Developing a Trading System for QQQ/NQ Part 2 – 12/31/12

This will be the last blog post for 2012 and although I feel compelled to write about the fiscal cliff, for a technical trader like me, it is just another piece of news and an opportunity for the many talking heads on TV to show their faces and argue. We need the higher earners to pay more taxes and we have to seriously cut spending. We cannot keep spending $1.50 for every $1.00 we earn! Perhaps that will be discussed in more serious detail when we need to increase the debt ceiling – which we have to. So enough said and let me move on to developing my trading system on QQQ/NQ.

After developing a shorter duration QQQ system I manually ran it through to see where the entries (shown by arrows) and exits (shown by X’s) would be on the first chart I had printed. I was originally looking in the 2009-2012 time frames. My intention is to start trading straight call and put options on these and later switch to futures on the NQ after I gain some confidence. I can trade the ETF QQQ which is what it is based on. I realize that futures on NQ and QQQ will differ; but by trading options on the Q’s I am using the same data.

My initial findings were very positive. I was showing somewhere between a 70-100% win rate and the losses were on average much less than the amount for an average win. Not bad….

I wrote down my rules for trading. First was the Long entry, and then the Long exit and next the Short Entry (using long Puts as I don’t want to short stocks or an ETF) and the Short Exit. Shown below are the entry exits for the time period 11/2011 to 12/2012, the most current data. It generated 100% wins over 15 trades and 13 months. Seems impossible but there it was! Realistically, I will take anything from 70% -100% wins, given that a typical trend following system only generates 30-60% win rate; except the average win is much higher than the average loss.

Next I printed charts of QQQ (not NQ as shown) from 2002 – 2012 where each page had about 18 months of data. I went to the first chart and applied my rules manually and saw where the entries and exits were. From 9/2001 to 2/2003, I had 19 trades of which 14 were winners. Also the losers were on average much less than the winners. I also noted that the worst consecutive losses were 2 in a row and the best consecutive wins were 6 in a row. I think I can live with that. Attached below is a scanned document of the 2002 QQQ (not NQ) chart and the indicators and entry exit points. It is somewhat weak and hard to see, and I apologize for that. It is a document that I will use to run the next several years of data through to see how it does under the same trading rules. Then it will be “Start your engines” for live trading!!!

Developing a Trading System for QQQ – Part 1 12/14/12

Friday I flew into Pittsburgh to take care of some family matters. During the flight I pulled out my charts on QQQ with all the indicators I wanted on them. I am sorting through my favorite indicators and linking them to see if they yield a reliable trading system.

First I looked at basic trend following systems. They are reliable but tend to give a lower probability of success. That also means I would face several losses in a row – possibly as many as six. Those losses would stretch over 2-3 months on a daily system. Not a good system for me.

Next I started looking at shorter duration trades based on price movements in waves. I want to catch the waves with my indicators and not wait for the waves to form visually before making a decision to enter. By the time I see the price wave forming, I am entering late. Mentally it is hard to enter long when price is falling.

My preferred method is to use a price accelerator/decelerator to tell me turning points. Stochastics is good but this is the second derivative of price movement, the first derivative being a price change. I am a trend follower in my heart as a trader, so I still want to keep a watch on whether the tide is coming in or going out. When the tide is coming in, the waves for going long are easier to catch and bigger in size. When the tide is going out, the troughs are larger than the wave tips and a reverse approach is better – that is to sell short or buy put options or sell futures at high points.

I had three pages with each page representing about a 14 months of QQQ data. One of the charts is a nice trend following chart. The second one was a nightmare – as QQQ stayed in a sideways mode for a full ten months; enough to destroy any trend follower’s system! The third page showed some smaller up movements, but very distinct medium sized wave formations that a trend following system would have done well in. I want my system to do well in all three scenarios....

401K Still going strong long – 12/9/12

The overall market signal on SPY (S&P 500) is to exit any short positions – defacto go long in my books. I have re-entered positions in equity and in my 401K.

The 401K monthly chart analysis on my current company’s choices suggests I put my monies into WFA SPL Midcap VL, Fidelity DIV Intl, and Fid Eq Income, although the Freedom 2050 and 2040 funds looked strong as well.

In my previous employer’s 401K funds, TRowe Price Intl discovery, Fidelity DIV Intl and Lazard Emerging Market equity funds looked the best. PIMCO Real Retn bond fund looked the best among the bond fund choices. See charts on the top 401K funds below.

SPY Gives a change in Signal 12/5/12

My trading system on SPY (S&P 500) gave a change in signal showing an exit on short positions. This can be interpreted as a tepid long signal. I will place more long positions.

In addition, I saw up signals on several currencies in their end-of-day charts recently. I have taken long positions in FXA, FXC, FXF and FXE. This is going to continue to evolve into a method by which I will hedge our portfolio by placing a portion into the strongest currencies based on them showing up signals. I believe this will allow me to hedge against a potential weakness in the US dollar in the coming years in case the Fed continues to print money. I am also long in IIF and TLT. See my chart and comments on IIF in a recent post.

Despite our debt situation, I remain bullish towards the future outlook of the US. One of the reasons is that we are gaining strength in oil and gas production. The word on the street is that we will surpass Saudi Arabia for oil production by 2017. Wonder when that will be felt in the pumps or if the Iran fear factor will keep gas prices propped up for eternity?

I am holding put positions on some stocks such as SNDK. Apple got hammered today with a 6.5% drop. Intel has not been fairing well either.

Time to put more money back into long funds in my 401K now that the master switch has been pulled back to signal exit short..

Ford (F) and IIF are back pointing up North 11/30/12

Ford has triggered another buy signal. Looks like it held at the trend line and powered back up with the market. I think I will wait for a pullback before re-entering. It is these kind of delayed decisions that I always seem to regret later, as the stock moves on up without me.

SPY is still saying exit long; but it has gone up since the down signal. It looks like the slower stochastic is saying it is moving up strong but the faster stochastic says it is high and due for a pull back. As far as I am concerned, I still have a down signal and will not rush in at this point. Maybe I will miss the Santa rally! Too bad…

IIF (India Fund) also gave an entry signal. So did several currency funds such as FXA, FXC, FXE, FXF. Attached below is the latest end-of-day chart on the India fund.

How can I be Anti Fragile? 11/25/12

Nassim Taleb’s new book “Antifragile: Things that gain from disorder” is likely to be another hit as he uses a catchy title, excellent reputation and his academic standing to promote his extreme but correct theories. I have to admit I was one of the readers of the “The Black Swan” and wondered how I could make money from a market crash. Options came to mind certainly. But I felt I would have to take a thousand cuts of the sword before the black swan event unfolded, whenever it did. I am not too good at taking a thousand cuts. After a few cuts, I am out of there. I think I am still fragile; but I do have plans for risk management of my portfolio. the few people who did massive bets against the sub-prime also had to take a thousand cuts as the markets kept climbing against their positions and they were paying out money against their credit default swap positions. The investors in those pools riled against their money managers and one famous investor and his company sued their momeny manager but the money manager held firm, held the money and remained antifragile and came out with a huge win.

The notion that we are fragile, robust or antifragile is interesting to me. Someone who can handle volatility and actually gain strength from it is antifragile. Taleb talks about his drinking a drop of local water in India to make him stronger. David Cameron supposedly considers Taleb his “Guru”.

I remember thinking about the housing markets in its prime and wondering how I can shelter myself from a possible market drop. The idea of buying put options against a major ETF like IYR or against the housing stocks like HOV occurred to me. But no one else was talking about it and soon my own ideas withered away. I would have bought put options worth my mortgage when the housing market was indicating a fall. Would that have worked? Yes. But I did not act on it.

So what is the next Black Swan event and how do I make myself antifragile? I like to use put options as a hedge and it feels like a thousand cuts when the market climbs like it did last week. But does that make me more robust? Yes. But antifragile? Hmmmm not sure that I have reached that far. Governments and States are extremely fragile and it will take a huge change in the Government to think of them getting antifragile. Taleb talks about allowing institutions to fail so that there is learning memory from the events. But Paulson, Bush, Bernanke and Obama all backed away after Lehman Bros and Bear Stearns… and other like AIG, Bank of America and Merrill Lynch who made very bad bets survived in one form or another. And what about Goldman – well they pulled off the two sided bets that kept them antifragile I suppose.

The next black swan event we will see will be Governments unwilling to take a tough course and instead continuing to print money. I need to map out a plan that Taleb refers to as being more heuristic in nature and not too complicated. The damage in those fat tails can be a lot more than investors like me can withstand.  I will always want to protect myself against them fat tails. But what can I do to truly make lots of money from those events without facing a thousand cuts? I think I have to learn to take those cuts in order to be stronger.
How about protecting my portfolio with alternate currency and gold trading positions? Yes – I need to take some time out during Christmas and finalize those plans and put them into action by 2013 January…I also need to learn to be more contrarian and keep positions in those tails, regardless of the direction.

Ford (F) Changes Direction 11/18/12

I was pretty upbeat on Ford (F) a couple of posts back. I feel obliged to post this and note the change in direction for F and the down arrow that has come up. I still see that the blue trend line I have drawn touching the past lows has not been violated, and the up trend could still survive. Yes – I went long and took half my position out when it started pulling back and closed out the entire position when the down arrow came along. I have pointed out before that I will theorize as to what is happening and sometimes hope; but will not permit such thoughts to cloud my judgment regarding whether to be in a stock or not when my system drops a down arrow on me!

A Down arrow or an exit signal is like Pavlov’s bell ringing to me, and I am the dog. No way that I will sit on a stock and hope it will go up with a down arrow saying it is now tilted towards the downward direction. Staying past your welcome is how people get burned in the stock trading business. Just take a look at the chart on AMD. It is now at a sorry $1.86 after being as high as $7.00 a few months back. There were plenty of down arrows indicating get out.

Gold (GLD) has been down as well and I am currently not in GLD. I will be the first to jump back in when the signal changes to an up signal however! I have also exited major portions of my long position in my 401K and in the last couple of weeks, made a little money on my SPY put positions on the down side. But the charts are pretty oversold and I am expecting a bounce on some good news. Better to close out some of my puts at a profit. I am using the down signals on SPY as my master switch to bias me up or down. Right now the bias is definitely down. The fiscal cliff is the key excuse, along with EU Union going back into a second recession. I certainly would be very surprised if those politicians agreed and compromised on anything! But surprises do happen and that would make the markets joyous for the moment in that the uncertainty would be removed. More likely is a long drawn out protracted process while the market sheds some more value. The drop so far has been  quite orderly. No signs of panic yet.

Pls note that the AMD system chart above shows large and small arrows. Large arrows are overall trend direction. The small arrows are meant to provide guidance within the large arrows - trade only in the direction of the larger arrows.

401K Analysis – SPY Points a Change 11/11/12

The S&P500 (SPY) points down. Attached below is a chart of SPY showing the down signal. Note the blue bubble which was an exit long signal a while back that I posted when it occurred. This sets the stage for the market going deeper downwards. This is the proverbial master switch that says it is not a good time to be long. My slower monthly 401K system is merrily suggesting staying in equity funds however. What do I do? I have decided that from now on, I will follow my overall master switch and use that to override any 401K picks in the equity arena. That means exit my equity funds.

Going into my current company’s 401K the top funds selected by my monthly analysis are Fidelity Div Intl, WFA SPL Midcap VL and Fidelity Disciplined Equity fund.  However, they are all starting to turn downwards and I will exit them based on my first rule outline above. I will place some money into bond funds like the PIMCO funds

As far as the 401K analysis on my previous employer’s funds, I see that top of the picks is Fidelity Invst Div Int, Lazard Emerging Market, and T Rowe Price Intl Disc. I will move money away from all these and place some into bond funds.

Also below is a chart on IIF, India Fund. It had a buy signal back in June and if one followed it, the return would have been a nice 17% with an exit signal marked today for market open tomorrow. Interesting that SPY, IIF are both facing downwards? Why fight them with long positions in my 401K? Worst case is the market goes up and I miss some gains. It is much better to stay long in my 401K when the overall market is long as well.

What is the most difficult thing to do in Trading? 11/11/12

I was thinking this morning about what is the most difficult thing I find doing in stock trading?

For many people it is exiting a bad trade. They get stuck in a trade and hope that it will turn around for them. This is the worst situation to deal with. Add to that most people do not know technical analysis and have no exit plans. I have suffered through that during the 2002 time frame before I got into technical analysis and it wiped me clean in my technology funds. I remember all my Strong funds that were the opposite of strong. I was frozen and could not get out. And when I finally did, that must have been when the market capitulated along with me. I almost promised never to trade again. But I picked myself up and told myself I will learn to master this. This is a non-issue for me now! When I see an exit signal, I head for the doors. No problem with that anymore.

For me, the hardest thing is buying into dips as a stock is moving up. When I see an up signal and the stock is going up, and it pauses for breath, starts pulling back; that is an excellent time to buy. Pristine preaches that methodology well. I have put together trading systems that is a combination of trend following and contrarian, that provide entry signals on dips. Still, it is easier for me to sit there and watch it pull back and then rip upwards without my participating in the trade! I knew it would happen, saw the signal, but did not jump in. Coulda-shoulda-woulda! Why? I suppose I am afraid to lose money. This game involves risk, and without risk, there is no reward.

Learning to trade stocks is a very hard thing to master. Not only are their technical things to learn, there is the difficult part of knowing yourself and managing your own emotions as it relates to money. I think that is why so many people hand over their money to others to manage. Unfortunately there are many shysters and very ignorant people out there under the guise of money managers. Their goals may be quite different from yours, particularly as far as risk tolerance is concerned. Their knowledge level could be poor. For many, it is diversify and rebalance once per year. That works well in a growing economy; but not so well for a stagnating economy. In the end, we need to learn when we want to enter a trade, when we should take profits and when we want to exit because the trade did not go our way. In addition, we need to master what % of our money we should put in a trade, recognizing that it is easy to have 5 losses in a row and we don’t want to blow our account on a string of bad trades. I never put on too large a trade – at least not consciously. And if I even did, I would balance it with put options to cover my tail.

  

<a href=”http://www.guerillastocktrading.com”>Cartoon courtesy of GuerillaStockTrading.com</a>
Read More http://www.guerillastocktrading.com/stock-market-cartoons/

Rising Star? 11/03/12

Years back I had made a great trade based on a couple of indicators. It was a trade I listed in my first blog titled "Beginnings" on Visteon stock. It looks like we may have a similar situation developing on Ford (ticker symbol: F). Can the same logic work again? Truth is no one knows and I would not risk life and limb on such a relationship but invest modestly with an exit criteria in mind that would limit my losses should it prove to be wrong. Other news could drown out the relationship and people can change their minds in this fickle market.

So what is this relationship? It is a combination of technical and fundamental indicators – the best way to go. From the attached daily chart on Ford the technicals show a spike in volume as the stock moves up strongly. It has already based and has been showing higher highs during the last 3 months. My trading system kicked in and gave a buy signal with an arrow up. I am adding some Ford stock to my long portfolio. Fundamentally, Ford had a record Quarter despite a soft Europe market. Among the auto stocks, Ford looks promising but above all, rise in volume as the stock moves up on good news should sustain an up move for the next month. Or so I think and will put my money behind it.

Everyone has to judge an entry and exit. The stock is over extended up and the support is quite far down at about $9.90. One could argue that the Risk: Reward is not so hot and wait for a pullback. But sometimes pullbacks do not occur and the stock can run away from you. My logic is to add some now and add more if it pulls back. Ford did reasonably well on a down day – Friday, and I am going long.

The Market Read 10/28/12

What is the market saying?

Looking at my chart on SPY (S&P500), we are still in an Exit Long stance. In reality, I am biased long based on signals and systems on different portions in my accounts. I have been debating letting the SPY signal be more of a Master switch like IBD suggests. Only go long when the main signal is long and override all other system signals. That makes sense to me. I will consider doing that starting January1, 2013. A New Year. A new methodology.  The signals on SPY have been remarkably accurate as anyone that has seen my blogs from day 1 will see. Also, the signals are infrequent, so we are not bouncing back and forth. I did increase my hedge positions to neutralize steep losses on longs. But the market is now entering its best 6 months of the year. Why do we then feel like a let down is ahead of us?

The elections – neither candidate is serious about the deficit. Instead we will kick the can down the road. Slow growth is more likely and slow increases in the market. The fiscal cliff could slow things down depending on who gets elected. But the fiscal cliff is an exaggeration compared to the fiscal abyss facing us a few years ahead when our Trillions of debt will finally overwhelm us. Politicians don’t really want to take anything away as that hurts them from getting elected. They prefer to give us the candy we are used to getting. One party gives their candy to the rich and the powerful (the military) and the other to the poor and now the lower middle class. Neither has the stomach to do what is needed - cut spending, cut entitlements and raise taxes on those that can afford it, including dividends on the rich.

I am still wondering how to take advantage of the fiscal abyss facing us. I am listening to “The Big Short” by Michael Lewis about the few who could see the sub-prime loans melt down ahead and how they advantaged their positions by buying Credit Default Swaps.

I am also working on my system on the NASDAQ. It is looking pretty good right now. I ran my top trading systems over three time periods; 2002-2005, 2005-2008 and 2008-2012. What was interesting is that most of the systems that behaved well in one period did not fare as well in another, with the exception of a couple. Then I took this base method and used that to create entry and exit points within the primary trend. The QQQ chart is show below showing the signals. The system and rules have to be finalized and written down and then back tested manually before trading. I do not want a losing year. The method is based on end-of-day. If I trade this method using options on the Q’s to begin with, I will prove it out with a relatively low risk. In fact I am thinking of using both straight calls and puts as well as selling credit spreads to take advantage of the time value of money during sideways moves that occupy the markets about 40-50% of the time. More on this method to follow.

Risks in the midst of a “Muddle Through” Environment 10/13/12

Talk by:

Dr. John M. Simms, Jr. Ph.D., CFA, Chief Investment Officer of Piedmont Trust Company

My Rating A-

This was the second time I have heard John give a talk at the AAII Charlotte Chapter and each time his talk was enlightening, full of data and charts and good words of advice. Speaking as an individual investor, he gets to the point, outlining all the risks we see.

John started of his talk showing the latest Barron’s cover Dow 14,165 Almost there… a rather bullish cover – the kiss of death to a bull market!

Risks:

The economy is struggling under weight of too much debt. State and local government finances are stressed by pension and healthcare costs. Global growth is slowing (collapsed)  and forward earning estimates assume continuation of record profit margins; a questionable bet. Fed has launched QE infinity, and while growth is elusive, fed is now leveraged more than Lehman! Entitlements and stimulus have created public debts and promises to pay we cannot afford to honor. Fiscal cliff will create further potential to slow down growth and possibly even push us into a recession. The US dollar is safe haven in light of Europe’s debt crisis.

Investment opportunities:

Gold still represents a hedge against poor policy. John pointed out that GLD had climbed 15.5% since he last visited us, and he intends to continue to hold his position in gold. My thoughts are to also continue to hold gold but will drop it when my technicals give a downward signal.

He likes alternative strategies that hedge downside risk. He is right in that it has been frustrating lately but he feels it will come handy in time.

Volatility is low and hedges are cheap, but don’t expect them to stay that way forever.

You can’t borrow and spend your way to prosperity. Although I feel you cannot “reduce taxes” your way to prosperity either.  History says to expect default, currency depreciation and deflation. That worries me as I think very, very few people will really be prepared for this when it happens. There is a possibility that none of this will happen and the clouds will lift away. I would not bet on it however. Both parties are taking us to the edge of the debt crisis. And then when the two parties are stalemated, there is Bernanke and QE3. Mr. Bernanke “owns” the stock market. Of course the banks are sitting on a huge amount of money (over 1Trillion dollars) and much is not entering the economy at all. Popular investments like China and Government bonds , popular income producing assets like REITs, dividend stocks, high yield bonds, emerging market debt may be due for a rest or worse. Exercise caution…

John went through pages and pages of charts. Correlations between asset classes have risen quite a bit over the past 10 years. I noticed he had managed futures as an uncorrelated class, and I asked him about that. He said they do not use managed futures at Piedmont Capital. This is an area I will explore for myself, and take another look at being cautious….

401K Monthly Analysis – 10/6/12

The S&P500 (SPY) chart points down based on my trading system, which gives me some reason to be cautious. The indivdual mutual funds in the 401K are all still showing up signals, although a pull back might be in order. Being conservative, I also hedge my long positions using SPY put options in a separate account. I am extremely averse to large losses and will do everything I can to prevent that, including giving up as much as third to half of my upside through buying “fund insurance”. However this insurance has cost me over the last several months and I realize it is a price I pay to avoid volatility in my account.

Going into my current company’s 401K the top funds selected by my monthly analysis are Fidelity Equity Income, Fidelity Disciplined Eq, Spartan 500, and Royce Opportunity. Fidelity Government Income Fund and Fidelity Blue Chip Growth fund needs replacing. Fidelity Govt Income Fund took a big hit Friday. Gold also went down. The stronger unemployment numbers have some people convinced that the economy is turning the corner and further Bernanke handouts may not happen. Royce Opportunity requires a long stay in the fund and I have a small position in it that I intend to hold for a few months due to the redemption fee for getting out early. See charts below on these funds.

As far as the 401K monthly analysis on my previous employer’s funds, top of the pick is American Century Equity Income Instl, Vanguard Inst Index, PIMCO Global Bond fund and TRowe Price Intl Discovery and Fidelity Mt Vernon Growth. The Cohen Steers Realty fund needs exiting. I see down signals also on VNQ and SPG which are all realty funds. The realty sector has recently turned downwards.

Notes:  The methodology I am using has been written up in the past and is based on a momentum strategy where I put my money into the funds with the best performance based on a slower monthly rate of change analysis using 3 and 6 months performance data. I conduct the analysis 1 month, always during the weekend between the 2^nd and 9^th day of the month. All my change orders are submitted Sunday night and are effected after 4 pm Monday.

Iranian Currency Collapse 10/5/12

Previously we have seen the Asian currency crisis. Then the Russian Rouble collapsing. Now it is the Iranian Rial’s turn. I hope that we in the US get our fiscal house in order or else it will happen to us one day because of our growing debt…we must protect ourselves from this type of scenario. 

Rial is the Iranian currency.

In 1979 70 rials = US $1
> > 2012 last week 24,600 rials = US $1
> > 2012 earlier this week in Iran 34,800 rials = US $1
> > Inflation 24% per year but some say it is more like 50%.
> > Currency has lost 80% of its value since 2011.

What has happened to Iran’s currency? Perhaps the US sanctions and US banks cutting of the Iranian Central bank and Iran not having planned for this attack by hoarding dollars or Euros have finally caused the Rial to break.

Dark pools, hi frequency trading, high volatility, flash crash, Procter and Gamble becoming a penny stock for a short while; all these are now a real part of the global trading markets. So much money can be moved so quickly, triggering computer algorithms to kick in, compounding effects. Most of the population is completely unawares. This is one reason why I prefer to have put options as protective tools and gave up mostly using sell stops. 

I can see that future wars will be fought on an economic basis, and that powerful countries such as the US, Russia, Israel, UK and China that have heavy think power, will need to prepare for attacks from foreign soil, or from within. Not a bomb will burst; but livelihoods and not lives will be lost. Much later, people may find out what really happened. This could be happening now to Iran. It begins with a crack. A small weakness. Then prying open that crack. Or perhaps as a flood. Huge. Overwhelming in a short massive onslaught.

Well worth thinking about as to how to protect yourself. Diversification, insurances, technical systems that are emotionless, and currency hedging are the tools for survival. Maybe keep an open buy order for a major stock or three at ridiculously low levels as a limit order. Might make you rich in an unexpected way one day. Some would also suggest buying low when the vultures are feasting. I find that hard to do, unless there is an established uptrend. Low can go lower and eventually disappear. You can do that with a portion but not all your portfolio.

But who knows. No one has the golden key. But we have been warned…

A Witch’s Brew 9/30/12

William Shakespeare – Macbeth. All the Witches –

 “Double, Double toil and trouble

Fire burn and caldron bubble”

Why do I feel that the work I am doing to develop my NASDAQ futures trading system is like making witches brew? There is nothing evil about it but there is no elegance in it either. Not so far anyway. Yet this is what comes to mind this morning as I stir up the “the charmed pot”. My first attempt with a base system this morning was weak and disappointing. Over a large time frame 2002-2006 it yielded a 33% win rate and produced a paltry 6% return – with 8 losses in a row during sideways movement of the QQQ. And although the system did much better out of period, this is not acceptable to me and I realize that if it was that easy to make money in the markets we would not be needing the high priced Quants coming out of the MITs and IITs… oops, I forgot I am from IIT says my dulled brain.

2-3 hours lost on a Sunday in bed with my laptop, cranking out a winning system. Not so easy the market wizards say and so say my data. Not a real US dollar wasted trying to find out. This is why I like back testing. I can take different portions of the market activity and simulate how my system would have done. It prepares me like the athletes who practice and practice and run the race through their mind many times before going to center stage.

I am still positive that good will come out of these efforts. The answer is in primary and secondary systems embedded in each other, willing to take risks that are real but likely to be less based on pinning down the markets mood first. The market stays positive for long stretches and then seems to lose its wings and gets morose, and eventually depressed over a period of time. However the price action during the down periods is much faster and quicker. This system will be capable of making monies in up and down markets. It has to be quick and agile, not slow like a big airliner. More like a fast, fighter plane able to turn instantly. It will be the alternative most average people will need to balance their losses in down periods. It is a system I will want to try out myself for a long while before I pull anyone else into it. Nothing like live testing your own bullet proof vest by having a few shots fired at it while wearing it yourself, before selling it to someone else!! Yes – that should be the requirement of Financial Advisors.  Show that you have managed your own money using the system for 3-4 years and been successful at it before you take anyone else’s money. Wonder why they don’t have to do that now?

Meanwhile as Shakespeare put it, I have to find an

Eye of newt, and toe of frog,
            Wool of bat, and tongue of -,
            Adder's fork, and blind-worm's sting,
            Lizard's leg, and owlet's wing,—
            For a charm of powerful trouble,
            Like a hell-broth boil and bubble.

SPY gives a new Signal 9/26/12

After 2 ½ months of being in a long “buy’ mode for SPY, the S&P 500 exchange traded fund, my trading system gave me an exit long signal today after market close. See chart below. That is ominous. I was hoping to see a strong surge to the upside following a pullback, but my system is telling me to tread the waters in the stock market carefully.

I have to be cautious as I am biased more to the long side. Need to stay flexible and turn on my caution lights….

Also see that my Ford (F) chart generated a sell signal tonight. The buy was a while back and the system yielded approximately 10% gain in 3 months. Not bad.

What is your Risk tolerance level? 9/22/12

If you tell me how much risk you can tolerate, I can tell you how to set up your investments for rewards. Why? Because high losses can take you of your investment game plan affecting your rewards. Some of the biggest winners in investing are people who have been willing to lose the most. So how much is your risk tolerance level?

For example, if you want to beat 85% of the fund managers and investors in the market, you will need to tolerate 3 successive years of over 20% losses and stay with your game plan while losing a cumulative 50% of your portfolio. I am not kidding. Just invest in the S&P500, and most 401K funds have at least one fund that mimics the S&P500 or SPY. Returns on SPY typically beat 85% of investors. But my problem is I cannot tolerate those levels of losses. I want to be able to make money every year I am invested. I don’t want losses. Is that possible? I think it is but my rewards are significantly throttled down.

I was looking at a study by No Load FundX which uses an upgrade system (momentum system) to make your money work more efficiently. Almost every year it returned a great return. Unfortunately the loss in 2008 was over 40% - completely intolerable for me. I use a momentum system on my 401K but will be quick to jump off the bus to protect my portfolio. No Load FundX has a simple questionnaire to judge your risk tolerance level. Unfortunately the results for me says what I already know, I am risk averse. Therein lies my problem. No Load FundX is right. I should just go with a mix of 70% bond funds and 30% stock funds and within that use market timing systems instead of my 50:50 mix..

Another thought going through my mind to make money independent of market direction is using managed futures; by me managing futures trades in the Q’s. I found that my trading system would work as follows. Assuming a starting point of $30,000 and using just one futures contract on the Q’s, I could see a loss of as much as $13,000 – $16,000 in the account at any time over a 3-4 month period with 4-5 consecutive losses when the market meandered sideways.. The gain over 4 years shows to be $70,000 during ripping up trends or down trends, taking the account to $100,000 in 4 years. The rewards look great but can I tolerate the losses of up to 50% of the account? Unfortunately the answer for me is “no” and I am working on how to dampen the losses. Perhaps I will have to buy protective stock options for the other side, reducing my losses and shrinking the gains. Now that would be unique – a trading account of managed futures using the Q’s where options are used to dampen the volatility… Hmmm  got to think more about it.

Meanwhile here is my stock chart on the Q’s using the system I am thinking of. There are plenty of minor signals as well that I may or may not use. Ignore them for now. Just look at the main Up and Down arrows. The basic signals generate the 45% loss risk to >200% gain reward scenario in 4 years. It is also a system that would make money in up or down market direction and the gains would be long term gains just as Mitt Romney gets to do with his investment incomes. There is no reward for hard slogging work for the lower middle class wage earner. They pay a higher % tax rate than the rich who are taxed lower in their investments, even if it is in short term futures trading.

(I love to blog – as I can start with a topic, and keep writing and thinking and learning. I don’t have all my thoughts pre-written. Instead I let my thought flow and as I write the blog….. )

Markets Analysis 9/15/12

I was looking back at the Up signal I posted on the India fund (IIF) back in 6/15/12 end-of-day. Since then it has weaved its way up from $14.62 to $17.11, a quiet but very impressive +17% gain in 3 months. It has also done a couple more impressive things from a technical view point.

- It has taken out the previous high of $15.79, establishing its uptrend. By definition, an uptrend is a series of higher highs.

- It has also climbed its way above the bold black line on the chart, its 200 day exponential moving average. Nice…The markets have taken note of that. See chart posted below.

Being cautious, if someone was looking to enter now, I would take a small position and wait for the pullback to add to.

Needless to say, let me contrast this move with the chart on SPY (S&P500), which too has been pointed long by my technicals since 7/2/12. In the chart posted below, there was a second confirming Up signal on SPY on 7/30/12. Right now, it has taken out its previous high and is starting to smell some rarified air above. The chart on SPY is clearly stronger than IIF which has been struggling for months dipping lower and lower and staying below its 200 day exp moving average.  

What goes high can go higher. The markets loved the fresh dose of QE3 it got from the Feds. My only concern was that 11/12 on the committee voted for the QE3; leaving little doubt that they feel the economy is making a weak recovery and could slip back into a recession. Without the smelling salts, and instead if we chose a harsher and stricter path like the Europeans have done, we would certainly be languishing in another recession – perhaps depression. But this is no political forum. We have come back from an enormous chasm and I am just glad that my portfolio is positive. I will also keep my enthusiasm down and make sure we not give up these gains. October through the end of this year is usually a positive period. Let’s hope that’s how it plays out.

Waiting to be discovered…

401K Monthly Analysis - 9/8/12

The S&P500 (SPY) chart points long, same as it did last month. The pullback that I was expecting in August did not happen and instead the market continued to push upward. Last month I went stronger into equities in my 401K and it was the right decision. The monthly 401K analysis that follows remains somewhat mild in its selections as it is weighed with bond funds picks. Being as conservative, I also hedge my long positions using SPY put options in a separate account. I am extremely averse to large losses and will do everything I can to prevent that, including giving up as much as third of my upside through buying “fund insurance”.

Going into my current company’s 401K the top funds selected by my monthly analysis are Fidelity Equity Income, Fidelity Government Income fund, Royce Opportunity and Fidelity Blue Chip Growth fund. Royce Opportunity requires a long stay in the fund and I will have to consider whether I want to get into it or not as I don’t want to deal with the redemption fee should I want to get out earlier. See charts below on these funds. I will move some money out of Fidelity Fund and place it into the Fidelity Blue Chip Growth fund, Monday. I already have monies in Fidelity Govt Income.

As far as the 401K monthly analysis on my previous employer’s funds, top of the picks is Cohen & Steers Realty fund (same as last month). Next picks are PIMCO Real Retn Admin and American Century Equity Income Instl. The choices are same as last month and I will leave these all unchanged Monday.

Notes:  The methodology I am using has been written up in the past and is based on a momentum strategy where I put my money into the funds with the best performance based on a slower monthly rate of change analysis using 3 and 6 months performance data. I conduct the analysis 1 month, always during the weekend between the 2^nd and 9^th day of the month. All my change orders are submitted Sunday night and are effected after 4 pm Monday.

Safe but steady returns 9/3/12

A past associate of mine who has a Master’s degree in Science and also in Business asked me the following question:

“I was trying to find out, if you know a source or person who could invest on your behalf (not 401k) and charge a fee but be relatively safe bet in picking stocks etc?”

What is “a relatively safe bet”? Money magazine gives us as their cover, 101 ways to build wealth. Everyone seems to have a great solution. Then why is it so difficult for me to answer my friend’s question simply without giving him a feel for the risks involved in trading? The only safe place to park your money and reduce risk is a money market fund delivering some awful 0.2% return. Even that is open to currency valuation risks down the road. Gone are the days a retiree could live off the interest when the banks were paying 5-6%. Of course inflation was much higher then, and we easily forget the net value of out holdings. Is too much knowledge a dangerous thing?

If my friend invests his money with an advisor who puts him in a basket of stocks balanced with a basket of bond funds, in a real recession, he is still likely to see a drop of 20-30%. That is completely unacceptable to him/me.

If he were to put all his money in SPY (S&P500) then he would see a loss potential of 30-40% in terrible down years. Unacceptable for sure.

Alternately Taleb suggests a less risky strategy is to only take very high risk with a small portion of your portfolio and leave the rest in a safer haven.

Most people go off their investment plan when they lose a lot of money. The first and most important question is not how much you want to make but how much you can afford to lose. I had a rich consortium of investors approach me to manage their money if I could generate 50-60% return per month and safely in the Forex markets. The reward potential for me was huge. But can you really separate risk from reward? I don’t think so. It would certainly be worthy of a PhD paper if one could actually dissociate the two in the investing world. Wall Street is littered with genius’ who thought they could.

I have asked my friend how much money he wants to invest, how much he can afford to lose, and what return % he is looking for. I am a conservative investor and don’t like to lose money. I find it safest to hedge my transactions, to lop off the high loss potential with put options. Next I diversify and also use stocks and also different trading systems. Finally I also sell near month options to generate a credit against my synthetic call position when I have a long signal. All sounds quite complicated, and so it is. It takes time to manage these positions as they are all end-of-day. I have hesitated to manage other people’s money because of lack of time. With my job that keeps me out for long hours, it is difficult. I have friends who have successfully made money through selling out-of-the-money options over shorter trading periods. But in every case, there is a risk and reward equation that cannot be ignored. Reduce risk and you reduce your reward.

Confucius said  “Real knowledge is to know the extent of one's ignorance.”

Gold scores a minor Victory 8/26/12

Gold has been going sideways in a triangle for 3 months now and finally broke out of the triangle heading upwards, scoring a minor victory. See the chart below where I drew in the green upper triangle line and the red lower triangle line. If it had broken to the downside, that would not have bode well for Gold buffs.

As it stands, GLD is now bumping up against another resistance level shown by the blue bold line touching the tops of a larger triangle. For now I am on the long side of GLD and saw a modest increase in my holdings.  See the entry signal. It had been a little confused before and had been consolidating.

The contrary picture is of course the US Dollar. As GLD has gained strength, the dollar has weakened, This is the Yin Yang of currencies - a strong negative correlation in statistical terms. As holders of UUP (US $) take flight, there is a rise in GLD. Of course if you were simply trading the US$ you could also place your money into UDN which is the reverse of the US$.

UDN goes up when UUP goes down.

Gold is much more beautiful though and any time I take a look at my wife’s 1 oz coins or better still, her Indian 22 kt jewelry, I am awed by its shine and luster.

In trading however, GLD or IAU is the way to buy Gold holdings. No emotions there. When there is the down signal, I exit and sell…

Is CREE finally changing? 8/18/12

CREE has had a rough going over the last year. Reaching a high of $72.47 in 12/10/2010 it has tumbled all the way down to $20 before recovering and sitting at $28.35 and right at its 200 day exp moving average shown as a black line on my chart below.

Is the worst behind CREE now? Has all the selling ended?

Hard to predict the future very far out but the technical analysis certainly shows a change in character. Why I say that is because CREE has now established a higher low for the first time since it started its dramatic drop in December 2010.. Next step for CREE will be to achieve a higher high above $33.10. Or it may go sideways for a while before it picks up from here. Still, this is encouraging for the stock.

Maybe the world of LEDs is looking up for CREE finally…

Otherwise, SPY is still pointed up. PCP turned in an Up signal and I am long in it now. Same with SCCO. Still long on SNDK and GLD. And still hanging on to my losing Q’s  put options for no reason at all other than the market has to take a breather somewhere! I have been violating my system direction on the Q’s which has been pointed long for a while and have felt the pain for doing so. Fortunately the max loss is a small limited amount based on my holding a small option position but this is exactly why traders lose – having a plan and not following it. Can happen in a hurry… and get out of control... I will need to learn my lesson here and change direction.

Yin and Yang 8/12/12

Yin and Yang. Two complementary principles of Chinese philosophy. One is negative and dark and feminine and the other is positive and bright and masculine. TLT and SPY are like Yin and Yang in the market. Currently we have an Up signal for SPY whereas last week TLT dropped and produced a Down signal. That is the current state of the market today.

I was expecting a drop and then a strong buy point but the market chose to ignore the drop and just went up. My system triggers were spot on.

I am much more heavily biased towards the up side in my 401K as I wrote last weekend. But I do have some offsetting put options and a position in TLT that I closed last week when I confronted the sell signal on TLT. I remain holding put options on PCP and HOG which still point down. I am long on GLD, and have been for a while as it stays in a sideways position. Also long on SNDK. I closed my position on Ford F with a small profit. And I am guilty of incurring losses on put options on the Q’s and copper against the up signal that my system gave me. I felt that the stochastics were reaching high and it would soon take a breather and go down, and I would exit. Wrong… best to just follow the systems.

I need to continually remind myself that I do not know what the market will do next; but my portfolio will do fine if I just follow my well tested systems in the long haul...

401K Analysis - 8/5/12

The S&P500 (SPY) points long. This sets the stage for going deeper into equities in my 401K and less in bond funds like Fidelity Government Income.

I am expecting a pullback in August and then a push up but it will be hard to time that and easier to just follow my monthly analysis. In any case, the fund selections are somewhat mild and weighed with bond funds to partially neutralize any steep drops.

Going into my current company’s 401K the top funds selected by my monthly analysis are Fidelity Equity Income, Fidelity Fund and Fidelity Government Income fund.  See charts below on all these funds. I will move some money out of the money market and place it into Fidelity Fund and Fidelity Equity Income Monday. I already have monies in Fidelity Govt Income.

As far as the 401K analysis on my previous employer’s funds, I see that top of the picks is Cohen & Steers Realty fund that I have already been invested in. No change required for that. Next picks are PIMCO Real Retn Admin and American Century Equity Income Instl..  I will move money away from the PIMCO Glbl Bond and Fidelity Contrafund into these two on Monday.

Fidelity typically requires you to keep money in funds for 1 month minimum, 30 days I think. Otherwise they hassle you with real threats to freeze you from changing investments and make you feel like a common criminal. Some funds have longer requirements for investing otherwise they charge a redemption fee. I think the funds selected here are not affected by that; but it always weighs on my mind.

SPY gives another signal 7/28/12

Every signal is a valid signal but how long the signal is valid for, depends entirely on the market and the next signal. A friend asks whether the market has changed direction and if it is Up or Down.

The current signal is Up on SPY (S&P 500 ETF). The signal triggered on 7/2/12. Last Friday end-of-day there was another potential buy signal generated with a 139.07 buy stop. That means if SPY goes above 139.07 which was Friday’s high, then the second buy signal will trigger. There is no information available on how long the signal will last; but the market is trending up for now.

A well known market analyst says that the market should rise until early August and then will fall precipitously until the middle to end of September after which the low of the year will come and offer an intermediate buying opportunity. If he is correct, then a cautious buy is all I can suggest. Unfortunately I am not a soothsayer past tomorrow…

The suspense is terrible. I hope it will last…  Oscar Wilde

A Simple System for Market Direction 7/20/12

Do I buy or sell? How do I determine direction without constantly changing my mind? Well, it is possible to determine that relatively simply using a weekly chart of SPY. Each bar is a week of data. By using a simple crossover of the 20 exponential moving average (ema) with the 50 exponential moving average (ema), we can see which way is the momentum for buying or selling.

The technical system says to buy when the 20 ema is higher than the 50 ema. Sell when the 20 ema is lower than the 50 ema, suggesting shorter term momentum is lower. By using a weekly chart, I have programmed Metastock to show these transition points as Up or Down arrows. We can see that the system picked up the buy and sell points very well over the last 10 years. By following this system, one would have completely missed the massive drop in the market in 2008. And if one traded both directions, the equity curve would certainly have looked quite nice.

The direction currently is still Up for SPY, as says my daily indicator system, which is a lot more complicated.

Creating a Portfolio with Low Risk 7/15/12

Trading is a mental challenge. Often it is easier managing money when you do not look at your account frequently. Unfortunately that can also have you lose excessively in a bad year. My goal is not to have a losing year, and while we are positive this year, it feels like I am being taken through the wringer and nothing good is happening.

I just finished reading a book called 7Twelve. It is about portfolio management and the author advocated a portfolio divided into twelve segments – wide diversification with about 50% in bonds when you are 50. The percentage of each of the segments is not equal, as there are lesser categories for bond funds. The segments included:

Large-cap stock           6%       Emerg non-US stock    6%       Bond                20%    

Mid-cap stock              6%       Real Estate stock          6%       TIP                  20%

Small-cap stock            6%       Natural Resources        6%       Intl Bond          6%

Dev non-US stock        6%       Commodity                  6%       Cash                6%

By allocating similar to this and rebalancing once per year, he showed an average return of  7.7% per year over the 2000 – 2009 time frame, I recall. Unfortunately in 2008 there was a 24% drop even with such a diverse allocation. A 24% drop is completely unacceptable to me and there lies my problem with diversification and letting things ride for a whole year and re-balancing once a year.

Instead if I let each segment run using my timing systems, the only major risk that would remain would be for a terrorist incident overnight. I could lose a large percentage before the markets would even open after such an attack. If I hedged the stock trades with put options, I would reduce the risk; but also reduce the reward. I would need to also do a dynamic hedge and trade the downside to make up for the cost of the hedge. I listened to a sales guy on TV yesterday promoting their wealth management system and he seemed so confident. That is ultimately just a lie. The process of trading or investing has risk and reward entangled together. You can act as confident as you want; but the future is not known, and best thing you can do is follow a system and stick to it through thick and thin. Just make sure it is a decent system. 

This time I am not attaching any charts; just a scene from Roger waters' concert "The Wall" -- it was fabulous...

" Money

It’s a crime

Share it fairly

But don’t take a slice of my pie

Money

So they say

Is the root of all evil today

But if you ask for a raise

It’s no surprise they are giving none away”    Roger Waters