of the year market could believe it's possible and reward stocks.

HOW I AM PLAYING IT
Don't know if models will shift to euro equity at the end of the month (see the end of post for further considerations), but I'm going to try this trade for the 2015

My ideal target for the year is the range 3.900-4.400. Don't know if will take months to be touched, let's say that I believe the lower band will be touched in 2015.
Here how I'll play it (unless Greece elections change my mind in the short term):

• Usually European indices moves in a zig zag style. It means that you have positive weeks followed by 1 negative even if there's an uptrend. Last week was the second consecutive positive week, a third one is not likely, a fourth one is very unlikely...
• Because "zig zag" I'll start with a conservative approach. I'll sell put 3 months (April)with strike in the lower orange area. Level 3000 is the area for income, level 3200 is my ideal entry levels. These will be my strikes.
• I'll also enter a long position in 3 steps: 1st next week 20%; 2nd and 3rd if there's a pull back, 40% each. 

I think this is a conservative approach for a quite long term trade (if things don't go bad...). I could also go long 100% next week, but it's not my style enter 100% in one shot. Another possible plan would be to go short put otm and long call otm, with a long maturity. Don't plan to do it for myself.

STOP LOSS - As things can always go bad....I'll place stop losses below 2790 (October low) for optioons and below 2900 (December low) for the long

NOTE: if models 1-2-3 will go long euro equity (Dax or Ftsemib) for February, then my long strategy will be limited to put and I'll close my 20% long.
NOTE 2: as always, these are my considerations and if you follow me, you'll be responsible for your investments. 

MODEL 3 - I WANT MY RISK

This is my third model, the one I appreciate most as an alternative to the pure B&H equity allocation.
I think  it can deliver more consistently in the long term, reducing the "ruin risk" (excluding one black swan event that can happen suddenly every moment).

Basically MODEL 3 invests in the same 10 ETF of MODEL 2 with a different approach.

1. Dax
2. Emerging Bond in $ 
3. Euro inflation bonds
4. Euro govt 1-3 years
5. US Equity
6. Ftsemib
7. HY Euro corp bond
8. Gold 
9. Treasury 7-10 years
10. Euro govt 15-30 years

All asset return are calculated from an € investor point of view (me) and ETFs reflect both asset performance and currency effect. To simplify the calculation I used the benchmark value (total return index).

At the end of each month the model allocate on 2 ETFs (the first and second in the rank), adding more diversification than MODEL 1 & 2.
The chart below shows how the model selected its allocation among all ETFs since 2001 . I appreciate a lot this model because I think is quite flexible and reactive to the events.
I also noted that with 2 ETFs I have much more consistent results instead of just one, even if commissions arise of course. Is not uncommon to see in one month ranking 1 etf dropping, while ranking 2 rising or viceversa.

The table shows annual results. Of course in real they will differ because you have commissions and slippage, as you won't always be able to get the perfect entry price. Moreover there's the market maker bid/ask and you'll pay taxes on capital gains reducing the benefits of coumpounding returns. But I think that in the good years you'll be rewarded regardless.

In the chart below you can see the gross performance over time.
I want point to two factors:
1) MODEL is not hyper-optimazed, because I want it real.
2) THE IMPORTANCE OF "FAITH".


As you can see you have some bad periods even if the the Yearly return table everything looks nicer. You can have long periods of flat/negative returns (2002 to part 2003 & 2006 to middle 2008) and also some bad corrections with consecutive negative monthly returns.
Because of this, faith in your model is essential and you must continue to follow it.

As I wrote in my introduction, investment is like agriculture. You have good and bad years (you don't know earlier, you can only suppose and/or hope) and you must follow a method that: a) rewards in good years; b) limit losses in the bad one.
Nobody knows how 2015 will be, many assets are quite overextended (especially in the fixed income) and could be a year either as 1999 (stock bubble foam building up...) or 2008 (crash).  This week SNB's move shows that 2015 isn't a normal year.
I believe that approaching it with an active model, fast to react to changing developments will be the best choice.


In Summary: this is my favourite model for an higher risk taking part of portfolio and is not hyperoptimized.
It selects 2 ETFs each month in a 10 ETFs'universe. 
Even if it had its bad years, it delivers consistent returns in the long term.
NOTE: allocation for January: A) 50% Treasury 7-10years B) 50% Euro Govt 15-30 years


I plan to build over 2015 an evolution of this model that can choose among 30-40 assets, but it's still at an embryonic state (it will take months...like a baby)

MODEL 2 - PRUDENT WITH BRIO

This is the second model I developed. It's based on the same algorithms of MODEL 1, but allocates within 10 asset classes instead of 7.
Basically I added the gold (in€), Euro government 15-30 years and Treasury 7-10 years.

The table below shows that yearly returns improve with more assets, in line with more volatility.
The model loses money in some years (2007 and 2010), but is a winner in long term.

In the pie-chart you can see the allocations: again you have zero allocation in some assets such as Dax, Gold and Inflation bond. Equity allocation continues to be very low and most of time is a choice between Short term bonds, Govies € or $ and High Yield/inflation bonds.

Because of the low equity allocation, MODEL 2 is quite defensive, but more aggressive than MODEL 1

Finally graph shows that MODEL 2 (INDICE) outperforms all other assets in the long term (taxes on capital gains and commissions not included).

In summary: MODEL 2 is more aggressive than MODEL 1, but still conservative because most time is on bond. Increasing asset universe led to higher returns, with a small increase in volatility.
One cons is that it the low allocation on equity (and none on gold) therefore I'll do further studies in the future to see if I can find other assets that improve the model. At the moment I'll let it run with the original setup.
In the next post I'll describe my favourite model, that is quite more aggressive and based on a different setup, but still quite conservative (as I am).
In the future I'll also explain how different models can be "diversified" in a single one to obtain a good strategy. But I'll let this for next months.
NOTE: for January the model is allocated on € government bond 15-30, in line with December position

Introduction

I am an Italian professional working as Strategist in a bank,
I have a passion for markets and decided to open this blog to write my thoughts, ideas and explain how is possible to approach markets as an investor point of view.

I see the markets like a farm. You must know the product you're going to cultivate (pros & cons), find a method that is expected give you a positive result and finally realize that non all seasons (years) are equal.

Like a farmer you can have good years and bad year (not depending by yourself but due to exogenous factors)- Is important to understand that you must be prepared for the bad year trying to limit losses and exploit the good ones.

In this Blog I'll show some of my methods I built over time to decide my asset allocation, most of them based on the momentum.
Past results are not a guarantee for the future, but they make sense that can continue to be profitable in the long term, even if can happen 1-2 year of bad performances.
I realized in these years that to be able to have solid results, you must diversify models (like with assets), exploiting the low correlations

In the coming posts I'll show some models I built, but please don't write me to ask for algorithms. I consider them as proprietary copyright.
Once i explained one model, I'll begin to update it every month with the new allocation.
You can read this blog as starting point to create your model based on your risk aversion. As i use them for my core wealth, my models are quite prudent.

Enjoy the blog and let's hope 2015 will be a year with a good harvest...even if we came from a very long bull markets in US.
Let's begin with this tracking in real time for 2015.
NOTE: Even if I give monthly allocation, you're deciding to invest at your risk and I  don't feel myself responsible for eventual losses. I'll be already losing on my own...

MODEL 1 - THE PRUDENT INVESTOR

This is my oldest model based on momentum and filtered to keep volatility very low.

At the beginning of the month, the model selects one of 7 asset class, allocating 100% of capital.

As asset I use Ishares ETFs listed on Borsa Italiana
1) Government 1-3 years 
2) Italian equity (Ftsemib)
3) USA Equity (S&P500 since 2003)
4) German equity (Dax)
5) Euro High yield (since 2005)
6) Emerging bond $
7) € Inflation bonds

The chart shows the model index (INDICE) vs other 7 assets. I didn't include transaction costs. Model 1 outperforms all 7 asset but Emerging Bonds in hard currency.

The table shows yearly performance since 2001 with some risk parameters (no cost included). You can approx take out 1% a year because of the low turnover of the model. Basically it never closed a year in negative, even if  returns 2012-13 weren't high.

In the graph you find the asset allocation since 2001. Model 1 was conservative going on Governatives 1-3 years most of time, with Euro high yield bonds at the second place.
It's a result of the low volatility filter I used that often excluded equity and Emerging bonds.

Summary: this is my oldest model. In the past I used it for my core portfolio.
Because it often allocates in the short term bonds (now yielding 0.3% with 0.2% Etf expense), it's important to add a second model that diversifies assets.
Stay tuned for next update with the evolution (already working in real)
NOTE: Model 1 January allocation is again on Eurogovt 1-3 years