Some thoughts on most of existing algorithms here that shows good results in the backtests since 2002 exists in the system, in this period the interest rates were only going down, and any algorithm that works well on the last 7 years historically low interest rates, I predict that its impossible that rates will be so low looking into the future, its just about time till both inflataion and interest rates will go up and with that bonds ETF's prices will go significantly lower with stock market. The question is how can we hedge against this in the various algorithms (e.g. if we can measure interest rates increase trend with fundamentals and add inverse bond ETF or drop all bonds ETF from the portfolio)
Awesome question. I made a selection of companies that have a positive interest hike future and companies that don't. So every company that has highly leveraged balance sheet with refinancing close will have pain. Other companies that will profit from the increase in yield are companies like custodian banks, BK, STT, salary pay companies like PAYX, ADP, and brokers like ETFC, AMTD, SCHW.
This list is not an algo of course, but one could look at the past seeing whether rate increases have indeed a good influence on the above firms.
Just a hint, no solution.
It would be nice if you can publish your work here. Nevertheless, It is beleived that once interest rates will go up then the whole stock market as a whole will go down badly, so individual stocks may be less affected but still, this is a hedging routine that should be added to most of the published algos qouantopain which may suffer without it and I am looking for ideas/implementation for such routine.
You could always short utilities or find an inverse utility sector, or something of comparable behavior. Utilities and other set rate companies are bought because they behave similarly to bonds in terms of yield. When interest rates go up investors will exit the utilities to hold bonds that now have comparable yield but less risk. This will give you a nice hedge against rate hikes.
Thanks, my question is which indicator does quoantopain provides to measure interest rate so I can short utilities?
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