An ETF Trading Strategy:

Transcription

1 An ETF Trading Strategy: Houston Investors Association Pat Finnegan Ph.D. Nov 05, 2011 I have no Financial Training This is Educational Material. It is NOT investment advice. I use several different software tools Showing or discussing one is not a recommendation

2 Topics Why Market Timing? The Market Timing Signal How we can use it Examples StockCharts Demo

3 Not the Holy Grail In 43 years you learn lots of things that do not work! or need to be handled with caution Buy and Hold Fundamentals Diversification Asset Allocation Middlemen Money Managers The Rational Market! P/E Optimism Indicator

4 The Mega Bubble The Real Estate Bubble The Stock Market Bubble The Private Debt Bubble The Discretionary Spending Bubble The Dollar Bubble The Government Debt Bubble Soft Landing, Long Play, Implode, Who knows Repeat of $NIKK cannot be ruled out at this stage.

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6 Market Cycles The Mega Bubble (hard to time) 40 year Kondratiev Secular Bull & Bear about 18 years cycle Regular Cyclical Bull & Bear 3 or 4 years 4 year presidential cycle? Annual sell in May, go fishing, back Nov 1 Intermediate Term Cycles (weeks to months) Position & Swing Trading (days) Daily Minutes

7 The Big Picture game plan Assume Mega Bubble does not implode out of control. The Market moves in multiple simultaneous cycles. In the long run it s The Earnings Stupid or CF, FCF However, up to 80% of Intermediate Term Market Movement is due to Market/Sector/Industry. Over 80% of all stocks follow, to some degree, the general market trend.

8 Why Time the Market? Wall St Wisdom: maybe some of it is good! Don t fight the Trend, The Trend is your Friend. No 1 Reason: To avoid major Drawdowns Avoid getting out near the bottom! Avoid emotional decision making Sleep better at night No 2 Reason: Possibility of Improved Performance Two categories of people in the world. Those who know something cannot be done and those that are doing it.

9 The 50 and 200 Day Moving Averages Popular averages The 50 Day MA by itself is a good indicator (Don Beasley) but it entails an excessive amount of trading. The 200 Day MA is often seen as the ultimate indicator, but it is way too slow for trading (based on it alone) The Cross of these 2 averages seems to be a good indicator of Bull versus Bear Market.

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13 McClellan SummaKon A Breadth view of the market Track the number of (Advances- Declines) McClellan Oscillator is difference of 2 moving averages Oscillator = 19MA 39MA Summation is a running total of Oscillator values. It filters the day to day noise!

14 SummaKon InterpretaKon $NASI = Summation on StockCharts (New York = $NYSI) Basic UP is good. DOWN Bad! Better UP (steep slope) DOWN (steep slope) Cross of 5 Day EMA and/or 2 steep consecutive days UP or DOWN MACD(12,26,9) Cross Stoc(14,5) UP (from low) DOWN (from high) Down fast is Super if you are on the right train!

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16 Other Confirming Info To accept as an actionable BuySell Signal we need to look at other indicators.? New York ($NYSI) in Synch with $NASI.? Nasdaq Dominant? VIX trending in right direction? COMPQ? QLD status? In Bull or Bear Market

17 Timing Signal: BeatRut & BeatRut2 Primary Input is the McClellan Summation Problem #1: All turns are not good! The trick is try and eliminate the whipsaws. Problem #2: A complaint is that BeatRut is a little slow. This is an inevitable outcome of the design! We can use QLD to refine BeatRut (BeatRut2)

18 BeatRut and BeatRut2 for 2011 BeatRut Signal BeatRut2 Signal B, 01/03 S, 01/07 B, 01/12 S, 01/19 B, 02/08 S, 02/23 B, 03/25 S, 04/11 B, 04/21 S, 05/04 B, 06/23 S, 07/25 B, 08/29 S, 09/21 B, 10/07 B, 01/03 S, 01/19 B, 02/07 S, 02/22 B, 03/23 S, 04/08 B, 04/20 S, 05/03 B, 06/21 S, 07/12 B, 08/23 S, 09/21 B, 10/07

19 How to use a Timing Signal? Timing is really an attempt to stack the odds Immediate Buy, Sell, Short, Cover Scale in or out Adjust Exposure Use hedging Increase or Reduce margin Option transaction timing Tighten Stops Front Run the Signal or Stall Taxes! Avoiding Taxes can be incredibly expensive!!

20 Develop a Trading Strategy! Five Overall Choices Selection of the Family or Watchlist or Trading Pair Ranking method of the Family (Type & Time) Selection of a Timing Signal (BeatRut or BeatRut2) The Trading Model (Positions held, MaxHold, MinPeriod) Bailout Trip Switch The Balancing Act Profitability What Return you are chasing? Trading Frequency How much action do you want? MDD How big a Drawdown can you handle?

21 The LimitaKon of RelaKve Strength Many Ranking systems are based on some form of Relative Strength, and some systems claim that Timing is not necessary. In a generally rising market the simple rotation, based on relative strength, can work ok. The problem is in a generally downward market, where everything is falling, you are in the issue decreasing the least. In other words, you may be in the issue decreasing the least but you are still losing!

22 Small ETF Family ETF9 SPY, ; S&P 500 Large Cap IWM, ; Small Cap IEV, ; Europe EWJ, ; Japan EPP, ; Pacific exc Japan ILF, ; Latin America DBC, ; Commodities ICF, ; Real Estate TLT, ; Treasuries

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25 Pair Trading Pair Trading is a much simpler approach Examples: SPY paired with SH (Inverse of SPY) QQQ paired with PSQ (Inverse of QQQ ) If you prefer, and can tolerate a wilder ride, go Leveraged SSO with SDS QLD with QID

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31 Pat Finnegan on StockCharts Click on: FREE CHARTS Click on: Public ChartsLists Click on: Posted by Scroll down to : Pat Finnegan Click on: Pat Finnegan.. See the $NASI timing example First Chart on page 1 See QLD example Second chart on page 1