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Issue No. 58 – December 26, 2005 Prescott, Arizona Systems@WiserTrader.com
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1.0 Trading
There is much wisdom in keeping an eye on the 200 day simple moving average (SMA) for the S&P 500 Index. Its behavior for the most recent month can have a strong impact on stock gains over the previous year.
1.1 S&P 500 200 day SMA
Table 1 lists the performance of the S&P 500 over four one year periods along with the performance of four stock filters we have been studying for the past few months. The filters are described on the website. Under most 1 year conditions analyzed so far, the filters performed favorably. For those cases the S&P 500 had gained about 8% or so over the prior year. A case where the S&P gained 8% over the prior year and the filters did not do so well was when the average value for the index dipped close to or fell below its mean 200 day SMA as it did in April and October of 2004. The fact that one prior month of S&P 500 performance can skew the performance of an entire previous year is seen by comparing each filter’s one year performance at consecutive one month intervals.
Table 1
Filter Performance versus the S&P 500 Index
Using No Trailing Stop
|
Year Ending |
Prior Year S&P 500 |
Prior Month Avg. S&P 500 Relative to Mean 200 Day SMA |
Growth $15-$40 Filter |
Growth >$40 Filter |
Absolute Value Filter |
Relative Value Filter |
|
9/02/05 |
9.4% |
+2.5% |
60.1% |
40.7% |
19.3% |
50% |
|
9/30/05 |
8.6% |
+2.3% |
25.4% |
61.4% |
12.3% |
24.1 |
|
11/04/05 |
8.0% |
-0.6% |
8.2% |
14.8% |
4.4% |
-0.6% |
|
12/02/05 |
6.2% |
+2.9% |
24.6% |
9.6% |
17.0% |
34.7% |
© 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.
The message is clear that stop loss settings need to be narrowed when the S&P 500 begins to dip below its 200 day SMA, a psychological support level that is tracked by individual investors and institution investors alike.
Each week a detailed look is taken on the effects of stop loss settings for one of the filters over the past one year period. The table below looks at the industry relative value filter over the year ending December 2, 2005. In this case, as in many others, no stop loss setting would have improved results.
Table 2
Effect of Trailing Stop on Industry Relative Value Filter
December ’04 to December ‘05
|
Stop Loss Setting (%) |
Avg. Gain reached Using Stop |
Month that stop was triggered |
Percent stopped out |
Percent that Gained |
|
10 |
12.6% |
5.6 |
71.4% |
71.4% |
|
15 |
15.6% |
4.0 |
42.9% |
71.4% |
|
20 |
24.3% |
6.0 |
28.6% |
85.7% |
|
25 |
27.4% |
3.0 |
14.3% |
85.7% |
|
30 |
34.7% |
none |
0.0% |
100.0% |
|
35 |
34.7% |
none |
0.0% |
100.0% |
|
40 |
34.7% |
none |
0.0% |
100.0% |
|
50 |
34.7% |
none |
0.0% |
100.0% |
|
60 |
34.7% |
none |
0.0% |
100.0% |
|
70 |
34.7% |
none |
0.0% |
100.0% |
|
80 |
34.7% |
none |
0.0% |
100.0% |
|
90 |
34.7% |
none |
0.0% |
100.0% |
|
100 |
34.7% |
none |
0.0% |
100.0% |
As these studies continue, more S&P 500 data points will be compared to growth and value filter performance data points and a comprehensive picture can be developed that has statistical significance. While it must be remembered that past results are no guarantee of future performance, the fact that the data are just 1 year old lends some degree of validity to judging recent trends in market sentiment and gives a degree of confidence on how these filters have performed in the recent past.
2.0 Market Analysis
Major indices continued their sideways movement for the fourth week. This consolidation appears to be concern about the sell off with reduced volume that occurred a year ago last January. The VIX and VXN remained below their 20 day simple moving averages.
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
|
|
1 month |
1 wk ago |
2 wks ago |
3 wks ago |
4 wks ago |
|
Dow Jones Industrials |
-0.4% |
0.1% |
0.9% |
-0.9% |
-0.5% |
|
NASDAQ |
-0.6% |
-0.1% |
-0.2% |
-0.7% |
0.5% |
|
S & P 500 |
0.0% |
0.1% |
0.6% |
-0.5% |
-0.2% |
|
Russell 2000 |
0.4% |
0.5% |
-0.8% |
-0.3% |
1.0% |
|
GLD, GOLD |
1.4% |
0.1% |
-4.4% |
4.1% |
1.8% |
|
RKH, Banking |
-0.2% |
0.0% |
1.5% |
-0.5% |
-1.2% |
|
IYT, Transportation |
1.9% |
2.7% |
1.0% |
-0.9% |
-0.9% |
|
SMH, Semiconductors |
1.0% |
-0.6% |
0.3% |
-2.5% |
3.9% |
|
BBH, Biotechnology |
-2.0% |
2.3% |
-1.5% |
-2.3% |
-0.4% |
|
IYR, Real Estate |
-1.7% |
-1.1% |
0.6% |
-0.7% |
-0.5% |
|
OIH, Oil |
3.9% |
1.4% |
-2.3% |
3.3% |
1.6% |
|
XLE, Energy |
0.5% |
0.4% |
-1.4% |
1.3% |
0.3% |
|
XLU, Utilities |
0.3% |
-1.5% |
1.0% |
1.4% |
-0.6% |
|
XLB, Materials |
2.8% |
2.4% |
-1.4% |
0.3% |
1.4% |
|
XLI, Industrial |
0.7% |
0.5% |
0.7% |
-0.8% |
0.3% |
|
XLK, Technology |
-2.2% |
-0.8% |
-1.1% |
-0.9% |
0.7% |
|
XLV, Healthcare |
3.3% |
1.9% |
1.6% |
0.1% |
-0.3% |
|
XLF, Financials |
-0.8% |
0.7% |
0.3% |
-0.7% |
-1.0% |
|
XLP, Consumer Staples |
-0.1% |
-0.5% |
1.9% |
-0.7% |
-0.7% |
|
XLY, Consumer Discretionary |
-1.8% |
-1.0% |
0.1% |
-0.7% |
-0.3% |
