Wiser Trader Stocks and Options Newsletter

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Issue No. 83  July 3, 2006                             Prescott, Arizona                       Systems@WiserTrader.com

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1.0   Trading

     

      End of quarter window dressing by institutional money managers combined with an optimistic interpretation of FOMC comments concerning future rate hikes has led to a sizeable bounce in the major averages.

 

1.1 Bounce

 

      The S&P 500 bounced off its lower 2-year trend line on good volume last week, as seen in Figure 1A.  It rests just above its 200-day SMA (simple moving average).  Prospects for a summer rally are improving.  However, the markets will not settle down into a fixed trend until after about the 3rd or 4th week of earnings reports, which are just beginning. 

 

 

FIGURE 1A

 

 

© 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 1A.  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 relative to its 200-day SMA 1 month prior to the dates listed.  The ongoing hypothesis is that although stocks were selected a year ago, portfolio performance is strongly influenced by behavior of the S&P 500 within the past month.

 

 

Table 1A

1 Year Filter Performance Using No Trailing Stop

Year Ending

1 Year S&P500 Gain

Month Ago S&P 500

SMA 30 vs SMA 200

Growth $15-$40 Filter Gain

Growth >$40 Filter Gain

Absolute Value Filter Gain

Relative Value Filter Gain

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%

04/28/06

13.2%

+4.0%

95.0% *

19.9%

12.2%

32.0%

06/02/06

7.7%

+3.8%

32.0%

7.1%

40.7%

85.0%

07/01/06

6.3%

+2.6%

28.5%

26.6%

10.5%

27.3%

* 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 in Table 1A is for cases where no trailing stops were used.

 

 

1.3 Trailing Stop Settings

 

     Table 1B shows how profits changed as trailing stops are varied from -10% to -100%.  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.  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%.  Results depend on market behavior.  For this group of stocks, fixed and variable trailing stops gave similar results over the past year.  A slight improvement is more likely when the trailing stop setting is narrower than -35% in an up trending market. 

 

 

Table 1B

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

3.3%

3.3%

15.8%

15.8%

14.2%

14.2%

15.2%

15.2%

15

6.7%

6.7%

20.2%

20.2%

13.0%

13.0%

27.5%

26.2%

20

7.3%

7.3%

27.3%

20.2%

19.8%

19.8%

25.6%

26.3%

25

10.5%

10.5%

27.3%

20.2%

23.7%

22.2%

27.9%

28.1%

30

10.5%

10.5%

27.3%

20.2%

24.3%

26.1%

28.6%

28.4%

35

10.5%

10.5%

27.3%

27.3%

20.7%

20.7%

28.3%

27.9%

40

10.5%

10.5%

27.3%

27.3%

28.5%

28.5%

27.1%

26.7%

50

10.5%

10.5%

27.3%

27.3%

28.5%

28.5%

26.6%

26.6%

60

10.5%

10.5%

27.3%

27.3%

28.5%

28.5%

26.6%

26.6%

70

10.5%

10.5%

27.3%

27.3%

28.5%

28.5%

26.6%

26.6%

80

10.5%

10.5%

27.3%

27.3%

28.5%

28.5%

26.6%

26.6%

90

10.5%

10.5%

27.3%

27.3%

28.5%

28.5%

26.6%

26.6%

100

10.5%

10.5%

27.3%

27.3%

28.5%

28.5%

26.6%

26.6%

 

 

 

      Applying trailing stops to individual stocks is most easily done by putting the data and formulas in an Excel spreadsheet.  XLQPlus can then be used to retrieve stock prices automatically from Yahoo and MSN.  The spreadsheet then dynamically updates stop loss settings and when it is time to buy, hold or sell.  An automated spreadsheet named “Portfolio Tracking” that does this is now available as a free download at http://www.wisertrader.com/excel.php . 

 

 

 

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Check out  the new list of books.

 

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2.0 Market Analysis

 

      Recent FOMC statements are being interpreted optimistically by investors who now believe that future rate hikes have a low probability.  We have heard this before.  This, combined with end of quarter window dressing by large institutional investors, led to a sharp rise in the major averages on Friday.  Little notice is being made of the sharp down turn in the last hour of Friday trading because the major averages ended up for the day.  

 

      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

-0.9%

1.5%

-0.2%

1.1%

-3.2%

NASDAQ Composite Index

-2.1%

2.4%

-0.4%

-0.2%

-3.8%

S & P 500 Index

-1.4%

2.1%

-0.6%

-0.1%

-2.8%

NYSE Composite Index

-1.6%

3.1%

-0.1%

-0.4%

-4.1%

Russell 2000 Index

-1.7%

5.0%

-0.4%

-1.2%

-4.9%

HGX, Phil. Housing Index

-5.5%

1.6%

0.6%

-0.9%

-6.8%

IYR, Real Estate

0.4%

3.7%

-2.2%

-0.9%

0.0%

GLD, GOLD

-3.6%

5.6%

0.5%

-4.6%

-4.8%

RKH, Banking

-2.5%

2.3%

-1.2%

-2.5%

-1.1%

IYT, Transportation

3.4%

3.0%

2.8%

2.1%

-4.4%

SMH, Semiconductors

-4.9%

1.4%

-1.7%

1.3%

-5.9%

BBH, Biotechnology

-1.4%

3.5%

-2.0%

0.6%

-3.3%

OIH, Oil Infrastructure

-3.8%

6.1%

-0.9%

-0.2%

-8.4%

XLE, Energy

0.3%

6.3%

0.5%

0.6%

-6.6%

XLU, Utilities

-0.8%

2.0%

-1.4%

-1.1%

-0.2%

XLB, Materials

-2.2%

3.7%

1.1%

0.0%

-6.8%

XLI, Industrial

-1.6%

1.7%

-0.1%

1.3%

-4.4%

XLK, Technology

-1.8%

1.5%

-0.8%

1.3%

-3.7%

XLV, Healthcare

-2.1%

0.9%

-1.1%

-0.4%

-1.5%

XLF, Financials

-2.9%

2.3%

-0.6%