The Average Investor's Blog

A software developer view on the markets

Archive for January, 2011

The Weekly Update

Posted by The Average Investor on Jan 30, 2011

Asset Symbol Position Date In Gain
Nasdaq 100 ^NDX Long 2010-09-03 21.40%
S&P 500 ^GSPC Long 2010-09-30 11.84%
US REIT VNQ Long 2010-07-23 12.98%

Friday was a huge down day, which turned a good week into a no-change week. There was another interesting development – we closed one of ours long term positions. The Emerging Markets gave a sell signal at the close on Friday. This position (opened July 23, 2010) was a winning one for a 10% gain. At some point the gains were as high as 18% so using a stop-gain or a trailing stop-loss one might have a achieved better results.

There is a better way to improve the gains though – using a leveraged ETF. Wait a minute, but isn’t it “common” knowledge that leveraged ETFs must not be used for leveraging, especially for long term positions? Many experts, including Mebane Faber, warn of the dangerous of such an approach?

In general, that’s true, as usual however the devil is in the details. At first, I myself was quite surprised by my observations.

The statement I am trying to make is that in my experience and experiments, quite often, leveraged ETFs seem to give the “expected” long-term leveraged performance over long term, but only WHEN COMBINED with a trend-following strategy. In other words, one does not expect a 3x ETF to grow exactly three times more than the underlying index over a randomly selected period of time (for instance think of a randomly selecting a three month period), however, this happens often when the entry and exit points are determined by a successful trade of a trend-following strategy.

The trick in my opinion is the combination between a trend following technique and a leveraged ETF. A plausible explanation might be that when we “catch” the trend, typically there will be more positive days and more moves to the upside. Thus, the negative impact of negative days is greatly diminished and we see a decent leveraged results with no other cost but the higher risk.

For this position for instance, using EDC, which is a 3x bull ETF on the same underlying index, one gets a gain of 27.79%, which is damn close to perfection (30%). Even better performance by EET, which is a 2x bull ETF on the same underlying index – 21.08%.

THIS IS NOT A RECOMMENDATION TO USE LEVERAGED ETFs IN THIS PARTICULAR MANNER, but yet another observation of how following “common” knowledge might be missing on significant opportunities. From now on, let’s keep an eye on the performance of the leveraged vehicles as well.

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The Weekly Update

Posted by The Average Investor on Jan 23, 2011

A significant pullback for our leader – the Nasdaq. Is it just taking a break, or is it a real reversion? The markets overall are acting weaker and weaker, but so far it has been a “normal” pause, at least according to the moving averages.

Asset Symbol Position Date In Gain
Nasdaq 100 ^NDX Long 2010-09-03 21.28%
Emerging Markets EEM Long 2010-07-23 12.95%
S&P 500 ^GSPC Long 2010-09-30 12.07%
US REIT VNQ Long 2010-07-23 11.05%

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The Weekly Update

Posted by The Average Investor on Jan 16, 2011

The markets continue their march up, getting more and more out of touch with the underlying economy in my opinion. One wonders, what’s going on? My two cents are that this is the result of the massive money printing going on around the world. It starts to look more and more like the 2008 financial crisis that just passed, but instead of interconnected institutions, now we have interconnected governments. Before arguing, just consider the last week’s announcement by BOJ to buy European debt. I can’t help it but wonder, why are they so convinced that the domino is not going to start falling apart. Ah yes, because it has never happened before. And if it does happen, printing is likely not being able to help us. Then what?

Enough rumblings. Here is the state of our positions:

Asset Symbol Position Date In Gain
Nasdaq 100 ^NDX Long 2010-09-03 24.23%
Emerging Markets EEM Long 2010-07-23 16.48%
S&P 500 ^GSPC Long 2010-09-30 13.33%
US REIT VNQ Long 2010-07-23 11.47%

Notice the strong gains in the most recent position in the S&P 500, surpassing this week the US REIT position.

Last week my contrarian system indicated opening a short position in Gold. While this position looked as a clear winner for the first few days, it was closed on Friday’s close for a loss. Using DGP and considering trading at the close, the loss is 1.46% ((39.68 – 39.10)/39.68).

This came after two/three heavy down days for Gold. As a result Gold is entering oversold territory yet again, and it’s likely that we will get another signal this week.

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The Weekly Update

Posted by The Average Investor on Jan 9, 2011

The first week in January was good for the markets. The US stocks itched a little higher, while the emerging markets and the real estate stayed flat.

Asset Symbol Position Date In Gain
Nasdaq 100 ^NDX Long 2010-09-03 21.73%
Emerging Markets EEM Long 2010-07-23 14.82%
US REIT VNQ Long 2010-07-23 10.17%
S&P 500 ^GSPC Long 2010-09-30 11.04%

The short-term long position in Gold which I discussed earlier is still intact. It is based on a different system (contrarian and short-term), with much higher frequency of trading than the long-term trend-following moving averages.

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Adding Gold

Posted by The Average Investor on Jan 6, 2011

As I have mentioned in earlier posts, I have been testing my own contrarian methods based on moving averages. The trading frequency is relatively low (just to my taste), but it’s all relative. For instance, yesterday on the close the method was supposed to close a short position in a double leveraged gold ETF initiated at the close of Dec 29. Using DZZ as a proxy, this trade would have yielded ( 8.49 – 8.11) / 8.11 = 4.7%.

Now I have decided to start posting these signals too. The first one was triggered today – at the close gold was a buy according to my short term contrarian system. Using DGP as a proxy (the bull version of DZZ), I will assume that we entered this imaginary trade at the close – $39.86. It is reasonable to have a 5% stop ($37.86).

How do I know to enter on the close? The overbought/oversold situation is triggered on the close of the previous day. A trade is entered, when the closing price on the next day is within a certain range. At some point in the afternoon (trying to be random here) I check the markets and if all holds I may take the trade. As you can see this is as real trading as it gets except that I can automate the whole thing:).

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The Weekly Update

Posted by The Average Investor on Jan 2, 2011

Happy new year to everyone! The markets ended 2010 on an up-note. All our positions are still intact:

Asset Symbol Position Date In Gain
Nasdaq 100 ^NDX Long 2010-09-03 18.58%
Emerging Markets EEM Long 2010-07-23 15.77%
US REIT VNQ Long 2010-07-23 10.92%
S&P 500 ^GSPC Long 2010-09-30 10.20%

Looking briefly at the performance over the course of 2010, it looks like buy-and-hold has slightly outperformed trend following techniques. For instance, Nasdaq 100 grew by 17.55% for the year. Although the gains of the last trade stood already at 18.58%, the annual gain is a less, since this trade was preceded by three losing trades.

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