Last Friday we traded a basket of defense stocks againts the XLI ETF (Industrial Select Sector). The goal is to take advantage of the spread spike displayed on the right side of the upper graph. The upper graph displays the price of 1000 * XLI minus the basket of defense stocks.
The lower graph displays the value of z-score. The last z-score recorded a value of 4.37 which is an extreme deviation away from the mean.
We sold the spike!
Defense stocks are trading down on an anticipation that defense spending will be cut dramatically. Gene Epstein at Barron's stated in his latest piece not to believe the hype about defense cuts.
We shall see if he is right or wrong. We view this trade from a purely statistical basis with time and price stops.
We have posted the detailed description of the basket in the forum section of our $spread premium product. This is the first time we expose our statistical basket data to the outside world. Dear users let us know what you think. For traders who do not have premium access to our product you can look at spreads between the $XLI and stocks such as $GD, $BA, $NOC and so forth using our spread analyzer.
