The Market and the Debt Debate

The market has been going down for the last five days and VIX has jumped from 18 to 25. VIX is the fear index. 25 is not much fear – real fear has driven the VIX into the 50s and higher in the past. So what are we to make of the market? Do we pull out?

Well, let me start by looking at the SPY chart. Still same signal as back in 2/23/11, which was an Exit on Long. Since tops take a while to form, I would call that an early warning signal. Doesn’t mean a top is necessarily forming. Certainly has been a pause for the markets after the straight run up from last September to February. I put on hedges on my portfolio since then. Yes – the hedges have cost me some profit as the markets have been going sideways, but I can live with that. Better to have the protection and still follow my game plan. I hedge with SPY put options but I recently read about placing hedges with call options on the VIX. Not a bad idea for sure, as the VIX goes up when the market goes down and call options would gain value as the VIX increased. Right now I am partially long with hedges in place and have a small long position on GLD, rest cash.

The smart people we have sent to Washington to represent us can’t seem to agree on anything. I don’t understand why the politicians can’t compromise to do both – raise taxes on the rich, close loopholes, take away the tax breaks for oil companies who make billions every quarter, but also reduce expenses like getting out of wars, cutting off waste and fraud, putting limits on Medicare spending per person, and also reducing the size of some of those Government departments as any business would have to do. As a family we are expected to balance our budget, and so should the Government. But after living fat for so long on credit cards given to us by the Asians and others, it will probably sink us into another recession if we take all the candy and guns (wars) away. What will the big war machine companies do when the demand for weapons and ammunition shrink? So let us do it slowly. As a family, we would be looking at both revenue generation as well as cost cutting. I suspect that is what we need to do. Just cost cutting will not be enough. So why can’t our politicians get that? This is not a Republican or Democrat message – just an independent point of view. And while they sit there trying to compromise, there remains a sense of uneasiness in the markets. And unease means fear. Europe is in a mess with excessive spending also and they too cause fear. But what drives up stocks is revenue and earnings growth in companies, GDP is still positive and the manufacturing index is greater than 50. All in all, we should do better for another several months. Eventually, our excessive spending will eat us or a new QE3 will keep shrinking our dollar’s worth and push the markets up again.  I suspect end of 2012 will mark some big changes and I will need to be cautious from now on as it is impossible to precisely predict macro events.

Back to the charts. I am seeing buy signals on some stocks. I mean a dip on a longward bound stock that I would consider worth buying. I think I will start putting my toe in the water and pick up a few more long positions. I also see where TLT just came in with a long signal. TLT is a bond fund.. As fear increases, bond funds get more popular. Think I’ll wait for a pullback on that one. Stay cautious. SPY signals are still Exit on Long.

Taking some more profits - OIH 7/21/11

Taking some more profits - on oil this time. Last time it was on currency, the Swiss Franc. Selling my position on OIH based on a short term signal using a limit order for tomorrow. If the order takes during the day, fine. If not then we will see next day. I am certainly not going to be looking at it till I get back home from work. Today I got back late, around 8 PM. Better to sell with some steam behind it. See my short term down signal on the chart below.

The chart shows a major signal that is UP and a minor signal that is down. I buy in the direction of the major signal (UP) using the minor signals for more precise entry and for higher percentage wins. The minor signal shows down. That does not mean it has lost steam. Just that I bought on a dip and now it is time to take money off the table.

The idea is to pay for the high price of oil using profits from buying and selling OIH - oil ETF...not really. Just joking there, tongue in cheek. I am running this off my R/IRA funds that are in a brokerage house that I trade using end-of-day signals and I am following the trading plan I outlined for managing my retirement portfolio. OIH is in my commodity section. It is not truly an anti-stock fund as it tends to rise with the market. But still, I consider Gold, Oil and Water as commodities and they can run counter-trend to the market.


See my chart on OIH below (done with Metastock software as all my charts are).

Take Profits 7/19/11

I have started executing my portfolio management plan, that I have been writing about in the last few weeks. If I had jumped in totally, it would have been just fine but why discuss coulda, shoulda, woulda.

- I closed my long position on FXF (currency ETF Swiss Francs) and took a little profit over the last few days that I had the position open for.

- Also my call options on HOG popped. HOG of course has nothing to do with pigs other than it is the ticker symbol for Harley Davidson. I had those for about three days and am happy to ring the cash register and not be too greedy.  I placed a sell limit order for ½ the position to take profits.

- I am still long on OIH and VNQ positions that I entered a couple of days back on the pullback.

- As I have mentioned before, my 401K positions are reviewed about once in 5 weeks and I do not intend to change those till next month.

Attaching my chart on HOG

SPY shrugs off Buy signal 7/18/11

Once again SPY shrugs off the buy stop signal at 131.87. The highest it got today was 131.280 and did not exceed the buy stop level of 131.87 and trigger a buy. That means we are still in an Exit long position or down position as the market keeps going sideways.

SPY gives potential Buy Signal! 7/16/11

My SPY system gave a potential buy signal based on a buy stop at 131.87 on SPY. That means if the price exceeds the previous day’s high, the system says go long. SPY has been pulling back and this may be a good place for it to launch an assault on the previous high. The chart has been going sideways for a long time and there is still no clear direction.

The debt ceiling debate can affect the market’s response over the next week or two. I was asked by a couple of friends whether they should pull out of their positions. I am still hopeful that those well paid congressmen and women we have in Washington are smart enough to know that a deal has to be done or else it will be very costly for the nation. That of course assumes that they will put the nation in front of their personal positional gains in politics and the jury is still out on that.

Creating my Retirement Portfolio – 4

Back to the Ivy Portfolio. In the Ivy Portfolio the simplest version is to put money 20% each into the following: Domestic stocks, Foreign stocks, Bonds, Real Estate and Commodities. Once I commit 45-50% of our money into stocks. I have to choose where to put my 45-50% anti-stocks monies into. When stocks are falling, some or all of the anti-stock funds should be firing entry signals for long positions, enabling me to keep drawdowns low and a steady move up on my total equity chart. My method will be to use my own unique upgrade system on my 401K funds, use the dynamic hedge or straight puts and calls on a few select stocks and then select the anti-stocks using timing systems using Metastock software.

The four categories for anti-stocks will be Commodities, Bonds, Real Estate and Currency.

Commodities:  I am looking at GLD, WAT, OIH,   (Gold, Water and Oil)

Bonds: TLT, TIP, ITR, CSJ 

Real Estate: VNQ, IYR and SPG

Currency: CEW, FXA, FXB, FXC, FXF, FXY and UUP (Emerging markets currency, Australian dollar and other currencies and of course the US dollar)

I have added currencies as I feel our US policy of spending more than our revenue will come to roost hard one day and will negatively impact the value of the dollar. My position is we need to increase revenue on the high earners and reduce expenses across the board as well as increase penalties on frauds and scams that waste our monies. But our Government appears to be deadlocked on policies. It would be best to hedge that by putting some of our monies into the strongest currency rising. And if that turns out to be the US dollar, that would be great but why hold our breath when we see FXF etc. climbing and not the US Dollar – UUP.

By keeping individual trades at a smaller percentage of the account, I should be Ok on position management. Still, my preference in the past has been to trade more stocks than ETFs as my trading systems work better on stocks than ETFs. I will have to think about that as I start running some back tests.

Creating my Retirement Portfolio – 3

First let me make a correction on a comment I made from “The Ivy Portfolio” by Faber and Richardson. The authors suggest market timing using a 10 month moving average applied instead of the 8 month that I mentioned. The authors also stated that it was not critical whether it was 8, 9 or 10 etc. Notice that a 10 month moving average is approximately a 200 day moving average on a daily chart.

If we keep our stock – anti-stock mix to an even level or perhaps even skewed a little more towards stocks, and then use market timing to manage each live stock, ETF, fund etc. then it is more likely that we will have less drawdown and a smoother equity curve. I fear drawdown, as it is the strongest force that takes us away from our game plan.

I am considering looking into getting a “portfolio back testing software” for Metastock if available. I think there is a program called Tradesim that enabled that. I will have to check. That would certainly make my work a lot easier. With Metastock, I can check individual stocks using back testing with trading systems but I am unable to check a portfolio consisting of multiple stocks where each has a trading system on it.  

Back to the portfolio. In the Ivy Portfolio the simplest version is to put money 20% each into the following

Domestic stocks, foreign stocks, Bonds, Real Estate and Commodities.

The asset is long in itself when above its 10 month moving average; otherwise the money is in T-bills. The portfolio is re-balanced monthly. The authors demonstrate a surprisingly smooth set of results when tested from 1985 to 2008 with annualized returns of 11.5% with a Sharpe Ratio of 0.79. Worst year was 1.71% in 2002. Max drawdown -9.7%. Very impressive. .

The key is “do not lose, do not lose” and I could not argue with that as it is my mantra also. But I still do not feel comfortable with even a 10% drawdown, so the search for something a little smoother. More next time.

Creating my Retirement Portfolio – 2

I am working on restructuring my portfolio to better achieve my goals. Essentially we want no losing years and an average return of 12% (my wife’s order). This blog is my second installment of my outline and thoughts as to how I expect to get there.

To start with I want a safe distribution. I don’t want a loss year and I don’t want steep drawdowns. So this portfolio is probably more suited for people who are 45 years old or older. If you wanted to tweak it for a younger age, I would shift the ratio to 70% stock funds and 30% alternatives or anti-stock funds as I will call it.

I am thinking of 45% in stock funds, 45% in anti-stock funds and 10% in cash or hedge money. Stock funds are mostly going to be 401K type retirement funds. I manage that by looking at it 1/month, usually between the 1^st and 10^th day of the month on a weekend. My preference is to put my money into about 4-5 funds that are providing the highest returns over a 3 – 6 month period of time. Slow and steady but put my money on the fastest moving funds. Bond funds in the 401K would be one category of anti-stock funds. It is entirely possible that one could be 100% in cash or bond funds using this system in a bear market, as was my case in 2008. That would be part of the tactical asset allocation or market timing component for the stock funds in my 401K. I am not suggesting keeping one’s money in stock funds all the time and re-balancing the portfolio 1/year. I find that method causes me too high a loss in a bear market and would not serve to meet my goals of “No loss years”. Instead I am using tactical asset allocation based on momentum to distribute my money in the fund choices I have in my 401K.

What about stocks? The ones I am looking at are ANR, PBR, HOG, AAPL, CAT, PCP, F, AMD, and SNDK.  Out of all these CAT is the unusual one for me as I tend to shy away from any stock in the Dow Jones 30. I prefer high volume stocks that are a little off the beaten path. AAPL is also not exactly off the beaten path! My trading systems seem to work better on these. Next I would run my dynamic hedge method. Others can use a slow 20 and 50 exponential moving average crossover to determine entry or exit in the stock. That would mean when the 20 day exp moving average crosses above the 50 day exp moving average go long in the stock. In effect this system is saying go long when there is short term buying momentum. The reverse is true for exiting the stock. In the “Ivy portfolio” the authors suggested an 8 month moving average as signal. I interpret that to mean that when you look at a monthly chart of the stock or fund, when the closing stock price is above the 8 exp moving average you would go long. This is a slow moving system. I would suggest some back testing before adopting any of these. I use other systems myself but I think following a disciplined method to manage the portfolio and keeping me weighted across the markets is more important than fine tuning the technical system.

Next time I will write more about anti-stocks and which ones I am thinking of using…