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.”