|
Wiser Trader Stocks and Options Newsletter ______________________________________________________________________________
Issue No. 65 – February 6, 2006 Prescott, Arizona Systems@WiserTrader.com ______________________________________________________________________________
1.0 Trading
After two attempts at a break out, the market fell back into its 2-year rising wedge pattern.
1.1 Another Fallback
Recent market performance is illustrated by the S&P 500 Index in Figure 1. In spite of previous positive sentiment and good volume, the rising wedge pattern continues to hold.
FIGURE 1
1.2 Filter Studies
Continuing with filter performance studies, the latest 1 year period is shown at the bottom of Table 1. Details of the filters can be found on the web site. One objective is to find a parameter that describes how S&P 500 performance affects profits for the previous year. Currently we are tracking filter performance with the average S&P 500 Index value relative to its mean 200-day simple moving average (SMA) for the previous month. The correlation remains promising.
Table 1 1 Year Filter Performance versus the S&P 500 Index Using No Trailing Stop
1.3 Trailing Stop Settings
Another aspect of the study involves determining whether applying a fixed trailing stop setting to all the stocks in a portfolio has an advantage. Gains shown in Table 1 are for the case where no trailing stop was used. Table 2 shows how typical profits increase as the trailing stop is widened from -10% to -100%, essentially no stop setting at all. One factor in such performance is that the S&P 500 has been in a bull market over the past year, all be it with a saw tooth rising wedge pattern. Another factor is the quality of the filters themselves.
Yet another aspect of the study is to determine whether a fixed trailing stop setting - X% can be improved upon by applying a trailing stop to each individual stock based on its highest percentage gain. The variable value applied to stocks individually is,
Variable trailing stop percentage = Highest_%Gain / 3 - X%.
This effectively tightens the trailing stop as the stock price rises in order to preserve gains. In no case is the trailing stop allowed to narrow to a value tighter than -10%. Ironically, for the 1-year time periods checked so far, not using a trailing stop has resulted in better performance. The effect this has had on the study is unclear. However, using the growth-momentum filter for stocks priced from $15 to $40, a variable trailing stop was clearly superior to a fixed trailing stop over the past year. A variable trailing stop applied to individual stocks improved profits by up to 9%, as shown in Table 2 (the yellow column). The improvement is more likely when the trailing stop setting is narrower than -35%.
Table 2 1-Year Performance Growth Momentum Filter for Stocks Priced from $15 to $40
Variable Trailing Stop Fixed Trailing Stop
Applying trailing stops to individual stocks may seem like many details to keep track of, but not really. The easiest way is to put the data and formulas in a spreadsheet that automatically updates values from Yahoo and MSN. Based on the kind of results above and growing confidence in the four filters, a wide variable stop loss setting is applied individually to stocks in the stock advisory portfolio.
2.0 Market Analysis
The market quickly concluded that another rate hike was likely at the March 28 FOMC meeting. Hopes have gone that the Fed might have reached the end of the tightening cycle. Concerns that the Fed will raise rates even past the March 28 meeting accelerated as January employment data showed a 0.4% increase in hourly earnings for the second month in a row. The unemployment rate also fell to 4.7% from 4.9% in December. This was combined with a 0.6% decline in fourth quarter productivity, which will fail to moderate any inflationary impact of rising wages. The market is obsessed with inflation and slowed earnings for the coming year.
Key industry ETF’s in Table 2A are Biotech and Semiconductors, which confirm the NASDAQ. Transportation confirms the Dow Jones Industrial Average according to Dow Theory. Banking and Financials are confirming indicators for the S&P 500. Gold and Real Estate are respective indicators for the inverse health of the currency (inflation) and the capacity for consumer spending.
Table 2A Indices, Key Industry ETF’s and Sector SPDR’s
|
