Don't consider investing in WSO now, it is risky at the moment
07 Dec, 201813 min read
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WATSCO INC is a falling knife that can bleed you if you catch it on Friday. It returned -1.46% to close at 152.05. On a day when the overall market breadth was 35%, it closed higher than 11% of the market. In comparison, the benchmark SP500 index closed today at -0.0233%.
WSO showed a strong down trend over the last 3 months. During this period WSO returned -15.56% and saw a maximum drawdown of -22.84%. There were 2 short signals during this period that returned a cumulative of +10.97% to investors.
WSO has been outperforming the SP500 index in recent time. Over the last 2 years 11 months and 3 days, WSO outperformed the SP500 index on 54% days.
During the last three months WSO was mostly loss making and delivered on average -0.26% per day. It's best return during this period (of +4.74%) was on Wednesday, 31 Oct, 2018. While it's worst loss in the same period (of -3.44%) was on Thursday, 11 Oct, 2018. There was initially a bearish trend during this period which started on 24 Oct, 2018 and went on till 30 Oct, 2018. The trend delivered -11.92% losses to investors. This was followed by a bullish trend that started on 31 Oct, 2018 and ended on 5 Nov, 2018. This bullish trend delivered +5.45% to investors.
On monthly basis, WSO delivered profits and losses in equal number of months. WSO delivered profits less regularly than SP500 index. WSO was also a more risky investment than SP500 index as it's worst month in the last year, Oct 2018, returned -15.12% compared to -7.28% returned by SP500 index in Oct 2018. WSO had a shorter streak of profitable months than SP500 index. It only went up in 2 straight months during the last year.
The only limit to our realization of tomorrow will be our doubts of today.
-- Franklin D. Roosevelt
WSO is becoming less volatile overall. In comparison, the SP500 index is seeing a rise in volatility. During the last three months, there was a significant surge in WSO's volatility from 18 Sep, 2018 to 31 Oct, 2018. While there was a significant surge in the SP500 index's volatility from 10 Sep, 2018 to 29 Oct, 2018.
Advanced/professional short-term investors should note that WSO has significant positive skewness in it's return distribution. This indicates that investors can expect WSO to recover from drawdowns quickly. Which makes WSO a good candidate for investing on short-term bullish trends or even counter-trends hoping for a pull-back.
SP500 index has more chance of extreme outcomes than WSO. Therefore, SP500 must receive a lower allocation than WSO in your portfolio. SP500 index usually has shorter drawdown period than WSO.
On a general note (since you are interested in WSO), two instruments that have been extremely volatile in recent times are VIPS and IX. Investors in these instruments should consider reducing their exposure (to VIPS and IX) and diversifying their portfolios.
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