Sunday, April 1, 2012

Update for Monday, April 2nd - Update on Timer Systems

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Summary

Overall, the long term trend is up but the intermediate trend is under pressure to move to cash, and the short term trend is in cash. The Long-Cash Ratio continues to contract, meaning that day-over-day, more stocks are moving to a recommendation of CASH than in the other direction, so moving long at this time would be swimming up stream. My personal view is that positions entered into in early January and around the middle of March should continued to be held if they have profits, but I will prune any underperformers and move to cash for those that are underwater. To accomplish this I have set a 1% trailing stop loss on the underwater positions and if they move up, great -- if they drop, I'm out.

Here are the details:

The price slope model (PSM) has been increasing in bearishness over the past few days:






As with all my images on this site, right-click on the picture to open in a new tab or window at the original size.


Price moved up a slight amount (+0.13%) on volume that was -3% below the 50d MA on Friday, which is unremarkable.

The slope of the 2d price EMA moved positive on Friday, but overall, you can see that behavior for the week was net down. While there is a positive expectation for re-entry on Monday on the long side under these price conditions (2d positive, 3d - 8d negative, 13d - 65d positive), the chances of these trades working out in a historical sense are only between 36% and 44%. The following chart shows the historical results compared to entry when the entire price slope matrix is negative, and the 2d transitions positive (the highest possible chance of the trade working):






It's clear that relative to coming out of a complete oversold condition that our present conditions are not any where near ideal. From the table you can see that you should be buying when:
  • All of the price slopes are negative and the 2d transitions positive (reference point)
  • The 2d is already positive and the 3d transitions positive (88% success relative to 2d transition)
  • The 2d is already positive and the 5d transitions positive (55% success relative to 2d transition)

Furthermore, the table suggests that re-entry on pullbacks can be incredibly powerful if conducted early in the recovery. Hence,
  • If 3d already has a positive slope, and 2d transitions from negative to positive (due to a short-term pullback), and the rest of the EMA slopes are negative, then there is a 91% chance of success.
  • If the 5d already has a positive slope, and 2d transitions from negative to positive, and the rest of the EMA slopes are still negative, then there is a 61% chance of success of the entry.

The table confirms what most of us already know -- participation early in a new move is key if we want the highest probability of gains. As the move matures the chances for gain decrease.

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The Long-Cash Ratio slope model continues to contract, with the LCR dropping another 1% on Friday despite the weak move up in price:






All of the LCR slopes are negative, although we did see some strength in the LCR acceleration on Friday. Bottom line, there is no compelling reason to move long when the database is showing us that stocks are falling below their historical optimized performance thresholds.

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I've refined the longer-term timer and have moved the 5d / 65d EMA crossings to a 13d / 65d set of crossings. Additionally, when I do this and combine secondary entries to the Elder Intermediate Timer Exits, the historical performance is outstanding and represents the best model that I've been able to develop to date.

Here's the performance table:




Across the top are the different timer conditions that I've chosen to display. Along the left are the descriptions on the various metrics I use. Let me quickly explain these.

Cumulative Performance is since 11/25/08, which is when the GGT database was expanded to over 3000 stocks. The data in the database is "stable", and the methods used to calculate the GGT optimized levels have not changed since this time (interpretation has, but methods of calculation have not).
Compounded Rate of Return is exactly what you think it is.
Market Exposure may be new to some of you. Timer systems have the ability to sit in cash, so the lower the value, the less you are exposed to the market. In general, we want this number to be lower, not higher. If we were in the market 100% of the time (buy and hold), we would see a 100% here.
Efficiency is a related to market exposure. It is the amount of Cumulative Performance divided by the Market Exposure. Large Efficiency values indicate higher gains with lower market exposure, which means lower overall risk.
Worse Trade, Best Trade, Average Trade, Median Trade, Stdev, etc. are all self explanatory.
Mathematical Expectation (ME) is the "edge" of the system. We want this to be positive. The more positive, the better. Note that ME has a "flaw" of sorts -- it does not look at consistency of trades.
Pessimistic Return Ratio (PRR) counters the "flaw" in ME and incorporates the consistency of trades. The more trades, the better PRR will indicate your "edge". We want PRR to be above 1.5, and values above 2.0 are considered very good.

I've circled two columns. The right column is the system which my focus will be upon going forward, and the left circled column will also be the focus of my efforts in the event I want to "jump into" the market mid stream (in the event I miss the initial entry for whatever reason).

The timer rules for initial entry are explicitly this:

Enter the markets on a new signal:
  1. if the 13d price EMA crosses the 65d price EMA from below AND
  2. the Elder Intermediate termed timer is NOT in CASH.

Re-enter the markets if stopped out or on a failsafe condition:
  1. if the LCR has been above it's 4d SMA for two days (this is my short-term timer system) AND
  2. the Elder Intermediate termed timer is NOT in CASH AND
  3. the long-term timer is already long.

Re-enter the markets if stopped out or on a failsafe condition:
  1. if the 5d LCR transitions from negative to positive slope AND
  2. the Elder Intermediate termed timer is NOT in CASH AND
  3. the long-term timer is already long.

Exit rules are simple: Exit all positions if the Elder intermediate-termed timer transitions to CASH.

The entry/exit dates for the system are as follows:






Additionally, there are times when there is an edge to adding positions to the system. I'm keeping track of those dates, and the results were in the timer table above in the "Secondary Entry + Entry Performance" column. This too has a significant positive expectation and is a very efficient system for managing secondary entries. Here are the dates and status of the system for secondary entries:






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Overall, my plan for Monday is unchanged. I see no compelling reason to enter positions at this time, and as far as selling is concerned, positions entered recently that are weak will be sold with a 1% trailing stop loss in place.  I do have hedging positions on in all accounts and plan to add to those positions if a reversal in the long markets is confirmed.

Regards,

pgd