The Average Investor's Blog

A software developer view on the markets

Archive for July, 2010

New Positions

Posted by The Average Investor on Jul 28, 2010

As of the Friday close a few instruments which I follow are above their 20-week EMA. The Nasdaq 100, the US REIT and the Emerging Markets all went into bull territory.

One way to trade the US REIT is by using Vanguard VNQ ETF. Coincidently, Friday was also the Ex-Dividend date for this fund. The dividend paid is considerable, about 4% annually, thus about 1% quarterly. Have I noticed that earlier (let’s say on Thursday), I could have approached the trade in a different way. I could have calculated at what price of the Friday close the 20-week EMA would have triggered the signal, and based on that decided whether it’s worth to take the risk of the added 1% or not.

One way to do that is to reverse engineer the EMA computation. We can build an equation where we have the EMA sum on the left and Friday close on the right. Solving this equation will give us the close that will make the EMA and the close equal. Thus, any close equal or higher will be considered a buy signal.

I was lazy, so I just tried a few different closing prices for Friday using Yahoo’s ^RMZ, which is the index tracked by VNQ. If the Friday close of RMZ was 657, then the EMA would have been higher (no buy), but for a close of 658, the EMA would have been lower, thus a buy signal would have been triggered.

On Thursday, RMZ closed at 678.58, hence, to close below 658 on Friday, it would have needed a more than 3% drop. Therefore, betting that a buy signal was coming and buying a day earlier to gain the extra income from the dividend was odds on.

Now for the aftermath: Friday itself was a positive day for VNQ, it added about 1.4%. In total, a buy on Thursday would have added about 2.4% (1% from the dividend and 1.4% from Friday itself) in total to the trade. Pretty good, eh?

Keep in mind for the next time!

Posted in Strategies, Trades | Leave a Comment »

Emerging Markets Bearish Again

Posted by The Average Investor on Jul 20, 2010

Last week the Emerging Markets (EEM) was a buy with respect to its 20-week moving average, but the choppy week ending on a deep plunge triggered a sell. Using Monday’s prices at the open, this trade would have yielded a 2% loss.

Posted in Trades | Leave a Comment »

Emerging Markets Turn Bullish

Posted by The Average Investor on Jul 13, 2010

As of the Friday close, EEM (the emerging markets ETF) is above its 20-week moving average. It’s time to open a position. I will use the price at the Monday’s open, $39.81, to track this (imaginary) trade.

Emerging Markets ETF (EEM)

Using the 20-week EMA is not random, in fact, it’s my favorite. More on that however – in another post, hopefully sooner than later.

Hope you also like the white charts better …

Posted in Market Timing, Trades, Uncategorized | 1 Comment »

S&P 500 pierced the 12 month MA

Posted by The Average Investor on Jul 1, 2010

If you remember, at the close of the last trading month of May, S&P 500 was below it’s 10 month MA (see my previous post S&P 500 in Bear Trend). Back then, I commented that the S&P 500 was still above the slower, 12 month MA. Not anymore. As of the close of June, the S&P 500 is officially below it’s 12 month MA as well.

And to show you how precise the 12 month MA has been – notice that it remained under the price for the entire bull move from 2003 to 2008.

S&P 500 and the 12-month MA

If that’s not sufficient, the Dow Theory experts have declared over the recent month the end of this bull rally. For those of you interested in this old system – Jack Schannep’s interpretation of the Dow Theory is the best around in my opinion. His work is definitely a significant contribution to this 100 year old strategy and it does provides followers with a well-quantified and well-defined investment framework.

To sum it up, I am out of the market. There are just too many red flags:

1. 10 month MA broken for two months now (compare with 2003-2008 rally)
2. 12 month MA broken
3. Dow Theory in sell mode
4. The rally from the March 2009 lows has been huge, in fact unprecedented
5. We don’t talk fundamentals here, but how do you feel about the economy anyways?

Posted in Market Timing, Strategies | Leave a Comment »

EMA vs SMA: A Curious Observation

Posted by The Average Investor on Jul 1, 2010

Last month the S&P 500 closed below its 10 month Simple Moving Average (SMA). In a previous post, I stated that taking this position would have netted a gain of 18%.

The curious fact is that if one has used the Exponential Moving Average (EMA) instead of SMA, the last trade would have resulted in “only” a 9.8% gain! The reason is that the EMA would have entered the trade a month later. A picture is worth thousands of words:

S&P 500, EMA (blue) and SMA (red)

Notice how the SMA (red line) is cutting the price earlier than the EMA (blue line) after the these big drops – these are the earlier entries.

Why bother with EMA then? My research has convinced me to use the exponential moving average (EMA) instead of the simple moving average. It was just a mere coincidence that I used SMA back then. Thus, for the sake of these discussions, I’d want to correct myself. Here is the table for the last few trades of S&P 500 based on 10 month EMA:

Date In Price In Date Out Price Out Gain/Loss
2003-05-01 916.92 2005-05-02 1156.85 26.17%
2005-06-01 1191.50 2008-01-02 1467.97 23.20%
2009-08-03 990.22 2010-06-01 1087.30 9.80%

Three winning trades, but still, the total accumulated gain 70.67% is still less than the total accumulated gain for the same period using SMA – 74.33%, regardless that the latter has a losing trade besides the three winning! Let’s review the SMA trades:

Date In Price In Date Out Price Out Gain/Loss
2002-04-01 1147.39 2002-05-01 1076.92 -6.14%
2003-05-01 916.92 2004-08-01 1101.72 20.15%
2004-11-01 1130.20 2007-12-01 1479.63 30.92%
2009-07-01 920.82 2010-06-01 1089.41 18%

And I am still convinced to use EMA … Hmmm …

Posted in Market Timing, Strategies, Uncategorized | Leave a Comment »

 
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