______________________________________________________________________________
Issue No. 37 – August 1, 2005
Prescott, Arizona Systems@WiserTrader.com
______________________________________________________________________________
1.0
Trading
Trading systems
involve controlling a few variables and letting the rest happen naturally.
1.1 System Controls
There are at least two
levels of money management. In the first, trailing stops are used with a
maximum percentage of capital per trade to limit draw-downs to less than 1 or
2% of investment capital. Fortunately, when one uses a consistent trading
system, a more precise relationship exists for choosing the correct stop loss
setting FL based on the average profit per trade FP, the
percentage of times that correct choices are made in the direction of trade FC
and the average fractional gain per winning trade FG. To maintain the
targeted value of FP, the stop loss setting magnitude must be less
than or equal to FL = (FP - FC FG)
/ (1 – FC). All quantities are decimal fractions with FL
being negative.
For the options advisory, an
average profit per trade of FP = 0.14 is the goal. There is little
control over FG because it is determined by market conditions.
There is some degree of control over the fraction of trades chosen in the
correct direction FC but this fraction is a function of experience.
It remains stable as long as the system is followed and it can not be changed
at will. The area where the most control lies is in FL, the stop
loss setting. The way this works is by monitoring FG for a
historical value of FC and a targeted goal of FP, the
proper stop loss setting FL becomes apparent from the above
relationship.
FG should be
monitored over a period long enough to provide a statistically significant
sample of trades. When equal sized trades are made, the number of trades
needed to earn an amount equal to the average trade size is 1/FP. Although
the average size of trades is selected independently of the trailing stop
percentage, it is a good idea to play it safe and limit the maximum trade size
to 10 or 20% of your risk capital. This assumes that your risk capital is no
more than 10% of your total investment capital. When a trading system is used
consistently, this model enables precise money management. A full derivation
of the model can be found at http://www.wisertrader.com/precisionmoneymgmt.php
.
© 2005 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.
2.0
Market Analysis
The markets are filled with
optimism backed by strong earnings and economic reports. About 70% of
companies reported higher than expected earnings compared with a historical
62%. Second quarter GDP was 3.4%, surpassing the long-term historical average
of 3.1%. Market strength is broad based. The top performing industries were
tire & rubber, wireless services, and construction and engineering. Poorly
performing industries included home electronics, computer storage companies,
thrift banks, and home furnishings.
Industry leaders in Table 2A
rank from highest to lowest. Relative strength is given in Table 2B and VTO
market sentiment in Table 2C.
Major Indices
For the Past Week:
Dow Jones -0.1%
NASDAQ +0.2%
S&P500 Index +0.0%
Russell 2000 +0.5%
30 Year Bond 4.474%
10 Year Note 4.286%
Industry Leaders
For the Past Week:
Tires
Mobile Telecommunications
Consumer Electronics
Heavy Construction
Water
Railroads
Industrial Suppliers
Telecommunications
Real Estate Investment Trusts
Aerospace & Defense
Industry Leaders
For the Past Month:
Business Training & Employment
Steel
Coal
Biotechnology
Industrial Suppliers
Industrial Metals
Home Improvement Retailers
Tires
Railroads
Consumer Electronics
Crude Oil $60.57
Gold for the past 30 days:
USD -1.36%
CAD -1.65%
CHF -1.09%
GBP +0.43%
EUR -1.74%
JPY -0.15%
Table 2B
Relative Strength Index
|
|
5 Day RSI
|
|
DOW
|
Neutral
|
|
S&P
500
|
Neutral
|
|
NASDAQ
|
Neutral
|
Table 2C
VTO Market Sentiment Indicators
|
Sentiment Indicator
|
Value
|
Last Week
|
2 Weeks Ago
|
Complacent
|
Cautious
|
|
VIX **
|
11.57
|
10.52
|
10.33
|
< 20
|
> 50
|
|
VXN ***
|
13.87
|
12.95
|
13.34
|
< 30
|
> 70
|
|
Put/Call Ratio
|
0.560
|
0.561
|
0.540
|
< 0.6
|
> 0.7
|
|
%Bulls - %Bears
|
33.3%
|
29.5%
|
32.3%
|
> 29%
|
< 20%
|
|
** Below 20 day SMA = Buy signal.
***
Below 20 day SMA = Buy signal.
|
In Table 2D, the broader
market was mixed for the week.
Table 2D
Index Tracking Stocks, Key
Industry ETF’s and Sector SPDR’s
|
|
1 month
|
1 wk ago
|
2 wks ago
|
3 wks ago
|
4 wks ago
|
|
SPY (S&P 500)
|
3.5%
|
0.2%
|
0.6%
|
1.3%
|
1.5%
|
|
DIA (DOW)
|
3.4%
|
0.1%
|
0.2%
|
1.7%
|
1.4%
|
|
QQQQ (NASDAQ 100)
|
7.7%
|
0.4%
|
1.4%
|
3.0%
|
2.8%
|
|
IWM (Russell 2000)
|
6.1%
|
0.8%
|
2.0%
|
0.0%
|
3.1%
|
|
GLD, GOLD
|
0.3%
|
0.9%
|
1.0%
|
-0.5%
|
-1.0%
|
|
RKH, Banking
|
2.2%
|
-0.9%
|
-0.8%
|
3.1%
|
0.8%
|
|
IYT, Transportation
|
8.2%
|
0.5%
|
3.4%
|
1.9%
|
2.2%
|
|
SMH, Semiconductors
|
10.6%
|
0.4%
|
0.6%
|
4.1%
|
5.1%
|
|
BBH, Biotechnology
|
13.9%
|
1.1%
|
2.0%
|
4.8%
|
5.5%
|
|
IYR, Real Estate
|
5.7%
|
2.4%
|
1.4%
|
-0.7%
|
2.5%
|
|
OIH, Oil
|
9.9%
|
1.5%
|
8.8%
|
-1.7%
|
1.2%
|
|
XLE,
Energy
|
4.8%
|
0.4%
|
4.5%
|
-1.9%
|
1.8%
|
|
XLU,
Utilities
|
1.3%
|
1.5%
|
-0.7%
|
0.1%
|
0.4%
|
|
XLB,
Materials
|
5.6%
|
-0.5%
|
3.1%
|
0.8%
|
2.1%
|
|
XLI,
Industrial
|
3.5%
|
0.0%
|
1.6%
|
0.7%
|
1.2%
|
|
XLK,
Technology
|
5.4%
|
0.4%
|
-0.3%
|
2.8%
|
2.4%
|
|
XLV,
Healthcare
|
2.4%
|
1.1%
|
-0.3%
|
0.8%
|
0.9%
|
|
XLF,
Financials
|
1.5%
|
-0.7%
|
-0.7%
|
1.6%
|
1.3%
|
|
XLP,
Consumer Staples
|
2.8%
|
0.9%
|
-0.3%
|
1.6%
|
0.7%
|
|
XLY,
Consumer Discretionary
|
5.4%
|
0.2%
|
1.3%
|
1.9%
|
1.9%
|
Key industry ETF’s 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 and the
economy in general.
Figure 1 compares index
tracking stocks for the major averages with Sector SPDR’s.
Figure 2 compares index
tracking stocks with five leading ETF’s for the week.
FIGURE 1
FIGURE 2
3.0 Procedure
The following watch lists contain
stock candidates for consideration. They are not necessarily trades. The “Reference”
is the date that a stock passed the indicated filter and was added to or
returned to the list. The “% Change” is how the price has changed since the
reference date. Stocks that are down 10% or more after being listed are
removed. The “% from Max” is the percentage the price has declined from the
maximum price reached since the reference date. Stocks that are down 8% from
their highs after being listed are flagged in yellow. Stocks that are down 15%
from their highs after being listed are removed. More information on filters
is available on the web site. Send an email
if you need more details.
Key
Companies that have
experienced net insider buying within the past 6 months of 5% or more of issued
stock are listed in Table 3A. These stocks should also appear in one of the master
trader screens or meet additional screening criteria before being given serious
consideration. FVRL was removed because it decline more than 15% from its
highest price after being listed.
Table 3A
Net Insider Buying Check List
|
Stock
|
Reference
|
% Chg
|
Company
|
Sector
|
Industry
|
% from Max
|
|
ACAD
|
04/29/05
|
28.0%
|
ACADIA
Pharmaceuticals Inc.
|
Health
Care
|
Biotechnology
& Drugs
|
0.0%
|
|
AFT
|
05/20/05
|
-8.2%
|
Axesstel,
Inc.
|
Technology
|
Communications
Equipment
|
-11.8%
|
|
ASPV
|
05/27/05
|
11.2%
|
Aspreva
Pharmaceuticals Corporation
|
Health
Care
|
Biotechnology
& Drugs
|
-4.9%
|
|
ATPL
|
07/01/05
|
4.6%
|
Atlantis
Plastics, Inc.
|
Basic
Materials
|
Fabricated
Plastic & Rubber
|
-6.0%
|
|
AUXL
|
07/15/05
|
7.9%
|
Auxilium
Pharmaceuticals, Inc.
|
Health
Care
|
Biotechnology
& Drugs
|
-1.7%
|
|
CRTX
|
07/01/05
|
-9.9%
|
Critical
Therapeutics, Inc.
|
Health
Care
|
Biotechnology
& Drugs
|
-13.0%
|
|
CRYO
|
07/29/05
|
0.0%
|
CryoCor,
Inc.
|
Health
Care
|
Medical
Equipment & Supplies
|
0.0%
|
|
FTD
|
04/08/05
|
-3.0%
|
FTD Group,
Inc.
|
Services
|
Retail
(Catalog & Mail Order)
|
-3.1%
|
|
HEM
|
07/29/05
|
0.0%
|
Hemosense,
Inc.
|
Health
Care
|
Medical
Equipment & Supplies
|
0.0%
|
|
IRN
|
05/20/05
|
2.3%
|
Rewards
Network Inc.
|
Services
|
Business
Services
|
-2.0%
|
|
ITMN
|
04/08/05
|
37.5%
|
InterMune,
Inc.
|
Health
Care
|
Biotechnology
& Drugs
|
-6.0%
|
|
KIRK
|
05/27/05
|
-7.5%
|
Kirkland's, Inc.
|
Services
|
Retail
(Specialty Non-Apparel)
|
-11.7%
|
|
MERCS
|
05/20/05
|
-1.1%
|
Mercer
International Inc.
|
Basic
Materials
|
Paper
& Paper Products
|
-1.1%
|
|
PCTY
|
07/08/05
|
8.7%
|
Party City
Corporation
|
Services
|
Retail
(Specialty Non-Apparel)
|
0.0%
|
|
RGN
|
07/01/05
|
14.5%
|
RegeneRx
Biopharmaceut.
|
Health
Care
|
Biotechnology
& Drugs
|
0.0%
|
|
RNAI
|
07/15/05
|
55.1%
|
Sirna
Therapeutics, Inc.
|
Health
Care
|
Biotechnology
& Drugs
|
-9.6%
|
|
SCLN
|
07/01/05
|
55.2%
|
SciClone
Pharmaceuticals
|
Health
Care
|
Biotechnology
& Drugs
|
0.0%
|
|
SLXA
|
07/29/05
|
0.0%
|
Solexa,
Inc.
|
Health
Care
|
Biotechnology
& Drugs
|
0.0%
|
|
SSAG
|
07/29/05
|
0.0%
|
SSA Global
Technologies, Inc.
|
Technology
|
Software
& Programming
|
0.0%
|
|
STLW
|
07/08/05
|
0.0%
|
Stratos
International, Inc.
|
Technology
|
Semiconductors
|
-1.9%
|
|
THLD
|
07/08/05
|
20.3%
|
Threshold
Pharmaceuticals, Inc.
|
Health
Care
|
Biotechnology
& Drugs
|
-5.1%
|
|
ZHNE
|
07/15/05
|
12.3%
|
Zhone
Technologies, Inc.
|
Technology
|
Communications
Equipment
|
-5.2%
|
Companies with net cash
positions that comprise at least 40% of their share price are listed in Table
3B. These stocks should also appear in one of the master trader screens or
meet additional screening criteria before being given serious consideration. CDCO
was removed because of its Over the Counter status making it difficult to
update the data. Its price performance is still in line with requirements for
being listed here. EXM declined more than 15% from its highest price after
being listed and was removed.
Table 3B - Capital Rich Companies Check
List