New Year’s Investing Resolutions - December 2013

The Santa Rally came in on time this year. It is now almost the end of the year and time to ponder about what to expect next year, what mistakes I have made and what I am going to do about it next year. One cannot change the past. The only point in dwelling on the past is to prevent mistakes from recurring.

After such a strong year, I expect we will have a modestly positive next year in the 5-8% gain range. There has always been what is called a reversion to the mean. When the value of SPY (S&P500 Exchange Traded Fund) goes up and is 8-12% above its 200 day exponential moving average (ema) it back peddles and gets back close to the 200 day ema. History shows that this is 100% the case. See chart on SPY below. Once more I should point out that the Up arrow on the chart below signals long. The blue bubble signals an exit to the prior signal and reversing of direction. Therefore treat the blue bubble after a down arrow as a enter long signal in this trading system. The black line is the 200 day ema. During down trends and when price drops below the 200 day ema it can go much further down, as much as 40-45% below its 200 day ema but it too is eventually always mean reversing. This does not mean the price will not rise once it goes up above its 200 day ema substantially; but it does mean that it is likely to go sideways and possibly pull back enough for the 200 day ema to catch up to it eventually. Regardless of the direction it goes, I need to rely on my own trading systems for the signals which I post on this blog site. Follow the systems at your own peril!! I will.

My first New Years resolution in trading is not to listen to others and instead follow my own trading systems.

That means I will not pick up newsletters from others as this can create conflict. When my system says long and someone else says we are in for a huge bear market, then it creates confusion for me that I do not need. If my system says long then I will posture accordingly. I do not need someone else to guess what is going to happen.

My second resolution is that I will add some aggressive systems that will enable me to pick up higher gains.

My third resolution is that I will position for the down side when I get an exit signal on SPY and look to breakeven or make a little money when the market goes down. I will do that by buying negative ETFs like SH or put options.

My fourth and final resolution is to develop an aggressive Futures trading system that will generate a much greater than market return. This will be my true ticket to independence if I can reach it.

Let us all hope to have a healthy and Happy New Year….

Frustrations in Trading 12/22/13

I am an Engineer by background and part of a senior management team for my company. The tools I was taught were math, physics, chemistry, and all those engineering courses that only reinforced black from white, a correct answer versus a wrong answer. We did not get positive grades for almost correct answers (although we had teachers that did credit our work sometimes). We learned to be careful and correct. Well in trading that becomes a lot harder to figure out.

In trading, I get frustrated with a trade that turns South on me after I enter. The more risk I take, the greater the loss when it occurs. And it tends to occur right away, making me think twice about taking a risk again. Then another entry signal pops up. I either miss it or avoid taking it. And sure enough that signal works out great and the stock climbs up beautifully without me on board. I look at all the $$$ I coulda shoulda and woulda made. Frustration mounts…

Or listening to my co-worker tell me that he had been trading this XYZ stock for ever and he wished he had bought it when it was $1.50 a share (It used to be $70). But when the markets turned down, he had no extra money to put in. He was stinging from the losses and did not have the nerves or capital to buy more. Another example of Frustration in trading. Missed opportunities.

When the markets turned down in 2008, the VIX (Volatility index or Fear factor) spiked from the teens to climbing up above 50. There was Lehman Brothers going bankrupt at the time while Cramer said Buy – Buy – Buy the week before… There was plenty of blood on Wall Street and Main Street. I remember telling co-workers that the guy who jumps in now into the market is going to make a killing (I had been spared the downturn thanks to technical analysis). I had cash sitting in my accounts; but did I jump in and buy stocks then? No. I thought I could limit my risk and buy put options on 5 financial stocks, as I had no way of knowing which one would suffer the most.. But I did not do it. Missed opportunities. Frustration… knowing what to do when; but not being able to do it because of fear and risk. How many of us can overcome that level of fear and take the trades? Very few… I vow to do that next time…

Another frustration can occur from not getting out of a bad trade when the signal came and went... I have very few of those, although I do make an occasional mistake or miss a signal.
I had posted a chart on Ford end of November urging caution and scaling back. It looks like that was well timed as the stock has broken down since then. See below. If a person saw this post and did not react, then he/she will be facing the frustration of missed signals. If I missed the signal I would get out now and not get frozen.

I do know a friend who is fearless. He likes to jump in when there is blood everywhere. A true contrarian trader. He has done well… sometimes being the slow and steady trend following trader is frustrating, particularly if you miss a trade that really makes a killing. The crazy thing about trend following systems is that a few good trades make the bulk of the returns. Rest of the trades are slow deaths. The only way to succeed then with such a strategy is follow the charts and stocks you want to trade, and take all the signals. With trading there is always losses and pain. But if you can climb to the level where you follow the system through the pain and losses, then over time you will have a steadier equity curve than those that are doing investing without any tools other than hope and prayer. Even contrarian traders can see stocks go from bad to worse and get in the way of a falling knife. 

Trading is a frustrating business, filled with many stabs of losses. There are always other stocks and other markets showing better returns than I am making. I have to be happy with my equity curve pointed up year over year and avoiding the huge losses that would make me give up this business altogether and put my money in a bank account earning 0.2% interest… I will strive to build better systems that mesh with my personality in trading. Managing frustration in trading is very difficult and there is no way around it; but to confront it, deal with the pain and find a way to move on recognizing there are always going to be losses along the way..

How are my Investments doing… 12/14/13

The markets have been roaring upwards throughout this year. Or have they?

I took a look at the performance from May 2013 through December 2013 and observed the following:

+ While the markets (SPY) in the US have gone up 6.7% since May 2013; and International markets (VEU) up 1.9%, \

- Bond funds (TLT) have gone down -13.1% and real estate funds (IYR)  down -18.7%. Commodity funds (DBC) has gone down as well -2.3%

- And Gold funds down over -10%… 

- If one followed a diversified route for managing one’s money, then this period showed a reduction in portfolio equity by -3%.!! That certainly feels bad.

The individual investor then turns to his portfolio manager and asks “How can you be managing my money so poorly? Every day I see the markets making new highs but my account is going down? On top of that I am paying you commissions”. What is the answer to that?

The real answer is that we cannot predict which sector is going to go up too well. I try to do that with my monthly 401K momentum investment strategy; but we cannot know in May, that we need to put all our money into SPY as it will do the best. Using the Ivy Portfolio diversified tactical asset type strategy that I have written about earlier, I can manage my losses by getting out of funds such as bond funds and real estate funds when technical analysis gives us down signals. Even then, the signals typically lag and all losses are not avoidable, just as all gains cannot be captured either. The main value is however in getting a steadier performance in the long run with minimal loss years. Patience – the one word most investors are unable to follow.

What should I do if I want larger gains? The only answer to trying for larger gains involves taking more risk. I can take a basket of stocks and trade them long and short (using put options or vertical option spreads) so that we are market neutral… meaning we can make money going up or down. Even then it is not a free ride as we are open to being whipped more often and any one stock can drop large. Also, quarterly performance reporting can be volatile and can constitute a significant gain or loss for any stock. One approach would be to participate fully in both directions and let the chips fall where they may. In a long only strategy, if a stock does not move up significantly, then the trader looking to make a killing going long, gets killed instead. The past may have shown a huge climb up; but the future behavior over a quarter or a year could be a slow ride sideways or down. In short, there is no free ride and one has to be patient waiting to ride that horse up when the stock performs well. Patience… stay consistent with the strategies and follow them for years.

			Index Performance by Sector								Diversified
	SPY	SPY %	TLT Bond	BOND %	IYR Real Est	RE%	Commodities	DBC%	Intl VEU	INTL%	Strategy
May-13	166.30		116.17		73.61		26.08		47.82		85.996
8/18/2013	165.83	-0.3%	102.55	-13.3%	61.24	-20.2%	26.43	1.3%	46.93	-1.9%	80.596	-6.7%
9/29/2013	168.90	1.5%	106	-9.6%	64.44	-14.2%	25.87	-0.8%	48.91	2.2%	82.824	-3.8%
12/7/2013	180.94	8.1%	102.92	-12.9%	63.4	-16.1%	25.74	-1.3%	49.73	3.8%	84.546	-1.7%
12/12/2013	178.30	6.7%	102.71	-13.1%	62.01	-18.7%	25.49	-2.3%	48.77	1.9%	83.456	-3.0%

Also note the down signal on the Dow Jones 30 (DIA)..

401K Monthly Analysis - Santa Rally? 12/6/13

Dare we hope for a last Santa rally?

The market remains buoyed with good news of an increasing employment picture and low interest rates. See chart below on SPY (S&P 500 Exchange Traded Fund). My trading system on SPY remains pointed up. I should add that it has been up since 7/11/13 when the blue balloon showed up on the chart. The blue balloon was an exit signal on the down signal. As I have pointed out in previous posts, ext down means enter long on this system. My strategy is to stay long on my 401K funds as long as the system is pointed up. Any long positions should be treated carefully with stops and rules for disengaging from the market during the period the system signals exit long or down.

My current employer’s 401K funds analysis shows that WFA SPL Midcap VL as the top choice followed by NB MDCP GRTH Trust, and then Fidelity Large Cap. The only change would be from Fidelity Div Intl to Fidelity Large Cap. The Midcap funds have held the top two positions for several months now and I can’t help but feel that they may top out soon. The chart below on WFA SPL Midcap VL shows the cycle indicator at its peak suggesting a pullback as likely. Still, there could be a Santa rally this year and I plan to hold on and follow the system.

In my previous employer’s 401K the top choices are Vanguard Admiral, Fidelity Contra fund, Spartan Ext Market, and Domini Social Eq funds.

I have also chosen to buy some TBF in my R/IRA account. TBF is the ProShares Short Bond fund. It behaves opposite to bond funds which are struggling to keep their head up in an economy that has been positive, raising questions about the Feds needing to raise interest rates. As for investing in gold and silver. I prefer to watch the commodities index and trade those when I get an up signal. Gold and silver has been weak and I am not a contrarian investor who buys weakness, unless my trading system suggests enter based on some upward movement.

I have been working on creating trading systems on about 8-10 stocks that I will trade for the next year. I am using back testing using about 33 different trading systems to pick and sort. In most cases I am using a primary trend following system coupled with a faster secondary system that is often contrarian in nature. I will post a couple of that next time.