Wiser Trader Stocks and Options Newsletter

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Issue No. 73   April 10, 2006                         Prescott, Arizona                       Systems@WiserTrader.com

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1.0   Trading

 

      The S&P 500 clings to the upper edge of its trading range.

 

1.1 Wall of Worry

 

        The chart in Figure 1 illustrates how the market continues to climb a wall of worry.  The S&P is about 4% above its 200-day SMA.

 

FIGURE 1

 

 

© 2006 Desert Mountain Systems, LLC.  Members of wisertrader.com are neither licensed brokers nor licensed advisors.  Trades discussed represent recommendations made by the editor for the wisertrader.com portfolio.  The newsletter and web site are for information only and should not be considered as personal advice.  While it is believed that the posted information is factual, mistakes can be made in transcription.  Investors should trade stocks only after verifying all information and consulting with a licensed broker or adviser.  Desert Mountain Systems markets third party trading systems but has no other affiliation with trading system companies. 

     

 

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.  Currently we are tracking filter performance with the S&P 500 Index 30-day SMA (simple moving average) relative to its 200-day SMA 1 month prior to the dates listed. 

 

 

Table 1

1 Year Filter Performance Using No Trailing Stop

Year Ending

Prior Year S&P 500

Month Ago S&P 500

SMA 30 vs SMA 200

Growth $15-$40 Filter

Growth >$40 Filter

Absolute Value Filter

Relative Value Filter

9/02/05

9.4%

+2.8%

60.1%

40.7%

19.3%

50%

9/30/05

8.6%

+1.8%

25.4%

61.4%

12.3%

24.1

11/04/05

8.0%

-0.1%

8.2%

14.8%

4.4%

-0.6%

12/02/05

6.2%

+1.9%

24.6%

9.6%

17.0%

34.7%

01/06/06

8.2%

+4.1%

39.8%

50.3%

27.8%

28.3%

02/03/06

6.1%

+4.2%

34.8%

60.7%

11.5%

34.3%

03/03/06

5.7%

+3.5%

32.7%

26.4%

11.0%

29.7%

04/07/06

9.5%

+3.3%

25.2%

61.2%

16.1%

18.4%

 

 

      The data continues to confirm that stocks selected by either filter do best when the S&P 500 remains several percent above its 200-day SMA for the most recent month.  The performance shown is for cases where no trailing stops were used.

 

 

1.3 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, an advantage is seen in using a trailing stop for the most recent 1-year period.  The arrow in Figure 1 shows the approximate date that stocks were selected, just before a steep downturn in April 2005.  A tight trailing stop at that point would have been beneficial.  In most cases, stocks recovered from the initial down turn and a wider trailing stop resulted in better performance.  Shaded areas of the table show where no stop was triggered.

 

      In some cases, a fixed nominal 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.  The variable trailing stop percentage should not be allowed to expand wider than X or be allowed to narrow to more than -10%.  A variable trailing stop was, in many cases, superior to a fixed trailing stop over the past year.  The improvement is more likely when the trailing stop setting is narrower than -35% in an up trending market.  Results depend on market behavior.

 

Table 2

1-Year %Gains with Variable and Fixed Trailing Stop Settings

 

Absolute Value

Relative Value

Growth $15 to $40

Growth > $40

“X“ Nominal Stop Setting (%)

Variable Trailing Stop

Fixed Trailing Stop

Variable Trailing Stop

Fixed Trailing Stop

Variable Trailing Stop

Fixed Trailing Stop

Variable Trailing Stop

Fixed Trailing Stop

-10

18.8%

18.8%

18.9%

18.9%

-0.2%

-0.2%

54.3%

54.3%

-15

17.2%

17.2%

34.1%

34.1%

19.9%

19.9%

56.5%

56.5%

-20

17.0%

15.8%

27.8%

27.1%

16.6%

17.6%

60.8%

60.8%

-25

16.4%

16.4%

27.8%

27.8%

13.3%

10.8%

60.8%

60.8%

-30

16.4%

16.4%

27.8%

27.8%

13.5%

8.4%

61.2%

61.2%

-35

16.1%

16.1%

22.8%

26.0%

16.2%

16.2%

61.2%

61.2%

-40

16.1%

16.1%

22.8%

22.8%

16.2%

16.2%

61.2%

61.2%

-50

16.1%

16.1%

18.4%

18.4%

25.2%

16.2%

61.2%

61.2%

-60

16.1%

16.1%

18.4%

18.4%

25.2%

16.2%

61.2%

61.2%

-70

16.1%

16.1%

18.4%

18.4%

25.2%

25.2%

61.2%

61.2%

-80

16.1%

16.1%

18.4%

18.4%

25.2%

25.2%

61.2%

61.2%

-90

16.1%

16.1%

18.4%

18.4%

25.2%

25.2%

62.4%

61.2%

-100

16.1%

16.1%

18.4%

18.4%

25.2%

25.2%

62.4%

61.2%

 

 

      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 use XLQ which can automatically retrieve stock prices from Yahoo and MSN. 

 

 

 

2.0 Market Analysis

 

      This week bond yields rose more sharply and interest rate sensitive stocks continued to consolidate.  The major averages pulled back in unison.  As earnings season begins this week, concern is being placed on inflation and interest rates due to high energy and commodity prices with lower unemployment.

 

      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 Housing 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

 

1 month

1 wk ago

2 wks ago

3 wks ago

4 wks ago

Dow Jones Industrial Index

0.4%

0.1%

-1.5%

0.0%

1.8%

NASDAQ Composite Index

3.4%

0.0%

1.2%

0.3%

2.0%

NYSE Composite Index

1.1%

0.0%

-0.6%

-0.3%

2.0%

S & P 500 Index

2.4%

0.5%

-0.2%

-0.2%

2.4%

Russell 2000 Index

4.1%

-1.2%

1.5%

1.0%

2.7%

HGX, Phil. Housing Index

7.6%

2.3%

-1.7%

-0.3%

7.4%

IYR, Real Estate

-1.3%

-3.6%

1.1%

-3.0%

4.4%

GLD, GOLD

8.8%

0.8%

4.3%

1.1%

2.4%

RKH, Banking

0.2%

0.1%

-1.4%

-0.5%

2.0%

IYT, Transportation

5.3%

2.4%

1.0%

-0.7%

2.4%

SMH, Semiconductors

2.7%

1.6%

0.3%

1.8%

-1.1%

BBH, Biotechnology

-3.0%

-4.0%

-0.3%

-2.4%

3.8%

OIH, Oil

12.2%

2.7%

2.9%

1.0%

5.1%

XLE, Energy

7.7%

1.7%

1.0%

0.4%

4.4%

XLU, Utilities

-3.3%

-0.5%

-2.1%

-2.1%

1.4%

XLB, Materials

4.8%

1.4%

0.9%

-0.4%

2.8%

XLI, Industrial

3.3%

0.4%

0.4%

-0.3%

2.9%

XLK, Technology

2.5%

0.5%

0.2%

-0.1%

1.8%

XLV, Healthcare

-3.5%

-2.2%

-2.1%

-0.1%

0.9%

XLF, Financials

-0.2%

0.1%

-1.0%

-0.7%

1.4%

XLP, Consumer Staples

-3.1%

-0.8%

-1.6%<