Wednesday, March 12, 2014

Intermediate Timer moves to Cash with Close on March 11

My intermediate-termed timer has transitioned to CASH with the close of markets on Tuesday, March 11.  I will not be purchasing stocks until this timer reverses to a LONG position.

As timers go, this one is quite stable in signal quality. Here are the stats if we used the GGT index, which most closely resembles the Russell 2000 Index (or use the proxy ETF IWM):

The intermediate timer, also called "combo timer", has a really good stability as the number of trades has increased.  Financial author Van Tharp has a metric for this, termed "SQN", and per his various publications, a value above about 1.5-1.7 is considered good.  Values at 1.5-1.7 are considered "chance".  The higher the SQN the better.  The present SQN here is 2.77, and here's a graph of all the trades of this system to date:

As you can see, we're bouncing on the higher range of readings, indicating that this timer is "in tune", and it has been for the last 20 or so trades.  Note that this is since 2008.

No timer is perfect, nor is this one.  Relative to my long-term timer (the 13/65 day timer I wrote about elsewhere) this timer underperforms in terms of total gain for the markets:

The long-term timer is in puke-green; the Combo timer is in purple.  They both are normalized to a value of 1.00 on 1/2/2009.  Over the course of 5+ years the Combo timer has underperformed the long-term timer by about 20% total.  The reason for this is simple:  the Combo timer takes you out of the markets when things go south, protecting gains and keeping you away from drawdown.  As you can see, the 13/65 timer does NOT do this, e.g., you experience the drawdowns, and they can be psychologically damaging.

As a point of reference, the long-term timer SQN is 1.89 on only 6 trades total since 2008.  Apples to potatoes comparison but you get the idea.

Whatever you decide to do is obviously up to you.


The question is what to do with present holdings?

For those holdings that are GGT Longs, I intend to hold them but will lighten up to 50% positions, including any gains.  I will do this with a 1% Trailing Stop Loss that will become active at 9:45 (to miss the early open bounce).  If the positions rise today (unlikely, as futures are very, very negative) then no harm.  If positions continue to fall I'll exit with some gains in all except one position.

My position in DL just signaled a move to "New Cash" last evening so I'm placing a 1% Trailing Stop Loss on it and will be exiting for a loss this morning.  I can't win them all.

As always, do your diligence, and take ownership for your actions.  You are responsible for your decisions and I am not.