At my firm I back-test, back-test and back-test... and when I feel okay about a new approach I back-test some more. Here's an interesting anomaly that I found the other day. You can put it in your trading arsenal. This isn't a 'stand alone' system, but nonetheless, it is rather impressive.
Did you know that on the closing bell of the 3rd Friday of July, August, September and October, the S&P 500 loses -17% (over the next 5 days) on an annual rate since 1942? With everything being equal, one should either, exit their 'long' positions or open a 'short' position during these periods.
Tuesday, December 14, 2010
Monday, November 8, 2010
An Investor's Biggest Mistake
An investor's ego is the major reason why beginning traders are drawn to discretionary trading. Discretionary trading feeds the ego; it is trading that relies on one's judgement, in contrast with systematic trading, where trading decisions are made by using rules that specify exactly when and how much to buy and sell. So when you use your judgement to trade and you win, the ego wins. You can brag to your fiends how you are the master of the markets.
I see this particular behavior constantly on online trading forums - especially the broad-based ones that attract new traders. You regularly see posts from individuals bragging about how they bought just before the run-up, or they have found the Holy Grail and have 90% accurate system, or they have been trading for three months and have made 200%. They invariably have done this by trading with too much leverage. A few months later you may see the same trader post that they have blown up their account and lost everything. These individuals were trading to feed their egos, and as the saying goes, live by the ego, die by the ego.
I see this particular behavior constantly on online trading forums - especially the broad-based ones that attract new traders. You regularly see posts from individuals bragging about how they bought just before the run-up, or they have found the Holy Grail and have 90% accurate system, or they have been trading for three months and have made 200%. They invariably have done this by trading with too much leverage. A few months later you may see the same trader post that they have blown up their account and lost everything. These individuals were trading to feed their egos, and as the saying goes, live by the ego, die by the ego.
Wednesday, October 13, 2010
Presidential Election Cycle System
The Presidential Election Cycle System was first published by Marty Zwieg in 1986. Simply and somewhat amazingly, the S&P 500 had a winning year each year preceeding the presidential election since 1942.
Since 1942, if you were to have placed money in the S&P 500 at the beginning of January on the year preceeding the Presidential election, and sold at the end of that year, you would have made an average of 16.66% return on your money.
With all the mixed news in the media, it makes it difficult to feel confident in which direction the market is headed. I can admit that the fundamentals of the economy do not look too rosey, and would expect 2011 do be a difficult year. However, according to the Presidential Election Cycle System, investing in 2011 seems to be a wise decision.
Since 1942, if you were to have placed money in the S&P 500 at the beginning of January on the year preceeding the Presidential election, and sold at the end of that year, you would have made an average of 16.66% return on your money.
With all the mixed news in the media, it makes it difficult to feel confident in which direction the market is headed. I can admit that the fundamentals of the economy do not look too rosey, and would expect 2011 do be a difficult year. However, according to the Presidential Election Cycle System, investing in 2011 seems to be a wise decision.
Monday, February 1, 2010
Bottom Fishing
This is a very simple phenomenon that all investors should be on the watch for. It doesn't happen often, but when it does, this strategy allows you to get in the market very early and at a low price.
The logic behind this strategy has been around for a long time and is detailed in the book "Trade like a Hedge Fund" by James Altucher. He makes a common mistake of using repeat signals in his analysis, so I use a hybrid of this strategy.
When the S&P 500 closes 20% below the S&P 500 200 day moving average, the investor places a buy order in an S&P 500 exchange traded fund (ETF). Hold the position for 20 trading days.
This strategy will fire a buy signal in the midst of panic selling. Therefore, this strategy is perfect for call options as it will generate a buy signal when almost no other system will. Everyone will be bearish and buying put options to protect themselves against further weakness.
I ran a historical analysis dating back to 1960 and the results are as follows:
Total Trades: 16
Winning Trades: 75%
Largest Gain: 14.34%
Largest Loss: -9.73%
Percent Invested: 2.67%
The logic behind this strategy has been around for a long time and is detailed in the book "Trade like a Hedge Fund" by James Altucher. He makes a common mistake of using repeat signals in his analysis, so I use a hybrid of this strategy.
When the S&P 500 closes 20% below the S&P 500 200 day moving average, the investor places a buy order in an S&P 500 exchange traded fund (ETF). Hold the position for 20 trading days.
This strategy will fire a buy signal in the midst of panic selling. Therefore, this strategy is perfect for call options as it will generate a buy signal when almost no other system will. Everyone will be bearish and buying put options to protect themselves against further weakness.
I ran a historical analysis dating back to 1960 and the results are as follows:
Total Trades: 16
Winning Trades: 75%
Largest Gain: 14.34%
Largest Loss: -9.73%
Percent Invested: 2.67%
Wednesday, January 6, 2010
Stock Market Seasonality
The stock market has very important seasonal tendencies that every investor must know. December and January are far and away the best months of the year for the stock market. Actually, a very bullish period of the year runs from November to early January.
September is easily the worst month of the year. Surprisingly, the next worst month of the year is February, as the stock market has seen many major tops occur in January. October, which many investors are deathly afraid of is in the middle of the pack as far as performance is concerned.
Don't miss these tendencies. These are based on over a half a century's worth of stock market history. Why they occur is really unimportant, but they do make some sense.
Since the stock market has a historical upward bias, at the end of the year many investors will have gains in their positions. If they can put off selling these profitable positions until the next year, they can put off the capital gains tax that they owe for a year. This reduction in selling during December could be the reason for the December/January bullishness.
The Pre-Thanksgiving Buy Signal
Here's an example of a market timing strategy that has worked for decades. It's very simple. You Buy the S&P 500 on the Monday before Thanksgiving and Sell the 3rd day of January.
Using the Rydex Nova mutual fund (beta = 1.5), I have back tested 54 years using this simple strategy and the results are as follows:
- Trades: 75% of the trades made money
- Maximum Drawdown: -13.9% vs the S&P 500 with -48%
- Total Gain: +13,285%
- Compounded Annual Return: +9.2%
- Tim Invested: 11.1% of the time
September is easily the worst month of the year. Surprisingly, the next worst month of the year is February, as the stock market has seen many major tops occur in January. October, which many investors are deathly afraid of is in the middle of the pack as far as performance is concerned.
Don't miss these tendencies. These are based on over a half a century's worth of stock market history. Why they occur is really unimportant, but they do make some sense.
Since the stock market has a historical upward bias, at the end of the year many investors will have gains in their positions. If they can put off selling these profitable positions until the next year, they can put off the capital gains tax that they owe for a year. This reduction in selling during December could be the reason for the December/January bullishness.
The Pre-Thanksgiving Buy Signal
Here's an example of a market timing strategy that has worked for decades. It's very simple. You Buy the S&P 500 on the Monday before Thanksgiving and Sell the 3rd day of January.
Using the Rydex Nova mutual fund (beta = 1.5), I have back tested 54 years using this simple strategy and the results are as follows:
- Trades: 75% of the trades made money
- Maximum Drawdown: -13.9% vs the S&P 500 with -48%
- Total Gain: +13,285%
- Compounded Annual Return: +9.2%
- Tim Invested: 11.1% of the time
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