Market Overview

The Technician's Playbook: 11 Sector Pair Trades

The Technician's Playbook: 11 Sector Pair Trades
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A pair trade is a trading strategy, in which a long position is matched with a short position in a pair of highly correlated instruments such as stocks, options, commodities and ETFs.

It's essentially buying an instrument, which may be considered and underperformer, and selling another instrument belonging to the same sector, perceived to be an outperformer.

For two instruments to be considered for pair trading, one has to determine that there should be correlation in their stock prices for most of the time in the past. Even when there is deviation, there is tendency for normalcy to be established. The size of the position in each instrument should be determined based on the dollar amount and not the number of each.

This strategy helps one to make profit even when the market retreats, as only the relative performance of the paired instruments matters.

MKM Partners recently identified one buy and one sell from each sector based on the stocks relative trend to the sector.

MKM's Pair Trades

(first stock listed as a Buy, second stock listed as a Sell)

  • Consumer discretionary sector:Colgate-Palmolive Company (NYSE: CL) & Bed Bath & Beyond Inc. (NASDAQ: BBBY)
  • Consumer staples: Central Garden & Pet Co (NASDAQ: CENTA) & Nu Skin Enterprises, Inc. (NYSE: NUS)
  • Energy: Pioneer Natural Resources (NYSE: PXD) & Hornbeck Offshore Services, Inc. (NYSE: HOS)
  • Financials: Intercontinental Exchange Inc (NYSE: ICE) & Waddell & Reed Financial, Inc. (NYSE: WDR)
  • Healthcare: Agilent Technologies Inc (NYSE: A) & Envision Healthcare Corporation (NYSE: EVHC)
  • Industrials: Trex Company Inc (NYSE: TREX) & Triumph Group Inc (NYSE: TGI)
  • Information Technology: Teradyne, Inc. (NYSE: TER) & Manhattan Associates, Inc. (NASDAQ: MANH)
  • Materials: Olin Corporation (NYSE: OLN) & Kaiser Aluminum Corp. (NASDAQ: KALU)
  • Real Estate: CBRE Group Inc (NYSE: CBG) & Omega Healthcare Investors Inc (NYSE: OHI)
  • Telecom: AT&T Inc. (NYSE: T) & Verizon Communications Inc. (NYSE: VZ)
  • Utilities: NextEra Energy Inc (NYSE: NEE) & SCANA Corporation (NYSE: SCG)

MKM Partners clarified, regardless of the primary trend of the market, there are always different stocks in each sector that show relative strength and weakness. For long-short players, the firm thinks the above pairs offer attractive set-ups as pair trades.

See Also:

The '$5 Threshold' Trading Strategy Explained

The Fair Value Trading Strategy, Explained

Carter Worth And Mike Khouw's Coca-Cola Trade

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Jan 2019NeedhamInitiates Coverage OnBuy
Nov 2018Morgan StanleyMaintainsOverweightOverweight
Oct 2018Morgan StanleyMaintainsOverweightOverweight

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