The Average Investor's Blog

A software developer view on the markets

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!


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