The Average Investor's Blog

A software developer view on the markets

The Weekly Update

Posted by The Average Investor on Mar 20, 2011

(Finally) A few changes in the positions. As of last Friday, both the Nasdaq 100 and the Emerging Markets closed below their 20-week moving average which constitutes closing these positions.

Asset Symbol Position Date In Gain
US REIT VNQ Long 2010-07-23 14.38%
S&P 500 ^GSPC Long 2010-09-30 12.09%

The US REIT position is still open. So is the S&P 500 position, however, it is based on a 10-month moving average, thus, it is updated only at the end of the month. It is worth noting however that it is more than 6% above it’s monthly moving average, so unless something drastic happens it seems likely it will be intact by the end of the month.

The Nasdaq 100 position was opened on September 3th, 2010 and it delivered 18.75% gain. If the double ETF, QLD, was used instead, the gains would have been boosted to 39.23%! I am not recommending using double ETFs, only trying to make the point that double ETFs are an easy and reliable way to leverage when combined together with trend-following strategies, which goes against the “common” knowledge.

The Emerging Markets position was the third whipsaw leading to a loss lately. Here is the list of the last five trades:

Date In Price In Date Out Price Out Gain 3x Gain
2010-07-23 39.97 2011-01-28 45.33 10.16% 27.79%
2011-02-04 46.50 2011-02-11 45.63 -1.87% -5.84%
2011-02-18 46.31 2011-02-25 45.52 -1.71% -5.45%
2011-03-04 46.90 2011-03-18 45.23 -3.56% -11.02%

This sequence of trades is quite illustrative of the trend-following results. A few trades are successful, the hope is that the successful trades will deliver gains large enough to cover for the losing trades plus some more. In the EEM case, the last three losing trades have left only 2.47% from the last gain. Even more stunning is that using a 3x ETF, after the last trade, the previous 27.79% gain is reduced to a mere 1.2%! That’s why it’s important IMO to do these analysis.

Reducing the whipsaws is essential, but certainly non-trivial. In my opinion, that’s the place to spend efforts improving these systems.

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