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Wiser Trader Stocks and Options Newsletter ______________________________________________________________________________
Issue No. 76 May 8, 2006 Prescott, Arizona Systems@WiserTrader.com ______________________________________________________________________________
1.0 Trading
Market momentum is strongly positive.
1.1 Advance
This week, all the major indices advanced, as shown in Figure 1.
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. 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
* Only 2 stocks were filtered for this group
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.
Stocks were filtered 1 year ago just after the S&P 500 bottomed out. 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 is not allowed to expand wider than -X% or any narrower than -10%. A variable trailing stop was, in some 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
Applying trailing stops to individual stocks is most easily done by putting the data and formulas in an Excel spreadsheet and download XLQPlus to retrieve stock prices automatically from Yahoo and MSN. The spreadsheet dynamically calculates stop loss settings and when its time to buy, hold or sell. Efforts are underway to make such an automatic spreadsheet available as a free download at http://www.wisertrader.com/excel.php . The effort involved has to do with providing a clear description of what the spreadsheet is doing and how to use it. Expect the spreadsheet to become available by next week.
Discussions of the 5-index momentum indicator will continue next week.
2.0 Market Analysis
All ten major sectors advanced this week accompanied by a slight lowering of treasury yields. Advances were led by blue chips. Employment data indicated a continued strong economy without inflation fostering wage increases. This gave more hope that the Fed would reach the end of rate tightening sooner rather than later.
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
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