The Average Investor's Blog

A software developer view on the markets

Archive for November, 2010

The Weekly Update

Posted by The Average Investor on Nov 29, 2010

Except the Nasdaq position, everything has seen a significant pullback. The Emerging Markets, the US REIT and the S&P 500 have given up about at least half of the gains. Still no adverse crossover yet.

Asset Symbol Position Date In Gain
Nasdaq 100 ^NDX Long 2010-09-03 15.16%
Emerging Markets EEM Long 2010-07-23 8.87%
US REIT VNQ Long 2010-07-23 7.75%
S&P 500 ^GSPC Long 2010-09-30 4.22%

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Posted in Market Timing, Trades | Leave a Comment »

The Weekly Update

Posted by The Average Investor on Nov 23, 2010

Some of our positions barely survived this volatile week. On Wednesday VNQ reached lows that if held would have triggered a sell at the end of the week (a previous post shows how to pre-compute the exit points). In fact, if stop losses would have been used, two of the positions (EEM and VNQ) would have been closed.

The tide turned however for the rest of the week and all positions were intact at the end.

Asset Symbol Position Date In Gain
Nasdaq 100 ^NDX Long 2010-09-03 14.17%
Emerging Markets EEM Long 2010-07-23 13.03%
US REIT VNQ Long 2010-07-23 6.49%
S&P 500 ^GSPC Long 2010-09-30 5.13%

Posted in Market Timing | Leave a Comment »

Using Stops

Posted by The Average Investor on Nov 16, 2010

Probably a controversial area, but I do use them. They seem to help not only to limit losses, but also to protect (realize) profits. To realize profits, I have been using lately “trailing stops”. With the today’s pull, but EEM (Emerging Markets) and VNQ (US REIT) hit their trailing stops, closing the trades for about 10% and about 6% gain, respectively. However, I will still keep the trades as open – the idea is to concentrate only on the MA.

To be honest, I am a bit disappointed with the VNQ trade. This trade has been up as much as 17% and it seems stupid to end up pocketing only 6%. True, hitting the stop loss might be a false alarm, just a pullback before another leg up, but only future will tell. I also used a wider trailing stop on the VNQ – 8%, instead of my usual 5% (which I was using on EEM). Similarly, the EEM trade went up as much as 19%.

I’d like to have both a stop loss and a stop gain, however, my brokerage doesn’t allow me to set these two at the same time. They allow only a single stop trade at any time. At present I have been solving this issue using a trailing stop, but I think it’s time to reconsider my approach. At least for these long term trades I will be taking profit at around 15% from now on.

Posted in Strategies | 1 Comment »

The Weekly Update

Posted by The Average Investor on Nov 14, 2010

A nasty week! It looks like the market might be (finally) turning around. One of my positions, the US REIT, dropped more than 4% on a single day. Regardless of the severe pullback, there are no changes to the positions.

Asset Symbol Position Date In Gain
Nasdaq 100 ^NDX Long 2010-09-03 14.31%
Emerging Markets EEM Long 2010-07-23 12.78%
US REIT VNQ Long 2010-07-23 8.93%
S&P 500 ^GSPC Long 2010-09-30 5.08%

On the bright side, a contrarian strategy I have been researching gave a sell signal on S&P 500 on the close of Monday. Quite satisfied with the performance so far – closing the trade on Monday close latest.

Posted in Market Timing, Trades | Leave a Comment »

S&P 500 in the 50s

Posted by The Average Investor on Nov 14, 2010

Nowadays it’s a common knowledge that trend-following MA-based techniques can boost returns, at the same time lowering the risk.

What I found quite annoying, and what these articles are trying to fix, is that performance of such techniques is rarely shown in a realistic way. What do I mean by that? Let’s take as an example the S&P 500 total returns.

Relative price and total return of the S&P 500 index

Doesn’t this graph scream buy and hold?

At least in my opinion it does. However, how many of us have an investing horizon of 60 years? Furthermore, there a few places on the graph which indicate considerable pain for a potential investor, that is not easy to spot at first glance. For instance, in 1975 one would have had less money than in 1966! Not only that, but this would have been the second time this happened over 10 years – the situation is similar in 1971! Similar story after 2000. Now the real question – how many investors would have managed to close their eyes and continue with their investments?

To understand the pros and cons of MA techniques, my approach has been to split the historical data in chunks of equally long periods. Quite often I have used 10 years. Let’s take a look of three time frame MAs over 1950-1960:

Moving Average Annual Growth Trades Winning Trades Time In Max Drawdown
200 Day 12.78% 26 42% 59% 6.21%
20 Week 11.50% 26 53% 70% 6.16%
10 Month 14.93% 4 50% 49% 7.89%
Buy and Hold 13.65% 21.47%

So, what – the omnipotent 10 month MA is the winner again? The devil is usually in the details. For all the returns, I have excluded dividends. One reason is that I don’t have (or Yahoo Finance doesn’t provide) the dividend adjusted data for S&P500. It is also unfair IMO to use dividend adjusted returns for anything but for buy and hold.

Back to our discussion, considering that dividends were in the 5% range in the 50s, it is clear that buy and hold performed best. However, notice the drawdown. Following the buy and hold strategy, one should have been able to accept almost 22% losses from a previous peak! Knowing how I feel after losing 10% on a single trade, certainly it won’t be easy to not pull the trigger on a 22% of the entire portfolio.

The MA strategies certainly address the “pain” factor. The worst of them, 10 month MA, exhibits a drawdown of less than 8%.

Why the 10 month (and the buy and hold) performed so well?

Monthly S&P 500 with EMA(10)

Notice, that the first trade we made using the 10-month EMA was in 1953. If we have started at the beginning of the period, the performance would have been much better in this case. However, we don’t start trading until we receive the first signal – we have to draw the line somewhere.

All in all, in the 1950s we have had a trendy, growing market. Thus, MAs techniques have performed quite well, the less trading, the better. Thus, buy and hold and the 10 month MA performed best.

Posted in Market Timing, Strategies | 1 Comment »

The Weekly Update

Posted by The Average Investor on Nov 7, 2010

Another very strong week fueled by the Fed announcement of another 600 billion money injection. I wonder how many tries it will take before the market cries foul. So far so good though and we have been up with the trend!

Asset Symbol Position Date In Gain
Emerging Markets EEM Long 2010-07-23 17.84%
Nasdaq 100 ^NDX Long 2010-09-03 16.92%
US REIT VNQ Long 2010-07-23 14.72%
S&P 500 ^GSPC Long 2010-09-30 7.42%

Posted in Uncategorized | Leave a Comment »

The Weekly Update

Posted by The Average Investor on Nov 1, 2010

This week ended also the month. All our positions are intact.

Asset Symbol Position Date In Gain
Nasdaq 100 ^NDX Long 2010-09-03 13.59%
Emerging Markets EEM Long 2010-07-23 12.08%
US REIT VNQ Long 2010-07-23 9.23%
S&P 500 ^GSPC Long 2010-09-30 3.68%

Posted in Trades | Leave a Comment »

 
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