Friday, October 31, 2008
Now is the time to take a look at your taxable accounts and realize your loss’s . If you are fortunate enough to have some gains this year, you can use any realized loss to offset the gains, dollar for dollar. You can deduct $3,000 annually from your ordinary income and any loss that is not used will carry forward until it gets used.
If you realize a loss in a position you have to wait 31 days before you can buy that position or options relating to that position back otherwise you will be subject to a wash sale rule and your loss will be disallowed. One strategy is to substitute an ETF or similar stock or mutual fund for your realized loss, so that you wont miss a market rebound while you wait out the 31 days. You should use replacement securities to maintain your desired asset allocation. For example if you realize a loss in a handful of financial stocks you could buy XLF which is an ETF that tracks the banking index and avoid the wash sale rule. Im not a proponent of doubling down, if you double down you double your risk. A better approach is to find a swap like an ETF or a similar highly correlated stock or mutual fund.
You should also contact your mutual fund companies to get an estimate of capital gains taxes. Even though the markets are down around 40% from the highs it is possible for some mutual funds to have realized gains on the books. Don’t be caught by surprise. Take 5 minutes and make the phone calls. You can get the mutual fund, phone numbers at the profile page on yahoo finance . The only thing worse than taking a capital loss is having to pay tax on it.
There are almost 1,000 ETFs to choose from, it is very likely that one will track your realized loss positions closely.
Below are some of the major market and sector ETFs as swap candidates.
Obviously, you should always consult your tax advisors before doing any of this.
Thursday, October 30, 2008
The S&P model will potentially sell the long position and get short on Fridays close Oct 31, if the VIX stays > 62.76.
The NDX model and roadmap suggest a decline and the S&P model is on the verge of getting short.
However, the S&P is starting to make a trend change , below you can see the chart of the S&P which shows the intermediate term down trend line has been broken with bullish divergence in momentum ala MACD and breadth ala McClellan Oscillator.
I think a short term pullback to test the trend line is probably in the cards, then the markets go higher longer term.
If you are looking for some short candidates below is a list of stocks that are in a down trend , just under VAP resistance, with high Price/Sales ratios and a recent earnings miss. I would only short if you get a bear pivot or bear range pivot and place a stop 2 ATR above the swing high.
Since 1990 if you only invested for overnight activity and bought the close then sold the open on the next day you would have made $167.65 in SPY, $99 in QQQQ and $59 in DIA based on trading 1 share. As a comparison if you only invested for the market hours, and bought at the open, then sold at the close you would have lost -$97 in SPY, -$72 in QQQQ and -$45 in DIA also based on trading 1 share.
The bottom line is look to hang on to your trades a bit longer and take advantage of this overnight edge, your P&L will certainly appreciate it.
Wednesday, October 29, 2008
The NDX model took the profit in the long trade from October 27th for a 11.5% profit and got short at todays close.
The S&P model stays long from October 27th entry.
Above is a roadmap of the things I monitor regularly which influence the S&P for the short term 1-7 day and long term weeks and months. You will also find the track record of the trades that I have presented on this blog. I will update the roadmap and live track record when I post the model updates.
Since 1991 the alcohol and tobacco sub sector has been positive 88% of all years ( 15 up and 2 down ) with an average change of 3.63%. The software and services sector has had the largest average percentage change with an average gain of 4.35%, this sector has been positive 76.5% of years (13 up and 4 down).
As a comparison Since 1991 the S&P has been up 70.6% of years ( 12 up and 5 down) and the average November change in the S&P has been 2.92%.
Below you will find 2 tables that show the historical performance of 24 sub sectors of the stock market. The table on top is sorted by most positive months and the table on the bottom is sorted by largest average monthly change. The bottom line is that November has been the best performing month for the S&P with ( Alcohol/ tobacco, Materials, Capital goods, Media, Noncyclicals, Services, Software, Transportation) being up more times and ( Software, Telecom, Retail, Hotels/ restaurants, Alcohol/Tobaco, Technology, Healthcare, Services, Financials, Conglomerates, Noncyclicals, Media ) being up a larger percentage change.
Note I only calculated the sub sector returns back to 1991 because my data was limited. I hope you find these tables insightful and please make any effort to share this information to whom you believe would find it useful.
Tuesday, October 28, 2008
However, short and intermediate term I will continue to follow our computer models, until they stop working. They are working just fine now, the S&P model is up 35% YTD and the NDX model is up 58% YTD.
The intermediate term (1-7day) NDX model will potentially sell the current long from October 27th and get short at tomorrows close October 29th , if the VXN closes > 66.2 or if the VXN closes > VXN open.
The intermediate term (1-7day) S&P model will potentially sell the current long from October 27th and get short at tomorrows close October 29th , if the VIX stays > 66.96
For an uptrend within the period of consideration, draw a line from the lowest low, up and to the highest minor low point preceding the highest high, so that the line does not pass though prices between the two low points
Down Trend lines
For a downtrend within the period of consideration, draw a line from the highest high, down and to the lowest minor high point preceding the lowest low, so that the line does not pass though prices between the two low points
I learned about this technique of drawing trend lines in one of my favorite books Trader Vic--Methods of a Wall Street Master
I like to draw trend lines on close only charts, so for these examples I will use close only charts. If you like to use OHLC charts make sure that you connect the lows on uptrend , so that the line does not pass though prices between the two low points and for down trend lines make sure that you connect the highs so that the line does not pass though prices between the two low points .
Up trend line example, click image to enlarge
Monday, October 27, 2008
If the long bond futures open higher than ( 115^10.5/32 ) then buy the S&P futures on a stop 12 points above the open.
Exit 1st profitable open or 2% stop loss.
The performance report above is based on the current pattern and conditions, the results of trading 1 S&P futures contract since 1980. SPY and SSO also track the S&P futures.
A bullish pivot occurs while in a down trend and is a day when the low is higher than the prior days low and the high exceeds the prior days high.
A bearish pivot occurs while in an uptrend and is a day when the high is less than the prior days high and the low is less than the prior days low.
Please see the chart below labeled pivots for a visual aid. The green highlight bars are bullish pivots and the red highlight bars are bearish pivots. The green arrows indicate a long trade and the red arrows indicate a short trade. I used a 10 day moving average to determine trend.
A bullish range pivot occurs in a downtrend and is a day when the stock or market rallies an increment of the prior days range ABOVE today’s opening price.
A bearish range pivot occurs in a uptrend and is a day when the stock or market declines an increment of the prior days range BELOW today’s opening price.
As an example if we are trading GE and yesterdays high was 20 and yesterdays low was 19 the range is ( high – low) = $1 , today GE opens @ 20.5, I will buy GE if it rises 30% of yesterdays range above today’s open. ( yesterdays range = 1 * 30% ) + 20.5 today’s open = enter long @ $20.8.
For a visual aid the chart labeled Range pivots highlights a strategy of entering the market on a bullish range pivot or shorting the market on a bearish range pivot . The thin green line that tracks above the open shows the spot for long entry’s and the thin red line shows the spot where shorts may be entered. The green arrows indicate a long trade and the red arrows indicate a short trade. I used a 10 day moving average to determine trend.
Below you will find performance report statistics based on the pivot and range pivot concepts explained. As a comparison I also show the performance report statistics of a random entry and 7 day exit. I used a 7 day exit because that is the average trade length of the Pivot / range pivot in shorts and longs. Each backtest was run on, every one of the S&P 100 stocks since 1962 , than all of the performance reports were combined for the statistics shown below. You can see that bullish/ bearish pivots and bullish range/ bearish range pivots clearly do outperform the random market entry, in all of the most important performance measurement criteria’s listed.
Take some time and look at some charts of any stock or market, you will clearly see that every major top and every major bottom is accompanied with a pivot and or range pivot. The next time you are looking to enter or exit a trade remember these very simple rules and your trading results will almost certainly improve.
Click on image to enlarge. Pivots.
Sunday, October 26, 2008
The NDX model will potentially cover the October 21st short entry and get long at the close on Monday October 27th if the VXN makes a lower high or closes below yesterday's close or closes lower than Mondays open.
Both the S&P and NDX models are intermediate term models with a trade that usually lasts around 6 days.
Below you will find a quant screen of stocks with the bullish attributes of ( average volume > 200,000, low price/sales, strong relative strength ) I would look to enter long in these stocks if they make a bullish pivot or bullish range pivot.
Friday, October 24, 2008
My intermediate term (1-7 day) SPX and NDX models are still short but may flip and get long on the close of Monday October 27th, and as I have mentioned before I would never buy anything that’s in a downtrend until there is some sign of strength such as a Bullish pivot or Bullish range pivot.
Trust me, I didn't amass legacy wealth (underestimated by Forbes magazine in the high eight figures) by smoking weed during trading hours. Exhaling that first hit I thought and might even have moaned aloud: ``Whoa, dude! Why are you even running a hedge fund?'' The markets were collapsing, and so was my passion.
Thursday, October 23, 2008
Above is a chart of the Dow Jones in 1907, then the market declined 48% from its January 1906 top until its November 1907 bottom. The decline lasted around 22 months. Assuming the market has made a low, currently the Dow Jones has declined 45% from the October 2007 high to October 2008 low .
After the November 1907 market low the Dow Jones proceeded to advance 88% to the October 1909 high. History doesn’t always repeat itself but it usually does rhyme.
Below is a wikipedia description of the events of 1907.
Panic of 1907
Wednesday, October 22, 2008
As a longer term strategy you could buy the DIA or better yet take advantage of the VIX @ 61 and sell naked puts in the DIA equal to the amount of shares you would have bought. As an example for a $100,000 investment in DIA @ 88 buy 1136 shares or using the naked puts park the 100,000 in MMKt earning interest and sell 12 out of the money puts on DIA, the NOV 83 strike are trading ~ $3.5 that’s a 4% premium for only 1 month of time and these are 5.7% out of the money. You will have downside protection and a breakeven @ $79.5 If you look at these risk reward stats annualized the numbers are very attractive, ~48% premium income and much better downside protection when you consider the out of the money strikes. Don’t forget your 100k + premiums collected will be sitting in the money market during the 6 month period collecting interest. That’s a Ripe Trade.
One other note, is that I wouldn’t place any trades until you see some form of short term strength. I like to look for what I call a Bullish pivot or a range pivot. A bullish pivot is a day when today’s low is greater than yesterdays low and todays high exceeds yesterday high, entering at prior days high. A range pivot is adding or subtracting 30% of yesterdays range on to today’s open for longs / shorts respectively. This is probably one of the most basic but most important rules I have learned during my years of trading. A declining market or stock can not go higher without having a Bull pivot or Range pivot. And a rising market will never go down until after its formed a Bear pivot or bearish range pivot. This is a fact and I challenge you to prove me wrong.
FYI on Monday October 13th the markets put in what is referred to as a 90% upside volume day, this action in breadth is indicative of a major market bottom, especially when it occurs after a series of 90% downside volume days, which it has.
According to Paul Desmond of Lowry’s Reports Inc. “These two events – panic selling (one or more 90% Downside Days) and panic buying (a 90% Upside Day, or on rare occasions, two back-to back 80% Upside Days) – produce very powerful probabilities that a major trend reversal has begun, and that the market’s Sweet Spot is ready to be savored.” You can read the full details of Paul’s, Charles H. Dow Award winning research paper “ IDENTIFYING BEAR MARKET BOTTOMS AND NEW BULL MARKETS “
Tuesday, October 21, 2008
This model got short NDX / QQQQ at the close today.
This performance report is based on 1 contract trades in the NDX futures since 2001.
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Why Warren Buffett is Right (and Why Nobody Cares)
So long, suckers. Millionaire hedge fund boss thanks 'idiot' traders and retires at 37
Monday, October 20, 2008
Real time results during blog publication from October 2008 to February 2011
This system is designed for timing both long and short trades in the S&P 500 futures, SPY, SDS,SOS, SPX options, or any other vehicle that tracks the S&P 500. This model gets long or short based on a proprietary quantitative algorithm. You will notice from the performance report that this system trades about 37 times a year, the average trade lasts 5.3 days. This system has only been invested 55% of all trading days since 1991 however the average annual return has been 20.4% with a largest peak to trough drawdown of `8%. The system hasn’t had a down year. The worst performing year is 1995 for a +4% return. The best performing year was 1999 for a +62% return. From 1991 to present (October 2008)This S&P system would have turned a 100,000 account into $2,692,000 without using any leverage. As a comparison buying $100,000 worth of the S&P in 1991 would now be worth $320,000 with a largest equity drawdown of 50% during the bear market from 200 to 2003.
This system enters the S&P market on close and exits are based on an opposite signal, time based or a progressive profit taking mechanism, all next day orders will be emailed out the night before and posted to the website.
To prove this point in January 2007 I calculated the number of mutual funds in the Thomson Investment view database that showed a positive Alpha for 1, 3, 5, and 10yr returns and you can see in the table below that approximately only 32-38% of fund managers have generated a positive alpha. You may also notice that the percentage of managers that generate a positive alpha for 1yr (32%) is smaller than the percentage of managers that generate a positive alpha for 3,5,10 year periods. This phenomenon can be attributed to a survivorship bias .
Our systems have historically outperformed the markets with smaller amounts of drawdown risk.