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Wiser Trader Stocks and Options Newsletter ______________________________________________________________________________
Issue No. 68 March 6, 2006 Prescott, Arizona Systems@WiserTrader.com ______________________________________________________________________________
1.0 Trading
After the first weekend of the month, it is time to check the performance of our stock filters for stocks filtered a year ago.
1.1 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 S&P 500 Index 30-day SMA (simple moving average) relative to its 200-day SMA for the dates shown.
Table 1 1 Year Filter Performance versus the S&P 500 Index Using No Trailing Stop
The data continues to confirm that stocks selected by either filter do best when the S&P 500 pulls upward away from its 200 day SMA. The performance shown is for cases where no trailing stops were used.
1.2 Trailing Stop Settings
Table 2 shows how typical profits change 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. In some cases, a slight advantage is seen in using a trailing stop for the most recent 1-year period. For many past cases, not using a trailing stop has resulted in better performance. Shaded areas of the table show where stops were not triggered.
In some cases, 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% (no tighter than -10%)
This effectively tightens the trailing stop as the stock price rises in order to preserve gains. A variable trailing stop was, in many cases, superior to a fixed trailing stop over the past year. The improvement was more likely when the trailing stop setting is narrower than -35%. Results are mixed in the data below. This might be the result of choppy market conditions.
Table 2 1-Year %Gains with Variable and Fixed Trailing Stop Settings
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 an Excel spreadsheet and let XLQ software automatically update stock price values from Yahoo and MSN.
2.0 Market Analysis
Little has changed since last week’s focus on interest rates. Home sales declined a few percent, as would be expected, and unemployment remained low. As we enter warnings season with rising oil prices, the markets can be expected to remain choppy and mixed.
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
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