AGNC break out of 23 limit in Optimal Portfolio Selection Theory
AGNC has broke out of the 23 limit of my optimal capital allocation system. Hence, volume need to be watched and for follow through. If this caves and recedes, then this is just short covering, trading on market news. Remember "Risk" and "Risk Aversion" parameters don't change with a two month delay. A convenient way to represent short term phenomena is a probability distribution showing exponentially rising risk metric over time. My challenge here is to distil much of that info. into a single number assuming the distribution is symmetric, assuming the deviations above the limits and the deviations below the limits or means are empirically symettrical, then strictly speaking, this should drop just as fast and sharply. Didn't AGNC show a near .80-1.00 drop in price just a few days ago. Today, the rise is just as sharp, note the volume today compared to that other sharp down day, if symmetry holds, the random variable may normally be distributed to a bell curve.
Now, most people dislike uncertainty and variance. Portfolio managers or strategies want results with low standards of deviation than those with high standards of deviation. Hence, based on these high deviations ov the past week, there is intimately more uncertainty due to the greater variance and hence greater risk of fast losses or gains. Something is assunder, be on notice and be very careful, for capital and wealth preservation does not like increasing variance.
You may want to play the dividend capture phenomenum, by trading AGNC positive vairance on other REIT's reporting results. The two released recently, NLY and CYS still show decreasing yield spread, decreasing net, and decreasing book values as well as decreasing leverage. Hence, future profitability is still trending down and future dividends will get reduced. Hence, optimal portfolio selection theory says to use a short term trading strategy to capture positive variance upside and book profits quickly. Do not exposure yourself to Nov 5 earnings announcement or divy reduction announcements. Book profits on this positive variance, the magnitude is high indicating INCREASE RISK. So increase your risk aversion on these positive deviation days.
You made more than the divy in one day, optimal portfolio selection theory and modern efficient market theory says AGNC was fairly valued yesterday based on available fundamental news and todays positive variance extreme is not related to valuation metrics since many knowledgeable investors are in the market, AGNC is likely fairly priced at 22.50 yeasterday. Hence, todays one point rise makes the security overvalued and action is warranted if your expected return was the .80 for the quarterly dividend, hence you have captured the .80 plus an additional .20 bonus, with no risk to earnings announcement or divy announcement. Based on CYS and NLY, nothing much has improved, hence this theory SAYS BOOK THE DIVIDEND EQUIV. OF $1.00 FOR A RETURN OF 4.5% NOMINAL GAIN, WHICH IS ANNUALIZED AT 17.7%. If you bought at low end of the spread, you have $3 addl. capt. gain added to $1. assuming your cost was $20.