Thursday, February 13, 2014

Short and Medium Term Timers are Now Long (2-12-2014)

With the close of markets on Wednesday, February 12th, my medium-termed timer has transitioned to "Long" status.  The short-term timer moved to "Long" with the close of markets on February 7.  My long-term timer is still in "Cash", and is indicating caution.

With the Long-Term timer still in "Cash" I do not plan on jumping in with both feet.  This timer is a safety net, and when it's in cash, conditions simply are not favorable for long positions.

So let's look at the Long-Term timer a bit closer.

This is a brutally-simple timer.  Most of you could implement this yourselves; the only distinction that is different is that this uses my GGT index, which is comprised of about 3000 stocks with 50day average volume greater than 100K shares and prices above $1.  The index is adaptive, so your actual results may vary.  In fact, I'm sure they will vary.

You can see that the TREND of this timer is such that the difference between the 13d MA and the 65d MA lines is going more positive.  The 13d is still below the 65d, but the difference is almost 0.  When the 13d crosses the 65d the difference will be positive, as opposed to slightly negative, and away we go for another long signal.

It's important to note that this is a very long timer.  It withstands market gyrations, and is designed to keep you in the markets, or, alternatively, out of the markets.  Because of this, you can also give up gains, but that's the risk with being fully invested, isn't it?  Please don't complain to me that it's too slow.  It's not designed to move fast -- as I said, it's a safety net.

The performance of this timer, in isolation, is noteworthy.  It has provided 6 signals since November 2008.  5 of those signals have been winning signals, with an average trade of nearly +19% gain and winning performance of nearly 24%.  The exposure is nearly 70%, e.g., it has you in the markets 70% of the time since November 2008.  Also in this time if you invested in the GGT index (think IWM or the Russell 2000) you'd be up nearly 155% or a CAGR of 19.63%.  Your worse trade in this time would have been about -6% (it's slow) and your best trade about 60%.  Here are the stats for those of you who like to understand such things:

My usual disclaimers apply, but suffice to say, with only 6 trades in the past 5+ years, the sample size is small and you need to be careful.  The wheels could come off the wagon at any time.

The problem with this timer is drawdown.  Drawdown is realizing a paper gain, being really, really happy about it, then watching it vaporize.  As I've discussed privately with many of you, I think drawdown is the number one reason why we panic and lock in losses.  We watch gains disappear, and rather than stay the course, we exit.  Here's an example of this comparing my medium-term timer with the long-term timer:

The long-term timer is showing in puke-green; the medium-termed timer is purple.

Study the graph and you can see where things hurt you with this timer, but also note that since 1/1/2009, when these were set to "1.00", the LT timer outperforms the medium timer.

You have to be willing to take more risk if you want more gains.  Market exposure is greater risk, and you'd expect more gains with greater risk.  It shows here.

So, what to do here?

I plan on taking the medium-term signal and moving long in my positions, with the understanding that this signal could reverse and we could be headed south at any time.  Futures are down sharply as I write, which is actually a good thing, as it will allow us to get a good entry if we so choose.

If you are inclined to move into and index ETF, the GGT system is performing most like the SPY (S&P500) over the past 100 trading days using a simple Pearson correlation (Rsquared = 0.952).  The IWM is close at  0.951, so it probably doesn't matter.  One strategy is to simply buy the SPY and be done with it.

On the matter of how to enter:

I do NOT plan to buy weakness.  For those of you who know me, I buy strength.  How do I do this?

If a stock is in an uptrend, then the markets pull back, the uptrend is intact on longer time frames on the first day of the pullback.  As long as the uptrend continues we'll be good.  So I typically set an order for stocks that is a penny or two above the previous day's high.  This is a BUY STOP order.  If the stock takes off, the stop price will be exceeded and the order will be filled at the market price a tick or two after it exceeds my buy stop price.  I make the order GTC (good to cancel, or several months in general), so that it carries the next day.  If the stock does not take off, I reduce the BUY STOP to be the high of today, so as the price drops day over day, I'll get a better price when it finally does trigger.  Here's a graphical example:

So I placed an order on the 2nd day of the series, shown as the red cross on the left (2nd bar from the left).  On the 3rd day of the series, which was an up day, the high of that day DID NOT EXCEED the high of the 2nd day, so my order did not fill.  In this case I did not have to adjust my BUY STOP, since day 2 and day 3 were equivalent highs, but you get the idea.  On the 4th day the stock took off, and I filled where the little blue circle is.  The stock has moved upward, and as a safety net, I've placed a stop order below the low of the next day.  This is where I am at today.

The list of stocks I like right now, in decreasing order, are these:


These are all good stocks so if any break out they are worthy of consideration.  Note that I presently have positions in BRD (not on list), DL. ILMN (not on list), PKG, and XRS.

What you do from here is up to you, obviously.

If you take the medium-termed signal and move into the markets, do so with an itchy finger as long as the LONG-TERM timer is in cash.   If you choose to sit on the sidelines cash is a very good position.

Your crystal ball is as good as mine.