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

401K Analysis – Yellow light 7/7/12

The monthly 401K analysis showed little to no change from last month. This is a period of uncertainty. My daily SPY analysis showed an up signal; but the market has been trading sideways for a while. The eventual resolution to the sideways move will be either up or down.

With my current employer’s 401K fund, I will stick to 50% Fidelity Govt Income Funds (weekly chart attached) and 50% Money market funds. If one wanted to be in stock funds, then the Fidelity fund and the Fidelity Blue Chip were the two strongest; but I will prefer to err on the safe than sorry side. When markets do drop, they do so ferociously and a lot of damage can occur in one month. 2008 sure pointed that out.

With my previous employer, the suggested road is a 50:50 stock fund bond fund mix in my 401K. Funds to be in are Cohen & Steers Realty fund (weekly chart attached), Fidelity Contrafund and two PIMCO bond funds – Real return and Total return. In addition, I am carrying some SPY put option hedges against my long 401K position. This is not a period of time I am making money in my 401K other than treading water and waiting for the directional move to be made visible with time.

SPY gives an Up Signal 7/2/12

My trading system on SPY (S&P 500 Exchange Traded Fund) gives an Up signal!  The system is quite frugal in providing signals. As I have mentioned before, this system like everything else in trading, is far from perfect; but still, it is pretty darned good.

This means I will change my perspective to a more bullish outlook and will take long trades when appropriate.

See Chart below.

Take your Lickin’ and Keep on Ticking 6/30/12

What’s on my mind today is Stop losses. And I what I have to write about is going to rub some people the wrong way. But this is my blog and it’s about how I trade and look at things. It is also about how I have changed and how I have learned to take a lickin’ and keep on ticking..

Back in the early days when I knew nothing about the markets, I just thought everything went up over time. Sure things would drop, or pause; but in the end, there was only one resolution – and that was up. Therefore I was confident and cocky. When markets went down, I was only purchasing more shares of stock at the lower prices. A fire sale I would think.

Well, my first dose of reality was hard. It was 2002 and as I have written before, my mutual funds went South, and I mean deep South. When I purchased my technical analysis software and charted my mutual funds, I found they were deep red and I was frozen. I did not have the nerves to exit the funds and transfer the funds into money market funds in my 401K. I was part of the crowd that looked the other way. We did not open our quarterly statements as the news was bad. Somehow things would be better if I did not look. And yes – I heard the following from an associate– we don’t have a loss until we close the trade. Wrong!

I have changed. I have learned that a lot of my trades are wrong and unsuccessful. But if I follow my systems, then my winners last a lot longer than my losers. A key to these systems is being able to cut my losses quickly when I get an exit signal. Case in point is the following chart on Ford (F). F gave a long (Light Green up arrow) and I entered a trade that went South on me (Maroon down arrow). When I saw the down signal, I exited. I have no idea how much longer it will stay down; but I will patiently wait for the next entry. Yes – the volume was very high on the last drop, which could be a capitulation. But what if it was not?

I have lived in the Tier 1 automotive world. I have seen a friend stick $700,000 – his entire 401K into Visteon (VC) stock at $12 and ride it down to $2. When the stock crawled back to $5, Visteon closed that option for Visteon employees and he was forcibly exited at $5. Lucky for him, as the stock finally went to 0 and I am sure he would have ridden it down into the ground, as Visteon went bankrupt. So did GM and Delphi and I am sure there were many people who were like I used to be – looking the other way, not opening their quarterly statements, and hoping it would get back up..

I have learned to take my lickin’ and keep on ticking. When F turns around, the charts will show it and I will be ready. Everyone needs to have a stop loss, even if it is a mental stop loss. I remember telling a friend who had $75,000 in Delphi stock at $11. Delphi had gone down to $5 and he looked sick. I told him to get out of the stock. If he wanted to get back on the ride, then get back in when it climbed above $6. William O’Neill suggests an 8% stop loss level. My friend rode Delphi down to 0. He was a PhD type – but the stock market froze him and he could not act to cut his losses and tell himself he was wrong.

I believe one of the key learnings for a person who wants to learn to navigate the markets successfully using technical analysis is to understand how to use a stop loss, that is to get out when things turn against you, and get back in when the winds of change favor re-entry. Learning to use a technical trading system enables me to follow this discipline.