Long-only relative value with an index hedge and a crisis stop

The archive records a long-only relative-value workflow. A three-pass stochastic times a long stock against an index. While that stock is open, an index or inverse-index overlay can be added from the index trend. A crisis price floor from entry can force an exit if the relative-value exit never fires.

How the stress indicator times the long

Entry and exit are timed with a 60-day three-pass stochastic: one on the stock, one on the index, and one on the difference of those two readings. A long stock is opened when that third reading falls to or below 10 and is closed when it rises back through 50.

Mean reversion, in this construction, treats a stock as temporarily oversold versus an index and exits when that relative condition normalizes. The three-pass reading is the stress indicator that times the oversold state and the later recovery.

The long stock leg only

The construction takes only the long stock leg of a stock-versus-index pair and substitutes an index or inverse-index overlay instead of shorting the individual name.

When the index hedge is added

While a stock position is open, an index hedge is added only after a 60-day index trend turns down and is removed when that trend turns up. Beta hedging here means selling that index overlay so a long stock book is not left fully exposed in a market selloff.

Hedge size equals stock shares times the ratio of 60-day stock-return volatility to 60-day index-return volatility, then scaled by a hedge ratio. A hedge ratio of 1.00 is a full risk offset. A hedge ratio of 0.50 is half.

The crisis stop and the reset gate

A 20 percent decline from the entry price is required as a crisis stop because the relative-value exit can fail if the stock keeps weakening while the index trend stays up. The stop-loss is a crisis price floor from entry that forces an exit when that relative-value exit never fires.

After a stop, a new entry is blocked until the stress reading first returns above 50. That wait-for-reset gate blocks a new entry until the relative-value indicator has first recovered above its exit threshold.

Sizing, occupancy and the universe

Each name is sized as a fixed cash allotment divided by current price and is not rebalanced during the hold. The archive describes that hold as about eight days.

The archive describes mean-reversion occupancy as about 20 percent of the time, so a 25000-unit book is instructed to keep five concurrent names and replace any closed trade.

Pairwise correlation or co-integration screens are set aside. The construction assumes most S&P 500 names move with the index and filters the tested universe after results are known.