Sunday, July 31, 2011

As a follow up to yesterdays post titled "How to beat the best market timing strategy" . A reader commented on the difference in annual returns, Hulbert states an 11.4% annualized return and I cited a 5.4% annualized return. The difference is 4 fold. ! 1) I tested the strategy on the S&P while Hulbert used the Wilshire 5000, 2) I didn't account for growth while not invested 3) I didn't get the exception rule coded and 4) we started on different dates.

1) The strategy is only invested 30% of all days. I didn't factor in how the account would grow while it was sitting in cash for the remaining 70% of days. From 1980 to present 7/21/11 the average 90 day T bill yield was 5.17% if we assumed earning 70% of that yield while this model is in cash there would be a 3.6% improvement to the 5.4% annual return, bringing it up to 9% annual return.

2) I dont have Wilshire 5000 data to run this strategy, I do have Russell 3000 data back to September 1987. Perhaps the Russell 3000 is more representative of the Wilshire 5000 versus the S&P 500. Below is a chart of using the original timing strategy on the Russell 3000 ( $RUA) and as a comparison the timing strategy on the S&P ( $SPX) . Using the Russell 3000 boost the annual return to 6.26% if we add the 3.6% improvement from the money market the model is at 9.86% annual return.

3) I still cant seem to code the exception rules, its making smoke come out of my ears, but I haven't given up.

4) I don't have the data to start in the early 1980's which Hulbert quoted the 11.4% annual performance from.

The difference between Hulberts quoted 11.4% annualized return and the 9.86% annualized return that I came up with is a combination of not having Wilshire 5000 data, not starting on the same date and not having the exception rules coded.

The title of yesterdays post was "HOW TO BEAT the best market timing strategy ever" . If we test the "How to beat " rules on the Russell 3000 since 1987 the account would have grown 10.6% annualized then add in the 3.6% per year in money market growth brings the return to 14.2% then tack on any additional boost in returns from the other variables we weren't able to account for, perhaps another 1-2% = ~15.2 to 16.2% return per year. Below you will find the equity curve using the "How to Beat " rules and original rules as a comparison both tested using the Russell 3000 and no account for money market growth.

FYI there is an ETF for the Wilshire 5000 ticker WFVK, it trades by appointment only 1,000 shares if you are lucky and has only been around for 1 year.

Check out some of our market timing models that are even better. We don' just beat the market we leave bruises! Join our team and become a champion, sign up for a free 14 day trial, here.

SPY, XLF, QQQ, EEM, EWJ, TNA, TZA,IWM, DIA, QID, IWB, IWO

Wednesday, July 20, 2011

How to beat the best market timing strategy ever!

In reference to this article titled Maybe the best market timing strategy ever I ran a series of backtest reports to verify the concept..

In a past article titled “Timing System Gone, Not Forgotten” from 2003, Mark Hulbert lists Norman Fosback’s past timing system rules as:

1. “To exploit positive seasonality around the turns of each month: Buy at the close of the third-to-last trading of each month, and sell at the close of the fifth trading session of the following month.

2. “To exploit positive pre-holiday seasonality: Buy at the close of the third-to-last trading day prior to exchange holidays, and sell at the close of the last trading day before a holiday.

3. “Exceptions: If the holiday falls on a Thursday, sell at Friday’s close rather than Wednesday’s. Also, if the last day before a holiday is the first trading day of the week, don’t sell until the day after the holiday. Finally, never sell on the first trading day after options expire; instead wait an extra day.”

I had a problem programming the 3^rd rule above , the “Exceptions” . I tried a bunch of different approaches but couldn’t seem to get the “exceptions as a quantified rule” correct for the back test. The results that you find below are based on the first 2 rules listed above.

Based on the first 2 rules listed above, below you will find the performance report based on taking a $10,000 position in the SPY for each signal since 1988. There have been 380 signals since 1988 and 220 have been winners for a 57.9% win rate. The average trade made .39% , a compounded return of 247% which is 5.43% per year.

Is a 5.4% annual return really the “best market timing strategy ever”? I think not!

Using the following rules you can more than double the historical performance.

1) Buy at the close on the 5^th day prior to the end of the month then sell at the close after 6 trading days since entry.

2) Buy at the close on the 5^th day prior to a holiday then sell at the close after 1 trading day since entry.

Below is the performance report based on the 2 "improved" rules listed above, this report is based on taking a $10,000 position in the SPY for each signal since 1988. There have been 380 signals since 1988 and 236 have been winners for a 62% win rate. The average trade made .59% , a compounded return of 745% which is 9.51% per year.

Below is the equity curve of Norman Fosbacks rules, the improved rules that I have presented and a buy and hold for comparison.

Trade like a champion and join our team, details here!

SPY XLF IWM QQQ EEM EFA EWJ

Monday, July 18, 2011

Short squeeze screen

This is a list of short squeeze candidates that will get updated when new short interest data comes out on the 15th and end of month.

If you are familiar with Phil Erlangers work you will know that he has found success at buying stocks in an uptrend that have an increase in short interest. Below is the equity curve of Mr. Erlangers short squeeze setup.

Below is a list of the stocks with very high short interest as a percentage of the float and sorted by 6 month relative strength. The idea is that it is bullish that these stocks are able to continue higher with such dour sentiment and heavy selling from shorts. When the shorts admit defeat and throw in the towel, they have to buy and cover the position which will boost the stocks even higher.

Sunday, July 17, 2011

Link list

Here is a list of links you may find interesting

Weekly re-cap

Key Earnings Reports Next Week

How to use paired trades to profit in July

A Breadth Thrust Signal

The economic debacle in 4 simple charts

India is outsourcing jobs to the U.S.

Linda Bradford Raschke – how to focus and why she keeps notes

Lessons From Irwin T. Yamamoto

Overview of Research on Individual Investors

REITs a Proxy for Real Estate?

Interview with Joel Greenblatt: The Little Book That Beats the Market?

Magic Formula and Small Caps–The Missing Link?

Why Winners Win

Highly correlated markets are more volatile markets. (Don Fishback)

Why the US balance sheet recession won’t last as long as Japan’s. (Pragmatic Capitalism)

I will post on this one in a few and show the optimal entry and exits Maybe the best market-timing system ever

Wednesday, July 13, 2011

S&P and VIX up at the same time

Today the S&P closed higher than yesterday while the VIX also closed higher than yesterday, this is not normal. The S&P and VIX usually have a very strong inverse relationship, when the S&P goes up the VIX usually goes down. I was curious to find out what the expectancy is in the S&P when the VIX and S&P both go up at the same time. Rather than eyeballing my charts and trying to find instances in the past that look similar to the present I ran a backtest on the S&P from 1990 to present. All performance results are based on trading 1 S&P futures contract.

This table shows the 1,2,3,4,5 day performance of buying 1 S&P contract at the open after the S&P had a higher close and the VIX also had a higher close. There is clearly a negative expectancy for the S&P when this scenario has occurred in the past.

As a comparison , the table below shows the 1,2,3,4,5 day performance of buying 1 S&P contract at the open after the S&P had a higher close and the VIX had a lower close. This is a normal inverse S&P and VIX correlation and the historical results are improved when compared to the positive correlation.

The table below shows the 1,2,3,4,5 day performance of buying 1 S&P contract at the open after the S&P had a lower close and the VIX had a higher close. This is a normal inverse S&P and VIX correlation and the historical results are improved when compared to the positive correlation.

As a comparison , the table below shows the 1,2,3,4,5 day performance of buying 1 S&P contract at the open after the S&P had a lower close and the VIX also had a lower close. This is a positive S&P and VIX correlation and the historical results are negative when compared to the positive correlation.

Trade with the odds on your side , click here.

Monday, July 11, 2011

Trade like a champion!

A new subscriber asked for the last 2 month trading history for the Ripe Trade and Sharpe Idea setups. There have been 31 winning trades out of 33 total trades a 94% win rate, the average trade made a 3% profit. Based on taking a $10k position in each setup you would have made $10,055 in profit.

Check out what our subscribers have to say about us, here.

Below are a list of the the trade dates and prices, many of these trades were posted on Twitter and Facebook , follow us.

We don' just beat the market we leave bruises! Join our team and become a champion, sign up for a free 14 day trial, here.

Sunday, July 10, 2011

Link list

Briefings weekly market wrap commentary.

The Day Stockpickr was going out of Business- A story of friendship

Condor Options newsletter performance review

HUI Still oversold

When the VXO is extremely low for 3 days in a row

How to trade while away

The Matt Drudge market indicator

How to reduce trading stress. (Attitrade)

Below you will find the most popular links from abnormal returns

· A must read on the psychology off all-time highs. (The Reformed Broker)

· How to short bonds. (Tyler’s Trading)

· 25 things every Wall Street summer intern should know. (NetNet)

· Using the Drudge Report as a contrarian indicator. (Bespoke)

· Some classic nuggets to start your week from Jesse Livermore. (Stock Sage)

· The shorts really hate these five stocks. (MarketBeat)

· The market looks cheap only because megacaps look cheap. (MarketBeat)

· Are underperforming hedge funds set to pile into equities? (FT Alphaville)

· High asset class correlations make for future sharp market moves. (Market Anthropology)

· What has gotten into gold (and silver)? (Stock Sage)

Saturday, July 9, 2011

Three inside up bullish

Today we test the "Three inside up bullish" candlestick pattern. This is part of a series of tests we are conducting to measure the efficacy of candlestick patterns.

This is the description as per the Lit Wick website

Three inside up bullish - How to Identify it:

A bullish Harami pattern occurs in the first two days
The third day is a white day with a higher close than the second day

Definition of the bullish harami.

As always if the term “Long” is used in the description, we will define “long” as a range that is greater than the 20 day moving average of range. When we test the pattern in a uptrend, we define uptrend as a close greater than the 50 day moving average and yesterdays 50 day moving average is greater than the prior days 50 day moving average.

We tested this pattern on every one of the S&P 500 stocks since 1990 and compared the performance results to the average 5 day move in all the S&P 500 stocks. The entry was at the open on the day after the "Three inside up bullish" pattern setup and 1 variations of the pattern , the exit was at the open 5 trading days after entry.

Below are the results of the "Three inside up Bullish", " Three inside up bullish with a close on the 3rd day greater than the high if the 2nd day". As a comparison the average 5 day holding period of all the S&P 500 stocks and all the other candlestick patterns that we have tested to date.

This pattern has historically under performed a random 5 day period and all other patterns tested. Trade with the probabilities, take a free 14 day trial here.

Friday, July 1, 2011

Stock market closed for Independence Day

The New York Stock Exchange, NYSE, is open from Monday through Friday 9:30 a.m. to 4:00 p.m. ET.
NYSE, NYSE Amex, NYSE Amex Options, NYSE Arca, NYSE Arca Options, NYSE Bonds and NYSE Liffe U.S. (NYSE Liffe U.S. 2011 Holiday Schedule - [PDF])

markets will observe the holidays below:

	2011	2012	2013
New Year's Day	-	January 2	January 1
Martin Luther King, Jr. Day	January 17	January 16	January 21
Washington's Birthday^*	February 21	February 20	February 18
Good Friday	April 22	April 6	March 29
Memorial Day	May 30	May 28	May 27
Independence Day	July 4	July 4*	July 4*
Labor Day	September 5	September 3	September 2
Thanksgiving Day	November 24^**	November 22*	November 28*
Christmas^†	December 26 (observed)	December 25*	December 25*

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