A wonderful and simple ETF strategy- 125% return more than S&P

I am a great fan of simplicity. Not just as a philosophical concept, but also in terms of stoic practicality. Growing up I used to admire elegant mathematical proofs. I came across Gödel’s first incompleteness theorem in an issue of time magazine in 1999. The proof of it was so beautiful that i was completely smitten by it, but now i don’t seem to remember it.

Like wise, as posted before, what about an ETF strategy that would give you 125% more than S&P!!

It has just one indicator: Whenever the Market is in Uptrend invest 100% of the funds you have set aside, if the uptrend is under pressure invest 50%, if the market is in correction invest 0%.

How is the market doing today : you can get it from IBD (subscription required), Or i will be talking about here.

Market is in uptrend if there have been 3 or less high volume selling days in the last 25 trading sessions.

Market is under pressure if there are 3-6 days of high volume selling.

Market is in correction if in any one session the market lost 1.5% in heavy trading or 7 or more days of high volume selling in the last 25 trading sessions.

ETFStrategyChart_11313

Now in other posts i will elaborate on how to make 250% or more in market returns.

Happy Trading

Stocks to keep an eye on: Fleetcor Technologies (FLT)

Market is in confirmed uptrend, but the days of high volume selling is high and steady at 6. (once it reaches 6-8, the market has hit the top for now)

Market sentiment indicators are also approaching great bullish optimism

The Delta MSI (DMSI)measures the position of ~3,600 stocks relative to an intermediate-term moving average crossover (MAC) point. When greater than 50% of the stocks followed are above this MAC point, the market is bullish and equities are attractive. When the indicator is below 50%, risk is elevated and stock exposures should be reduced

Current Sentiment          Last Week          2 Weeks Ago     3 Weeks Ago

BULLISH              61.6%   67.0%   73.9%

Investor’s Intelligence sentiment indicator has backed off

Also AAII sentiment indicator fell 6 points from an all time high.

Now lets look at Fleetcor (FLT)

NOVEMBER 20TH 2012 DAILY STOCK

Key characteristics : Number 7 on the top 50 stocks of the entire market. 99 Composite Rating (top 1% of all stocks), EPS rating of 97, Relative Strength Line rating of 93, accumulation by market (people are buying it) is C+ which is not good (but the volume has quieted down a bit), since it hit the double top of 120 USD.  Out of 197 industry groups  (we want to invest only in the top 40 industry groups in the entire market and in the top 6 broad sectors out of 33 sectors based on price performance). FLT belongs the industry group of finance-credit card/payment processing, this industry group is ranked at number 14. FLT is the sector leader in finance (sector leaders are the greatest performers often having 1-2 years of heavy stock price growth). Finance is the currently in the top 6 sectors with the rank of #6 out of 33 sectors.

We need to invest in the best of the sectors (top 6 of 33 Sectors), and within that the best of the industry groups (top 40 of the 197 industry groups), and the top 50 stocks of  the entire market or sector leaders. We want to invest when the market is in uptrend, and when the best of the best stocks are breaking out of bases or bouncing off their 50 day moving averages in high volume. Simple isn’t it?

Always, always, without fail cut your losses (5%-8% of your purchase price : Remember it is easier to make up for the loss with a gain of 100% or more for winners, and it is easy. Preserve your capital at all costs, so when those winning stocks come along the way you are ready to play. Opportunities are like train stations in Tokyo, one goes and the other comes. Have the cash to buy the ticket and be on the platform and ride any train that you are comfortable with. Let the chart speak to you: trade what you see and not what you think)

Look at the chart – it is forming a second base recently.

I will buy one call option if it crosses 120 in high volume (only if the market is in uptrend).

I will write a post later on call options.

Happy Trading

 

 

 

 

 

How to use only one indicator for trading?

The most robust investment strategies are often the most simple. — Nickolas Atkeson – Founding Partner Delta Investment Management.

DELTA PRICE PERFORMANCE

I could not have agreed more. For teachers, non-location based travelers, and common folks like us we need simplicity and effectiveness in investing.

As Atkeson mentions in today’s issue of IBD print edition ‘We target high relative-strength stocks experiencing the fastest price appreciation over the past six months.

I will elaborate on relative strength in other posts, but the fundamental philosophy of yours truly is this : Price is the true North star.

Combined with the basic physics principle Newton’s first law – A body in motion continues to be in motion, unless acted upon by an external force.

We have a simple strategy – If the price is increasing as the volume is increasing we have a uptrend.

Now let’s look at: Guggenheim S&P 500 Equal Weight (RSP). It was created in 2003. An equal weighted index is just as it sounds. Every stock in the index has the same weight, regardless how large or small the company is. This gives us a broad exposure to the market. The greatest diversification with equal exposure to fastest and slowest moving stocks.

The S&P 500 is a market capitalization weighted index. The market capitalization of each stock is determined by taking the share price and multiplying it the number of shares outstanding. The companies with the largest market capitalizations, or the greatest values, will have the highest weights in the index.

Why does it matter: Equal weighted index tracks more closely the price performance of small growth companies when compared to S&P 500. Small caps will also have they say.

For example : Going to the S&P fact-sheet, as of March 2013, AAPL has index weight of 2.97% with its value of 415 million, whereas small companies First solar (FSLR) have no say at all.

How does it affect? FSLR grew 70% in price in the last 3 months, whereas AAPL grew 0%.

So we want an index that would reflect that, ergo: Guggenheim S&P 500 Equal Weight (RSP)

Now here is the most important thing I learned from the Atkeson’s report (page A8, print edition IBD): His company just uses 1 indicator: He sells all his stock holdings if more than half of the stocks in the index fall below their 75 days moving average (100% in cash), and buys if 50% or more stocks rise above the 75 day moving average.

Isn’t that wonderful and simple!! It reflects his performance in the above graph!

He adds “Two ETFs that offer excellent exposure to this group of outperforming securities are PowerShares DWA Momentum Portfolio (PDP) and PowerShares DWA SmallCap Momentum Portfolio (DWAS). PDP holds 100 high relative-strength, mid- and large-cap stocks and is rebalanced quarterly. DWAS holds 200 stocks. Combining PDP and DWAS provides exposure to 300 high relative-strength stocks covering the full range of market caps.

I personally like DWAS – its small cap technical leaders index. If we have a robust exit strategy (only around 1-2% risk management), this is a fantastic ETF.

RSP WITH DWAS

Signal Vs Noise

A very Sound advice from Jim Wyckoff, quite long time ago, but still valid

Trading buzzwords “patience” and “discipline” again come to mind when a market is pausing in a narrow-range, choppy and non-trending condition. This condition of the market is also called “market noise.” The majority of the time, most markets are in non-trending or choppy modes. Thus, if a trader does not have a good plan to deal with this type of market condition odds are very low that any trading success will ever be achieved.

Most trading professionals recommend that position traders ignore the day-to-day market noise, and instead focus on the bigger-picture perspective of the market. This can be accomplished in several ways. Examining longer-term price charts (weekly and monthly) is a good way to obtain that important bigger-picture perspective of a market and its trend.

Here’s another simple, yet effective way to help you filter out day-to-day price “noise” in a market you are trading: Set major support and resistance benchmarks on the shorter-term chart (usually a daily chart for position traders). These major price benchmarks can be weekly or monthly highs and lows, or spike highs and lows, or major psychological price levels (such as $15.00 in soybeans, or $7.00 in corn, or $1,700.00 in gold, or $95.00 in crude oil).

It’s a better idea to set these price benchmarks before you execute a trade and are in the heat of battle. Once you have established and duly noted these important shorter-term price benchmarks, then if prices do move above or below one of your benchmarks, that is a solid clue the price move is NOT just market “noise” and a bigger price trend is likely developing.

 

Sometimes if prices do move above or below major shorter-term price benchmarks, that is also considered a price “breakout” from a congestion area on the chart. This also suggests a stronger price move is possible in the direction of the price breakout.

Some traders may prudently ask, “Should I set my protective buy or sell stops near these major shorter-term price benchmarks?” That depends on the individual trader and how much capital he or she wants to risk on any given trade. For me, the major price benchmarks that I set for guideposts on any market are usually too far away from the price at which I’m filled (my market entry). In other words, I like to set protective stops at tighter levels than where my major price benchmarks are located.

Any time a trader can implement a strategy to better define or determine a market’s trend, or that will help the trader keep a better perspective on the market during the heat of trading that market, odds will be higher for trading success.

That’s it for now. Next time, we’ll focus on another topic on your road to trading success.

 

Daily Market Analysis

Though the market has had around 6 heavy selling in the last 2 months. It is hitting it’s highs again. Caution is required during this period.

let’s look at the top 50 stocks in the USA

at number 33 is Whiting Petroleum (WLL)

First let’s look at its weekly chart, and then daily

WLL

as you can see in the weekly chart there is a strong resistance formed on april 1st 2011 – 74 -75 USD.

and also the red line – 50 week MA – consolidating neatly (we want to see a good pull back in light volume)

WLL DAILY

The float (at the middle top of the chart) is very nice 118 million (for a stock with EPS rating of 97 – performing better than 97 % of all the stocks) this is woderful float – very easy to go up.  with an average daily vol of 2.6 million

Whiting petroleum corp ranks number within the oil&gas expl&prod group of stock (102 stocks) for overall rating of 99 (top 1% of all stocks in the market)

IBD (Investors Business Daily) research shows that 37% of a stock’s price movement is tied directly to the performance of its industry group. An additional 12% is due to the strength of its overall sector. In other words, stocks aren’t islands.

Now the Industry group for WLL is oil&gas exploration & Production – it is ranked number 5 in 197 industry groups.
and over all as a group the growth is 37% YTD.

WLL has a Relative strength rating of 86, which is good but we want to see more high volume accumulation.

So keep an eye open on this stock

Happy Trading

Trading for Travelers

I love to trade. I can do it where i want (given internet availability). So i want to write a series on that.

The first impulse of any reader would be – you need a lot of money? I would answer – No. the next reaction would be – It’s too risky. I would answer – First define your risk (that is – can you limit your risk so that you are 100% certain that if anything goes wrong, you can only lose X amount of dollars). People say – that is impossible. No, i have done it, i will show it to you.

Any trade that you place must satisfy the basic conditions of trading. Why? Because they would help you set up a trade for maximum profit potential. Any random trade can be placed with a 50% chance that it would go up or a 50% chance that it could go down. It is like betting on coin flips – there is a 50% chance of either heads or tails. You want a chance of 51% to start making a profit. Think about that – just 1% increase in chance of profit would give you a profit. This is fundamental to trading, or for that matter life. Isn’t it? Consider the Pareto principle – 80% of any profit comes from the vital 20%. That is, if you keep yourself from losing just small amounts and setting your trade for maximum profit potential, you just need to be right 20% of time to make good money.

Consider the following chart

Coin flip

Now let’s do an experiment – You start with 4 dollars, and you take 10% out of it and make a trade. If you get heads on a coin flip you get 2 dollars and you lose 1 dollar if you get a tail (2:1 risk management). Please keep in mind that there is just 50% chance that the market goes up and down, and exactly analogous to that there is a 50% chance that market would go up or down. Even after that you made a profit of 26%!! That is $5.04 is your final ending equity and you started out with $4.00, so the profit percentage is (5.04-4.00)/4.00 = 26%.

Now just by increasing your chance by proper trade setting can help you enormously.

But how much do you place in a trade? Consider the above coin toss.

KELLY FORMULA

I personally think risking 25% is too much. I like risk just 1% initially. That is if you $ 5000.00, just put $50.00 into one trade. But you also want to cut that risk by 90%. That is, you are only willing to lose 10% of the 50 dollars that is just $5.00 in any trade. You are being most conservative, extremely conservative. That is preserving your life saving really means preserving your capital for life. This is where a proper trade set up will help you be in the market for as long as it takes.

Cut your losses ruthlessly. If you find, after all the precautions, that the market goes against you, just cut losses and run. There are thousands of opportunities – it is like trains coming into a Tokyo metro station. One comes and other goes. But preserving your capital is paramount. It is easier to make up for 8 – 10% loss than making up for 25% loss.

Happy Trading