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Can Market-Timing Ever Work?
http://poweredby.morningstar.com/PoweredBy/doc/article/1,3020,83565,00.html?CN=WSC789
by David Kathman / 11-29-2002
Dear Analyst,
In a recent article, Pat Dorsey lambasted the idea of timing the market.
Under the umbrella of timing, is he including such well-known approaches as William O'Neil's of Investor's Business Daily? It seems to me that there's a lot of solid research behind his analysis, plus years of successful results.
Mark H.
I assume you're talking about Pat Dorsey's recent column entitled "Three Ways to Lose Your Shirt in the Stock Market", although Pat also wrote a column earlier this year straightforwardly titled "Market-Timing is Bunk". As that second title makes clear, Pat doesn't have a very high opinion of attempts to time the market, and I tend to agree with him.
O'Neil has a system for stock investing, which he promotes in the newsletter Investor's Business Daily (of which he is the founder) and in his book How to Make Money in Stocks. Market timing is only one part of that system, but it's an important enough part to raise red flags. This is not a system that I would recommend for long-term investors.
CANSLIM, or Can't It?
O'Neil's system, known as CANSLIM, is actually a mishmash of different strategies, some elements of which make sense to me. For example, he advocates investing in companies with new products, markets, or management (the "N" in CANSLIM). That's not a bad thing to look for, in combination with other criteria.
Most of the CANSLIM system, however, is geared toward finding stocks with rapid earnings growth and lots of price momentum. That's a recipe for buying very expensive stocks, something we tend to frown on at Morningstar. Such a strategy can work fairly well during a roaring bull market like the one of the late 1990s, but it's extremely risky, to say the least. Lots of people lost their shirts buying go-go momentum stocks during the market bubble.
But CANSLIM is not really a long-term investment strategy anyway; it's more of a short-term trading strategy, which is where the market-timing--and its kissing cousin, technical analysis--come in. O'Neil recommends buying and selling stocks according to a variety of technical indicators, both for individual stocks and for the market as a whole. He places great importance on "cup-with-a-handle" chart patterns, and goes on at length about "pivot points" and "double-bottom price patterns." Sorry, but call me skeptical. While I'm willing to grant that broad forms of technical analysis can be marginally useful over the very short term (measured in days or weeks), I have yet to see any good evidence that the type of intricate chart-reading advocated by O'Neil works consistently.
Apart from the technical mumbo-jumbo, O'Neil advocates selling any stock if it declines 8% or more, in order to limit your losses. In theory, it's a very good idea to have a sell strategy in place. But such a low threshold is likely to lead to lots of short-term buying and selling, especially in a market as volatile as the one we're in now. All that trading increases transaction costs, which tend to drag down returns and increase your tax burden.
The Seductive Danger of Data-Mining
But what about all the research behind the CANSLIM system? Most of the evidence O'Neil presents in his book is anecdotal ("This person gained 279% in one year using our method!"), but he does describe the study out of which his system grew. O'Neil took the stocks with the greatest percentage gains each year since 1953 and searched for common characteristics, which he codified into CANSLIM.
This may sound impressive at first glance, but it's almost a textbook example of data-mining, or looking for patterns in past returns in an attempt to predict the future. The problem is that such attempts virtually never work for the stock market. Most often the patterns are just the result of random variation rather than correlation, and they don't continue going forward. If a genuine anomaly is discovered, such as the January effect, the market soon eliminates the inefficiency after it gets publicized.
As Exhibit A, I present the New USA Growth Fund, a mutual fund created in 1992 explicitly to follow O'Neil's methodology. It was managed by David Ryan, who had used CANSLIM to win an investing contest in the 1980s with three years of triple-digit returns. The fund was a different story: New USA Growth underperformed the S&P 500 in three of its four full years of existence, before it was merged into MFS Emerging Growth MFEGX in 1997. From its inception on April 29, 1992 until May 30, 1997, the fund had a cumulative return of 89.7%, versus 105.9% for the S&P 500 over the same period. And it achieved this underperformance with above-average volatility and a turnover rate that peaked above 500% in 1996--not a combination for the faint-hearted. On top of all this, the fund had a high expense ratio (higher than 2%) and a 5% load.
The recent history of investing is littered with other systems that were supposed to beat the market (usually based on what would have worked in the past) but which did not pan out so well in practice. James O'Shaughnessy's book What Works On Wall Street mined decades of stock-market returns to find the characteristics of the best-performing stocks, but the mutual funds based his research posted uninspiring returns. (Although, to be fair, those funds have done better since O'Shaughnessy sold them to Edward J. Hennessy.) The Motley Fool touted its Foolish Four as a surefire market-beating strategy, but then, after further research, admitted that the strategy's seemingly great past performance was largely the result of data-mining.
The one lesson to take away from all this is that no mechanical strategy is going to help you consistently beat the market. Investing well takes hard work, skill, and patience; trying to predict where the market will go is a fool's errand.
David Kathman does not own shares in any of the stocks mentioned above.
Market-Timing Is Bunk
If you think otherwise, I'd be glad to sell you a bridge.
http://news.morningstar.com/doc/article/0,,13767,00.html
by Pat Dorsey / 03-27-02
I will never understand why some people insist in making investing more complicated than it is. All this talk of resistance levels, market internals (yuck!), and descending flags drives me nuts--but none of it makes me as annoyed as suggestions that market-timing is consistently feasible. (Why am I bringing this up? Because when I suggested that "market-timing is bunk," on Fox News' Bulls & Bears last weekend, I was roundly booed by two other guests on the show. So, my dander is up.)
Folks, this is one of the all-time great myths of investing. There is no strategy that consistently tells you when to be in the market and when to be out of it. None. Anyone who tells you otherwise has something to sell you--usually a market-timing service.
No Way, No Day
Don't believe me? Listen to someone who's been around the block a lot longer than I have--Vanguard's Jack Bogle: "After nearly 50 years in this business I do not know of anybody who has done it successfully and consistently. I don't even know anybody who knows anybody who has done it successfully and consistently."
Now, the timers out there are saying to themselves, "Yeah, but Bogle is Mr. Index Funds--he has a vested interest in a buy-and-hold strategy!" Well, not necessarily--after all, a lot of market-timers use modified index funds from shops like Rydex and ProFunds to do their little dances in and out of the market. Bogle is, however, a big fan of controlling what you can (costs and taxes) and not worrying too much about what you can't control (how the market will do from month to month or year to year).
Moreover, when's the last time you heard someone advocating market timing who wasn't trying to sell you a proprietary system or service to get you out at the top and in at the bottom? (Wow, it's quiet in here… )
Another question: If the systems being touted are so darn good, why are the creators wasting their time trying to get a few hundred bucks in subscriptions here and there from easy marks, rather than leveraging themselves to the hilt based on their own signals? Logically, if you discovered a surefire way to time the market, the wealth-maximizing strategy would be to A) keep it quiet so that whatever inefficiency you'd discovered doesn't get arbitraged away, and B) leverage yourself as much as possible on the way up and the way down so that you could retire in style to Bora-Bora.
The Results Are In
If you still think the stock market can be timed--and judging by the number of dodgy services that pop up after a Google search on "market-timing," there must be plenty of people who think it's possible--consider some of the following studies:
An interesting piece in the February 2001 issue of Financial Analysts' Journal studied the difference between buy-and-hold and market-timing strategies from 1926 through 1999 using a very elegant method. Without getting into the gory details, what the authors did was to essentially map all of the possible market-timing variations between 1926 and 1999, with different switching frequencies. They assumed that for any given month, an investor could either be in T-bills or in stocks, and then calculated the returns that would have resulted from all of the possible combinations of those switches. (For the curious, there are 2-to-the-12th-power--or 4,096--possible combinations between two assets over 12 months.) Then they compared the results of a buy-and-hold strategy with all of the possible market-timing strategies to see what percentage of the timing combinations produced a return greater than simply buying and holding.
The answer? About one third of the possible monthly market-timing combinations beat the buy-and-hold strategy. When the authors looked at quarterly switching over five-year periods, the results got even worse for the timers: Only one fourth of the timing strategies beat buy-and-hold strategies. Annual results were even more grim: One fifth of annual timing strategies beat buy-and-hold strategies.
Now, some of you are probably thinking, "Heck, I have a 33% chance of beating the market if I try to time it? I'll take those odds!" But before you run out and subscribe to some timing service, consider the following.
First, the results in the paper I cited above overstate the benefits of timing, because they looked at each year as a discrete period--which means they ignore the benefits of compounding. (As long as you assume that the market will generally rise over long periods of time, that is.) To some extent, this is also demonstrated in the fact that buy-and-hold strategies outperform timing strategies as the length of time between switches--month, quarter, or year--increases.
Second, consider that stock-market returns are highly skewed--that is, the bulk of the returns (positive and negative) from any given year come from relatively few days in that year. This means that the risk of not being in the market is also quite high for anyone looking to build wealth over a long period of time. Barron's ran an interesting piece last fall (citing data from Birinyi Associates) that highlighted this issue quite well. According to the article, $1,000 invested in the S&P 500 in 1966 through late October 2001 would have grown to $11,171. If an investor had been lucky enough to have missed the five worst days of each year, that $1,000 would have grown to $987,120, but if they'd missed the best five days of each year, the $1,000 would have shrunk to $150. No, I'm not making this up.
I've read some articles by timers who claim that this study vindicates what they're attempting to do--after all, isn't the possibility of turning $1,000 into almost a million worth the risk of losing 85% of your initial investment? Maybe it is if you're playing the lottery, but not if you're planning on sending your kids to college or retiring someday.
Put another way, which of the following two options would you take: a high-probability expectation of 7% to 8% annual returns for some period of years, or a low-probability bet between achieving 30% annual returns and cumulatively losing most of your money? Doesn't seem that hard to me.
The Bottom Line
We invest today so that we can achieve some financial goal in the future. With intelligent diversification, reasonable return expectations, and prudent saving and spending habits, anyone can realize a fairly high probability of reaching most reasonable financial goals. Maybe those goals won't be as lavish as you'd like, but at least you'll have a strong degree of confidence in where your finances will be in 10 or 20 years. By trying to time the market, you are essentially gambling with your financial future at very poor odds.
Etc.
Hubris alert: General Electric GE CEO Jeffrey Immelt appeared on CNBC last week after PIMCO's Bill Gross made some scathing comments about GE's disclosure practices. When asked whether GE will be able to continue growing at double-digit rates, he responded: "Think of the lunacy of that question."
You know, I don't think it's a loony question at all. I think it's a damn good one that any potential investor in GE ought to be asking.
(My take: excellent arguments against market timing as a successful investing strategy. Yet, I believe that it is possible to successfully market time investments/trades but with two caveats:
(1) relatively few will greatly succeed at it so it is not practical for most investors/traders
(2) it requires a system/approach that is based on some original insight/principle which is not popularized/revealed to avoid having it arbitraged away)
Marc, sometimes SOX flags tech weakness before NDX does so I am watching SOX carefully.
Great Trader Mark Minervini:
http://www.quantechresearchgroup.com/markm.html
http://www.quantechresearchgroup.com/pressroom.html
Interviewed in "Stock Market Wizards: Interviews with America's Top Stock Traders" by Jack D. Schwager
http://www.amazon.com/exec/obidos/tg/detail/-/0066620589/103-8899877-2399005?vi=glance
(I am reading the book... Schwager says Minervini is a junior high school dropout who was playing pop/rock music for a time...I imagine he is a math whiz nevertheless)
very good point...after all recognizing the difference between data, information, and knowledge is what artificial intelligence research is all about
george
true and yet I do not use any non-price based indicators such as volume or options implied volatility for short-term trading decisions...
the larger picture of course should include the all-important market breadth indicators such as:
(1) Advance-Decline Issues/Volume:
http://stockcharts.com/candleglance?$NYAD,$NYHL,$NAAD,$NAHL,$AMAD,$AMHL
(2) McLellan Summation Indices (based on Advance/Decline data):
http://stockcharts.com/education/Resources/Glossary/McClellanSumIndex.html
http://stockcharts.com/charts/indices/McSumNYSE.html
http://stockcharts.com/charts/indices/McSumNASD.html
(3) Bullish Percentages:
http://stockcharts.com/candleglance?$BPNYA,$BPCOMPQ,$BPOEX,$BPNDX,$BPSPX,$BPINDU,$BPDISC,$BPSTAP,$BP....
theoretically yes, but since price action needs to be viewed in several time frames for a more comprehensive view, several indicators based on different time frames are necessary...
in other words, price itself has two main aspects: numerical price levels and numerical time intervals associated with different price levels...various indicators combine price levels and the corresponding time intervals in different ways...
Marc, I have tried to develop a system which simultaneously attempts to achieve four separate objectives:
(1) consistently follow the intermediate trend up on the long side
(2) switch to cash/short before short-term large drops during the intermediate trend up
(3) consistently follow the intermediate trend down on the short side
(4) switch to cash/short before short-term large rises during the intermediate trend down
Right now, for the first time ever, I am optimistic that most or all of these objectives can be (imperfectly) simultaneously achieved. The math of compounding clearly suggests that the bias/preference should be to trading on the long side. Yet, not recognizing the intermediate trend change to down in time will invariably significantly reduce the gains on the long side.
The most difficult aspect is determining the periods of intermediate trend change and trading during those periods. The backtesting of the system was done using only NDX daily/weekly data for 1997-2003 so it was limited in scope/validity as intraday data were not available to me. Undoubtedly, the system will evolve in time as new data come in and yet, surprisingly to me, a very limited number of indicators seems fully adequate to have a very robust system.
Marc, the breakthrough has several elements:
(1) synthesis of several ideas on using various indicators for NDX such as Bollinger Bands, Moving Averages, Stochastics, and RSI in several time frames to generate long and short signals (some of the ideas are actually yours)
(2) recognition of an intermediate trend (up or down) based on several indicators and adoption of a bias toward the long or short side based on the intermediate trend
(3) successful backtesting these ideas based on NDX daily charts for 1997-2003
The system is still untested and modifications may be necessary. The system is also not sufficiently mechanical.
Marc, please post your thoughts on my board and I'll respond.
************...A BREAKTHROUGH....FINALLY !...**************
Is the US dollar's fall already over?
Saturday, May 31 - 2003 at 11:49
http://www.ameinfo.com/news/Detailed/24528.html
Most investors only notice an opportunity after it has past. Is this now the case with the euro as an alternative haven for cash to the US dollar? The US dollar may bounce back quicker than some experts predict.
Last week was supposed to be the week in which the US dollar slumped against the euro, and we had an entire cast of bankers and speculators, led by the infamous George Soros, queuing up to say that this was the moment to buy the euro.
In the event the euro did, briefly, manage a new high of $1.19 but finished the week pretty much where it began at $1.17.
Could it be that far from expressing their true views, all these guys were piling on the pressure so that they could close out of their positions in the euro and shift back into the US dollar? It certainly felt like it, and this could be the moment for euro holders to cash out after a very satisfactory gain against the dollar.
Some people hate to be seen as a speculator, and decline to think in such a way. But the truth is that everyone who holds money in a deposit account – even an Islamic account with no interest – is a currency speculator whether he, or she, likes it or not, because you have to hold your money in one currency or another.
Why then should the euro weaken and the US dollar rise? It comes back to fundamentals. The euro zone economy is very weak - indeed Germany is probably still in recession - and facing up to the accession of 10 not-very-strong economies to the EU next year.
By contrast the US economy is still growing and there is a US presidential election coming up in 2004. The stage is surely set for a weakening of the euro – perhaps partly at the behest of the bumbling and incompetent European Central Bank which should cut interest rates as soon as next week – and a quick recovery for the US dollar.
Now chartists will tell you that, no, the US dollar will go to $1.25 by the end of the year and $1.35 by the end of 2004. These are the same analysts who brought you the Dow Jones at 20,000 by 2001! Simple upward projections of trends do not work.
On the other hand, look at the gentle swing of the euro from $1.17 down to 82 cents and then back up again, and this looks very much like a completed cyclical movement. Now the cycle will turn back the other way.
Ask Mr. Soros, was he buying or selling euros last week? The smart money says he was doing the reverse of what he was saying, and if your money is not out of the euro yet, you might like to consider whether to move it now.
In any case, the real shift in the value of the euro is probably over now, so there is little point in staying in, and the risk is to the downside.
(George Soros in action...)
Well, I have read about the Turtle Trading System:
http://www.originalturtles.org/system.htm
and I have completely changed my mind on how top traders can achieve 100%+ a year gains, year after year.
In my opinion, the ONLY way to achieve such gains for several years running is to have a well-defined SYSTEM. Luck/chance plays absolutely no role.
The system does not have to be written down or programmed but it has to be developed to the point where trading decisions are predominantly automatic. If trading decisions are not sufficiently automatic, i.e. the trader has to "guess" in too many cases what to do, then the results will be mediocre.
The "secret" is to have a set of rules that, based on experience or backtesting, result in successful trades in a high percentage of cases. Such rules will be based on some form of t/a, typically using real-time charts.
In addition, the system trading rules are often not the most difficult part of a system. Two more aspects of a system appear more difficult than that. The first one is money management, i.e. position-sizing. The second one is the emotional discipline to stick to the system.
Money management is undoubtedly crucial since probabilistically there is always a nonzero chance of any system failing for an extended period of time (theory of runs) so that one has to have a method to deal with this possibility.
Emotional discipline to stick to system rules can only be developed if the trader has confidence in the system. This confidence must come from either past system performance or extensive backtesting.
The system should be simple enough to be effective which really means that losses will periodically occur. Overfitting or trying to avoid losses at all costs is not the right approach. Interestingly, the Turtle System will produce losing trades most of the time, and in many cases initial substantial profits will turn into losses. Yet, the relatively few large gains in the Turtle System easily make up for this.
In my opinion, the ultimate test of a successful system is whether it can be effectively taught to other individuals who perhaps are not even traders. That was possible with the Turtle System which means that this system was sufficiently simple and robust to perform very well when used by complete novices (highly intelligent though).
These observations are the result of my continuous attempts to conceptualize most clearly the requisite elements of a very successful trading system. Very few individuals in the world have succeeded in developing extremely successful trading systems despite literally millions of traders attempting just that. Nevertheless, just like for George Soros, Dennis Richard, Ed Seykota, and many other famous traders, for me personally this is both a worthwhile and rewarding challenge and a fascinating intellectual pursuit.
Marc, look at these double tops on SPX(965) & INDU(8869):
http://stockcharts.com/def/servlet/SC.web?c=$SPX,uu[r,a]dacaynay[dd][pf]&pref=G
http://stockcharts.com/def/servlet/SC.web?c=$INDU,uu[r,a]dacaynay[d20020930,20030530][pf]&pre...
This inflation-adjusted chart shows that markets ONLY climb a wall of worry...problem is there is absolutely no worry at present:
http://www.chartoftheday.com/20030528.htm
A great post on candlesticks from Tom K (I do a lot of similar analysis):
http://www.investorshub.com/boards/read_msg.asp?message_id=1052447
Marc, Lefevre wrote a book about Livermore..so the quotes are Livermore's..here is the Amazon info:
(note the 5 books that customers also bought...great choices)
http://www.amazon.com/exec/obidos/ASIN/0870340654/ref=ase_sharefisgoldnugg/103-0839366-2079027
One more book about Livermore:
http://www.amazon.com/exec/obidos/tg/detail/-/0471023264/ref=pd_sbs_b_2/103-0839366-2079027?v=glance...
Edwin Lefevre:
It was the same with all. They would not take a small loss at first but had held on, in the hope of a recovery that would "let them out even." And prices had sunk and sunk until the loss was so great that it seemed only proper to hold on, if need be a year, for sooner or later prices must come back. But the break "shook them out," and prices just went so much lower because so many people had to sell, whether they would or not.
The spectator's chief enemies are always boring from within. It is inseparable from human nature to hope and to fear.
In speculation when the market goes against you, you hope that every day will be the last day -- and you lose more than you should had you not listened to hope
-- to the same ally that is so potent a success-bringer to empire builders and pioneers, big and little.
And when the market goes your way you become fearful that the next day will take away your profit, and you get out -- to soon.
Fear keeps you from making as much money as you ought to.
The successful trader has to fight these two deep-seated instincts. He has to reverse what you might call his natural impulses. Instead of hoping he must fear; instead of fearing he must hope.
He must fear that his loss may develop into a much bigger loss, and hope that his profit may become a big profit.
It never was my thinking that made big money for me. It was always my sitting. Got that? My sitting tight!
(I am trying to finally memorize these quotes...should have done it a long time ago...<ggg>)
An excellent article on housing:
"As Housing Buoys Economy, It's No Surprise to Greenspan"
http://www.freerepublic.com/focus/f-news/918937/posts
Since I started this thread over 2 months ago (at Larry D's insistence), I have re-thought and changed my "trading system" very significantly. As it turns out, I have simply re-discovered that the most fundamental technical principle in successful trading is that of
**********************************
****TREND FOLLOWING****
**********************************
The first person who initially made me think a bit about trend following was probably WinLoseOrDraw. However, it was positiontrader and also wahz who had the greatest influence on me in my re-orientation toward adopting trend following as an overarching trading principle. Interestingly however, KT does not seem to follow this principle.
And now I had the first chance to read in detail about the Turtle Trading System which is based on the trend following ideas:
http://www.originalturtles.org/system.htm
This system is admittedly not easy to follow due to the exacting discipline it demands and yet it has proven extremely successful for Richard Dennis, Bill Eckhardt, and the original Turtles. It also seems 100% mechanical and applicable to all types of markets. I intend to study this system and see how well it performs when trading NDX and SPX. I am especially interested in the magnitude of drawdowns (losses) that the system generates both in bull and bear market periods.
WLD found this excellent website about Turtle Trading:
http://www.originalturtles.org/system.htm
A good, brief read on "Turtle Trading":
http://www.traders.com/Reprints/PDF_reprints/TT_TURTLE.PDF
Richard Dennis did extremely well in his own multi-million dollar account (even with later losses)...but, his system had considerable drawdowns...this caused problems when he started managing money...no matter, trend following is a valid idea...the Turtle System is proprietary and presumably not really 100% mechanical when practiced by Richard Dennis and other top traders...
Major trading championships are an important venue for the most talented traders to establish their credentials...the focus
is primarily on trading stocks and futures as these offer 100+% gain potential...some championships may also include options...
There are likely no mutual fund trading championships due to the fact that almost all mutual funds are already actively managed/traded by their fund managers...index funds trading championship might be feasible but many index funds have ETFs or other instruments which closely correspond to their performance (such as QQQ approximating NDX)...
Here is a great source of info on trading/investment books linked to Amazon (bottom of the page):
http://www.sharelynx.net/Books/BookIndex.htm
Personally, however, standard trading/investment books are of little interest to me at this point...my sole interest is in identifying the top traders in terms of their historical performance and only then reading what they have to say...for example, the Turtle Trader method in general and the ideas of Richard Dennis in particular are of great interest to me:
http://www.turtletrader.com/
http://www.turtletrader.com/trader-dennis.html
The phrase "trading contest" has dozens of hits on google...my interest is not in this type of paper trading (even though the prizes are attractive)...paper trading is fundamentally different from trading using one's own money...
I am instead interested in identifying the very top traders who have multiplied their personal accounts to achieve multi-million dollar portfolios...and in their trading approaches and trading vehicles...
All I can say is this: 100+% gains for 10 years running mean increasing one's portfolio 1000 times...even with a very modest starting account (say, $10,000) this will result in a good-sized $10,000,000 account in 10 years...this is precisely the kind of achievement that MATTERS...and it should be THE GOAL
Math and investing tutorials:
http://home.golden.net/~pjponzo/gummy_stuff.htm
Quotes by top traders:
http://keplerweb.oeh.uni-linz.ac.at/trading/citation.html
Background on Norm Zadeh and U.S. Trading Championships:
http://www.insidebiz.com/insidebusiness/output.cfm?ID=362
Norm Zadeh, hedge funds, and SEC:
http://www.sec.gov/litigation/opinions/34-44632.htm
Brokers and trading results:
http://store.traders.com/-v06-c05-sevenbe-pdf.html
Larry Williams:
http://business-times.asia1.com.sg/story/0,4567,78255,00.html
Quote: "Find a time frame that suits your personality. Know that trend is the basis of all profits. Practise strict money management. And don't over-trade."
Ulf Jensen: winner of 1992 Robbins System Trading Championship:
http://books.global-investor.com/books/0649.htm
Robbins World Cup Stock and Futures Trading Championships:
http://robbinstrading.com/worldcup/
Recent winners of Robbins Stock and Futures Trading Championships:
http://robbinstrading.com/worldcup/stocks/standings.asp
Perhaps some of the top traders on the threads should enter trading championships in order to determine their relative performance compared with other top traders...
A useful tutorial on % gain calculations:
http://home.golden.net/~pjponzo/misc-stuff.htm
Update on top performers:
(1) KT...trades QQQ...only at the open (once a day)...had a 300% gain in the 12 months since 4/6/02 (or approx 12% a month compounded) with no leverage/margin...in the last 2 months had approx 0% gain...uses a 100% mechanical system based on a set of formulas
http://www.geocities.com/k_tieff/e/KT-QQQ-e.htm
(2) PAUL FAKLER...trades QQQ intraday...had a 12% gain for the past 2 months (6% a month)...does not use leverage/margin...uses partial positions probably no larger than 50% of total acct...uses a "system" based on t/a
http://www.investorshub.com/boards/board.asp?board_id=1628
(3) WAHZ...trades QQQ intraday...45% gain since 1/17/03 (or approx 10% per month compounded) with average position size of approx 125% of the account (1st position 75% of acct and 2nd position 75% of acct...2nd position open about 2/3 of the time)...uses a "system" based on a set of formulas and t/a
http://www.investorshub.com/boards/board.asp?board_id=1566
(4) POSITIONTRADER (MARC)...trades UOPIX (2x NDX long fund) and USPIX (-2x NDX short fund)...200+% gain since 10/9/02 (or approx 16-17% a month compounded) with 100% leverage by investing 100% of portfolio in the 2x NDX funds...uses a "system" based on t/a
http://www.investorshub.com/boards/read_msg.asp?message_id=948189
COMMENTS:
* KT achieved gains of 12% a month which is the best record on the list for a QQQ trader
*PAUL FAKLER achieved gains of 6% a month and may be deleted from the list given the fact that this 6% monthly gain overstates the actual gain due to multiple positions smaller than 50% of total acct
* WAHZ achieved gains of 10% a month but accounting for the average 125% position this translates into a gain of 8% a month (10% : 1.25 = 8%) which is also a superior record
* POSITIONTRADER achieved gains of 16-17% a month using 100% positions in Profunds NDX long and short leveraged (2x) funds which is an exceptionally superior record given the risk involved in those leveraged funds...in fact, I have yet to find another Profunds/Rydex trader with 10+% monthly compounded gains
Of interest are also these sites:
FUNDSwitch which trades Profunds NDX long and short leveraged (2x) funds and had gains of: 140% in 2000, 61% in 2001, 89% in 2002, 14% in 2003 (or approx 84% a year compounded) ...(the actual gains are actually somewhat higher as FUNDSwitch tables did not use compounding in their calculations)...FUNDSwitch uses a "system" based on t/a
http://www.fundswitch.com/performanceultra.htm
VTO which trades QQQ after the close (once a day)...the buy (sell) signal is generated when the NDX RSI(5) < 30 (NDX RSI(5) >50)...this long-only strategy produced gains in every single year since 1997 with the compounded gain of 277.4% since 1997 (or approx 23% a year compounded)
http://vtoreport.com/rsi.htm
COMMENTS:
* traders trading Profunds/Rydex should attempt to achieve gains at least exceeding those at FUNDSwitch since the FUNDSwitch site provides an inexpensive subscription allowing anyone to match the gains of FUNDSwitch
* traders trading mutual funds long only (401k etc) should attempt to achieve gains at least exceeding those at VTO since the VTO site provides free info on their buy and sell signals
* traders trading QQQ should attempt to achieve gains at least exceeding those of KT since KT provides real-time free info on his buy and sell signals through email
I will attempt to find more traders/sites with superior records in the future...
robin, please check this post:
http://www.investorshub.com/boards/read_msg.asp?message_id=955673
no one else qualified for the list thus far...
Soros adds to doubts by shorting dollar
By Simon English in New York (Filed: 21/05/2003)
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2003/05/21/cnsoros21.xml&menuId=242&s....
George Soros, the man who broke the Bank of England, yesterday increased the uncertainty surrounding the US dollar by revealing that he has been selling the currency for some time.
The billionaire financier also chided John Snow, US Treasury Secretary, for his remarks suggesting that the Bush administration was shifting away from a so-called strong dollar policy. In an interview with television channel CNBC, Mr Soros said: "I have to disclose that I now have a short position against the dollar because I listen to what the Secretary of the Treasury is telling me."
The dollar has fallen sharply against major currencies lately, hitting a four-year low this week. Mr Snow unnerved currency traders by appearing unconcerned by recent falls, which he called "fairly modest". Mr Soros declined to speculate how much further the currency had to tumble, saying: "I think the treasury secretary was somewhat irresponsible talking down the dollar, I try to be more responsible."
In 1992 Mr Soros made an estimated $1 billion profit by betting against the pound, a tactic that eventually forced the UK out of the European Exchange Rate Mechanism. He declined to say how long he has been selling the dollar - he predicted it would dramatically weaken a year ago. In an attempt to repair the damage, the White House said yesterday that President Bush remained committed to a strong dollar.
By late afternoon in New York the euro edged up to $1.1712 against the dollar, which also lost ground against the pound, up nearly half a per cent at $1.6403, and the yen.
Mr Soros also joined the criticism of President Bush's plan to end double taxation of share dividends, fearing the effect this will have on government debts. "It is not a very effective way of using a deficit. We need a stimulative monetary policy and a temporary deficit, not a permanent one," he said.
Warren Buffett, the second richest man in the world, repeated his opposition to the dividend scheme in a trenchant editorial for the Washington Post. He called the tax cuts "class welfare, for my class".
(Buffett and Soros don't seem be in sync on economic issues with the establishment...don't hey realize they are sure to lose money by not taking Greenspan's and Snow's pronouncements as gospel? and what imaginary problems do Buffett and Soros find in entirely legitimate instruments like massive amounts of derivatives or the govermental promise to support debt and equity markets by any means necessary...it's all for the greater good, after all, no?...<ggg> )
yes, i still follow KT...he sent me some info on his system...it's 100% mechanical but it's not clear how it works...he had net gain of zero last 2 months...in his last email he started questioning whether his system needs to be overhauled...overall his system still seems very good and superior to almost any other one i know of...
wld, major tops and bottoms are in principle important to LTBH types and frankly to anyone who has mutual funds which cannot be traded often and who is not following the market the way we do...
for swing traders, major tops and bottoms may be the object of interest since even they would like to hold their positions longer than few days at a time (whether long or short)...
and yet, since these tops/bottoms cannot be determined in advance, swing traders have to rely on their individual indicators suggesting the current direction of the market in order to trade in the trend direction...so actually, it is probably not tops/bottoms that traders are interested in per se but rather the correct reading of the intermediate trend...
personally, I have a bit of difficulty accepting the fact that in a sizable percentage of situations I am unable to determine the underlying multi-day trend correctly...and yet, since purely mechanical systems are no better in this regard imo, I have to focus on the overriding fact that being even partially correct (say, 60-70% of the time) in the market is more than sufficient to achieve outstanding success in trading...
well, some of my assumptions about the market behavior and optimal trading strategy are proving to be a bit suspect at closer inspection...
it appears that the sentiment/crowd psychology aspect of markets is proving rather difficult to quantify even using the best t/a or math/stat...
the specific major problem i encountered is determining major market tops/bottoms...i have carefully analyzed NDX and SPX charts for 1997-2003 and i have not found any reliable way to determine tops and bottom until well after the fact (such as using weekly charts or longer term moving averages on daily charts)...this is of course well known to veteran market watchers and i myself suspected this as well...
what is a NOVEL insight to me is that i found it difficult to effectively swing trade BOTH long and short based on chart behavior...specifically, one may have to choose the dominant mode of swing trading...either long or short...this in order to avoid being excessively whipsawed...in other words maximum gains are simply not possible on both long and short side due to the fact that the tops/bottoms have to either be anticipated or acted on after the fact...
apparently, the preferable mode of swing trading appears to be trading LONG...this may explain why in bear markets short sellers apparently do not achieve gains similar to those long in bull markets of the same duration...
the two reasons for this long preference are:
(1) even in a declining bear market of 2000-2002 swing gains on the long side equal swing gains on the short side due to the fact that, say, a 50% drop followed by a 50% gain still leaves the market 25% below the starting point
(2) sudden (1-day) market moves tend to be larger in magnitude in the up direction than in the down direction and also longer-term moves down appear to have more zigzags than longer-term moves up...all this makes it emotionally more difficult to hold on to short positions, see the NDX chart:
http://stockcharts.com/def/servlet/SC.web?c=$NDX,uu[r,a]dallynay[d19970101,20030518][pf]<i&pr....
the above observations, even if true, do not mean that i expect a bull market in the future or that i philosophically believe that trading long is the right way...rather, the math (and the psychology of trading) seems to be compelling in suggesting that disciplined swing trading both ways but with a preference for the long side may be a better strategy even in a bear market...
despite these observations it is clear than capital preservation remains key for those in long side only mutual funds as large losses are doubly difficult to recoup (a 50% loss requires a 100% gain to recoup it)
i should add here that these observations do not mean that effective successful trading with 100%+ annual gains is not possible...rather one has to accept the fact that only a certain percentage of market moves can be correctly anticipated and traded with resulting gains...
a short explanation of the THEORY OF RUNS:
http://www.coonrod.com/scot/poker/math/runs%20of%20winning.txt
From:: cardano
Subject: Long runs of winning and losing
Date: 4/9/97
In another thread (on stripped deck poker) Robert Copps poses the
question of the likelihood of long runs of winning, specifically the
chances of winning 29, 30, 31, or 32 times in a row. Here are some
useful probabilities on this sort of thing:
In order to calculate the likelihood of exceptional runs of good or
bad luck in gambling it is necessary to use the Theory of Runs, usually
only covered in texts of advanced probability theory. The equations
have no analytic solution and the results need to be calculated
numerically. I wrote a program in Mathcad 4.0 to solve these problems.
I need only plug in the values of p, r, and N in order to get P,
where p = probability of an individual event
r = number of consecutive occurrences of the event, or run length
N = number of trials
P = probability of run of length r or longer occurring
Assumptions: events are independent of one another and probability
of individual events remains constant at p, and p is known. In fact
in poker the events may not be completely independent and p is not
known, but must be estimated from past results.
Some sample results:
Assume that a winning poker player wins 80% of his or her sessions.
Number of Sessions, N 500 750 1000
r = 29 13.8 20.3 26.3
r = 30 11.2 16.6 21.6
r = 31 9.0 13.5 17.7
r = 32 7.3 10.9 14.4
Number of Sessions, N 500 750 1000 1500
r = 4 47.3 61.8 72.3 85.5
r = 5 11.9 17.4 22.5 31.9
a primer on deflation from the Ludwig von Mises Institute:
http://www.mises.org/fullarticle.asp?control=1225
(posted so that i have access to historical charts just in case...)
S&P 500 Index adjusted for inflation(CPI) with Trend Channel - 1871 to 1997 (log scale):
http://www.cpcug.org/user/invest/trend2.gif
a thought occurred to me...if inflation stays near zero (disinflation) for years then, in order for SPX to reach even the median of the trend channel in this chart, SPX would have to actually keep falling whereas if inflation were rising briskly this would allow SPX to stay constant or even rise somewhat while the inflation-adjusted SPX would still fall toward the median of the trend channel...
in so many words...disinflation is the asset price killer...in japan commercial real estate prices fell 90% and stock market prices 80% from the peak...negative demographics played a key role there of course...here in usa we may have a mild case of this phenomenon...
The Great Derivatives Smackdown
Ari Weinberg, 05.09.03, 3:15 PM ET
NEW YORK - Recently Federal Reserve Board Chairman Alan Greenspan and noted investor Warren Buffett of Berkshire Hathaway (nyse: BRK.a - news - people ) have participated in a mediated back-and-forth on the value and risks of derivatives. But, as far as we know, they have yet to air their views tete-a-tete.
At stake is the unfathomable $56 trillion notional value of derivatives contracts between U.S. commercial banks and counterparties, measured by the Office of the Comptroller of the Currency at the end of 2002. The entire market, around the world, is estimated at over $100 trillion. But such notional amounts--the face amount of the underlying security--are rarely realized.
Derivative instruments, most often used to mitigate interest-rate risks, can be used to hedge any type of risk exposure in any market. In light of the use of corporate credit derivatives and products peddled by Enron (otc: ENRNQ - news - people ), such as bandwidth and weather, Buffett has soured on the efficacy of derivatives. At Berkshire-owned General Re, its General Re Securities unit, though shuttered, is still stuck with 14,384 contracts outstanding with 672 counterparties, so far amounting to $6.5 billion in receivables.
How does that compare to other institutions? Well, both Greenspan and Buffett claim that derivatives values and liabilities are difficult for even their holders to track. Insurance giant American International Group (nyse: AIG - news - people ), by nature of its business, provides extensive disclosure in its annual report. At the end of 2002, AIG's Financial Products unit had $14.9 billion in risk related to credit derivatives and a notional amount in its credit-derivative portfolio of $126 billion.
Citigroup (nyse: C - news - people ) said it holds $37.5 billion worth of derivatives in assets on its trading account, or 24% of that account, and $41 billion in liabilities, 45% of its trading-account liabilities. Bank of America (nyse: BAC - news - people ) had an average of $25.3 billion in derivative assets and $17.3 billion in derivative liabilities in 2002.
The party line from most major financial institutions is that they believe their risk is minimal. Still, in certain cases, firms take cash or marketable securities as collateral for derivatives contracts.
Buffett fears that there is a lynchpin out there in the derivatives market that, when pulled, will send the financial world into a spin. Essentially, the Oracle of Omaha wants nothing to do with this hot-air market. Greenspan, too, sees the high concentration of derivatives contracts at so few firms as a pitfall. His answer, however, is to educate and spread the risk around.
The Smackdown
Alan Greenspan Warren Buffett
Title Chairman of the Board of Governors of the Federal Reserve System Chairman of Berkshire Hathaway
Nickname Mr. Uncertainty The Oracle of Omaha
Age 77 72
Tenure 16 years 38 years
Hands-On Experience Long-Term Capital Management bailout General Reinsurance Securities closure
The Big Picture "Although the benefits and costs of derivatives remain the subject of spirited debate, the performance of the economy and the financial system in recent years suggests that those benefits have materially exceeded the costs." "We view them as time bombs, both for the parties that deal in them and the economic system."
Regulation "Except where market discipline is undermined by moral hazard, owing, for example, to federal guarantees of private debt, private regulation generally is far better at constraining excessive risk-taking than is government regulation." "There is no central bank assigned to the job of preventing the dominoes toppling in insurance or derivatives....[Total return swaps and] other types of derivatives severely curtail the ability of regulators to curb leverage and generally get their arms around the risk profiles of banks, insurers and other financial institutions."
Risk Concentration "One development that gives me and others some pause is the decline in the number of major derivatives dealers and its potential implications for market liquidity and for concentration of counterparty credit risk." "Large amounts of risk, particularly credit risk, have become concentrated in the hands of relatively few derivatives dealers, who in addition trade extensively with one another."
On Recent Events "Even the largest corporate defaults in history (WorldCom and Enron) and the largest sovereign default in history (Argentina) have not significantly impaired the capital of any major financial intermediary." "In the energy and utility sectors, companies used derivatives and trading activities to report great 'earnings'--until the roof fell in when they actually tried to convert the derivatives-related receivables on their balance sheets into cash. 'Mark-to-market' then turned out to truly be 'mark-to-myth.'"
The Takeaway "We have made great strides in expanding the volume of publicly disclosed information related to risk exposures and derivatives. A more complex question is whether this greater volume of information has led to comparable improvements in the transparency of firms." "Derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal."
Source: Alan Greenspan Speech on May 8 to the 2003 Conference on Bank Structure and Competition, Warren Buffett's Annual Letter to Shareholders of Berkshire Hathaway, March 8, 2003.
(i posted earlier pieces by Stephen Roach and Bill Gross...along with this piece on Warren Buffett, i have presented viewpoints of 3 out the only 4 people in the financial world i listen to (George Soros is the 4th one)...
i know many people are currently bullish on the stock market and/or economy...i prefer to be in sync with the views of the 4 people i follow...and they are not exactly bulllish...so i'll wait till they change their mind...
of course as far as trading i'll only follow the charts so in the t/a sense i am bullish too as the trend is up for now...)
interesting...but it should depend on the underlying volatility..it's not 100% positions that are key but rather the max % loss that's possible...eg. 100% positions in a growth and income fund should be safer than 10% positions in futures with 5 to 1 leverage...
in fact, this issue of excessive volatility subtly changed my viewpoint on the optimal trading approach as will be evident in my trades from now on...
if you could provide more details on your observations re blow ups i would appreciate it...optimal money mgmt has always seemed the key aspect of trading to me so position size is of paramount importance...
all these charts seem "a bit" out of sync:
SP500
http://stockcharts.com/def/servlet/SC.web?c=$SPX,uu[r,a]maclynay[d19900101,20031231][pf]<i&pr....
DOLLAR
http://stockcharts.com/def/servlet/SC.web?c=$USD,uu[r,a]maclynay[d19900101,20031231][pf]&pref....
GOLD
http://stockcharts.com/def/servlet/SC.web?c=$GOLD,uu[r,a]maclynay[d19900101,20031231][pf]&pre....
BONDS
http://stockcharts.com/def/servlet/SC.web?c=$TNX,uu[r,a]maclynay[d19900101,20031231][pf]&pref...
OIL
http://stockcharts.com/def/servlet/SC.web?c=$WTIC,uu[r,a]maclynay[d19900101,20031231][pf]&pre....
Investment Outlook Bill Gross / May/June 2003
Is That All There Is - To A Fire?
http://www.pimco.com/IO/mayjune03/index.htm