A robust market neutral long/short equity strategy during corrections usually identifies a few stocks that buck the trend. This is an example from yesterday, February, 20, 2018.
Yesterday the Dow 30 fell about 1% from the previous close. From the open to the close of the day the index fell about 0.64%, as shown in the chart below.
Below is the output of DLPAL LS for Dow 30 stocks with data from 01/03/2000 to 02/16/2018. The results show values of some key features of price action as of the close of February 16 and are sorted for highest P-delta (directional bias) times significance S.
It may also be seen that WMT that fell more than 10% on the following day, February 20, 2018, was indicated as a Short.
Below are the top/bottom 10% results, or 3 long and 3 short stocks, with returns calculation based on equal allocation. From close to close the top/bottom 6 stocks gained 0.42% and from open to close of February 20, the gain was 0.39%.
Note that DLPAL LS identified MSFT as a top 10% long and this stock bucked the trend with a gain of 1.36% from open to close. This provided a boost to the long leg since AAPL and MCD were little changed. On the short side, returns from BA and DIS nearly cancelled out and TRV offered 1% gain for short.
This is basically what one should expect from a robust market neutral long/short equity algo in short-term corrections and DLPAL LS offers it as we have documented based on backtests but also as our customers with skin-in-the-game have reported.
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