Disclaimer: I am not an investment advisor. When I describe my own trading activities, it is not intended as advice or solicitation of any kind.

31 March 2011

Not The Spreadsheet's Fault

Two weeks ago, CS|MACO gave me a Buy signal when AAII.com released a bearish investor sentiment report -- bearish investors correspond well to short-term market bottoms, that's why we call it Contrary Sentiment.  The moving-average crossover component had no strong feelings either way, so the CS-based Buy signal was allowed to generate a system-wide Buy.  I dutifully bought SPY near the open price in my paperMoney account.

A week later, as the market rose, investors relaxed their concerns somewhat and found their bullish mojo again.  37.7% of them gave the thumbs-up to the world, which was outside of the Buy range, but not above the 41.5% required to close the trade.

Finally last night, a new report came out at 41.8%...just high enough to get a close signal.  But now SPY was above its 25-day moving average, which in turn was above the 200-day moving average.  So while CS went from Buy to Flat, MACO went from Flat to Buy.  Flat+Buy=Stay-Long.

If I had managed to put the numbers into the newly-fixed spreadsheet correctly, that's what I would have done.  Instead, I fat-fingered the 200-day moving average, entering 4119.49 instead of 119.49.  The spreadsheet was a little taken aback by this sudden 4000% spike in the long-term moving average, but kept a stiff upper lip about it.  "Guess you better sell, boss," it said.  I sold.

Hey, I got a great price, getting out about 35c above the close for the day.  But first thing tomorrow I'll have to get back in.  And I'm betting that the Employment Situation Report tomorrow an hour before market-open is going to send the S&P up sharply, causing a gap-up in SPY that will cost me for my stupidity.

Can't blame the spreadsheet this time... garbage in, garbage out.

26 March 2011

A Little Success

I had some tough trading days this month, so it's nice to have the kind of success that makes it all feel easy.

In Motion, but In Which Direction?

Research in Motion (RIMM), maker of fine Blackberry-branded devices, is a company built on a fad.  Corporate users relied on their "crackberries" for years, especially when travelling or otherwise out of the office.  But Apple's iPhone was Blackberry's first serious competitive threat, and the flood of Android devices were the second half of the one-two punch.  The fad is over, and RIMM is shrinking. 

For some reason, the investment community doesn't seem to have accepted this obvious fact.  Analysts still talk in breathless whispers about RIMM's upcoming tablet devices (I'm betting it'll suck), and the amazing experience provided by its latest phone operating system refreshes (evolutionary, blah).  Many otherwise intelligent hedge fund managers still treat RIMM like a tech sector bellweather, buying it up on every positive rumor, selling it off again on every fundamental stumble.  As far as I'm concerned, RIMM is as relevant today as Digital Equipment Corp was in 1997.  Unfamiliar with DEC?  I rest my case.

Just like an eccentric hermit who occasionally ventures into the big city for a group therapy session, RIMM lovers are periodically snapped back to reality.  This check happens quarterly, when RIMM reports earnings.  This is my opportunity for one of my very most favorite short-term trades: buying puts on RIMM just before earnings come out.  I have had varying success lately, as bubbly investors drunk on excess Fed liquidity shrugged off what could only be described as luke-warm results.  But overall I believe the trade is a good one, and I had another opportunity for it this week: RIMM reported its latest earnings on Thursday after the market closed.

I bought puts on Tuesday, and when the market rallied, taking RIMM along with it (thus reducing the price of my puts as well as the delta), I bought more on Thursday.  RIMM closed at 64.09 on Thursday, just before its conference call.

Don't ask me how RIMM did last quarter: I don't know and I don't really care.  But I know they disappointed both in their top-line revenue numbers ("oh but look at the continued cost-cutting!" the analysts said) as well as their outlook for the next quarter and rest of the year ("they're in a retooling phase, just like the late 90s!" the analysts screeched)*.  Ms. Market would have none of this posturing and spin management, and she sold that sucker off by 11-12% in after hours trading.  The next morning, RIMM opened at 57.17 (-10.7%), and my puts were up about 80-90%.  Hapless investors who haven't yet learned not to listen to analysts started buying the stock up, topping it out at 58.40 (-8.9%) about an hour after the market opened. 

2-day, 5-minute chart of RIMM showing the 11% drop after earnings
By the way, the first hour of trading is known in the professional trading community as "amateur hour."

I exited some of my puts pretty early, in case the rally had legs, and in doing so I took all of my investment out of the trade - the remainder of my puts were pure profit.  Later in the day, as the dead-cat bounce pattern continued to take shape, I exited the rest at a slightly higher price.  Total return: 90% in 3 days.

* I distinctly remember reading that exact comment ("retooling phase... just like the late 90s") on Thursday night after the release, on a news item linked from Yahoo Finance.  I remember noticing that the related links section at the end of the post included Jim Cramer and other well-known "pundits".  I also remember the analyst giving an unequivocal Buy! recommendation based on how he saw the market reacting the next day (he expected a lot of buyers to step in, for some reason).  Now that the market has spoken, essentially confirming what the overnight traders knew already, somehow I can't find that article anywhere.  Too bad, I would have included a link to it.

CS|MACO: Unnaturally Quiet

First the good news: the AAII sentiment survey for March 23 did indeed reflect a more bullish flock, but insufficiently bullish to make the CS|MACO trade exit the next morning.  Meanwhile, SPY rallied above its 25-day moving average, so I now have a Hold signal from CS and a Long signal from MACO.  Unless CS goes all the way to Short, or SPY sells enough to get a Flat signal from MACO, I can stay in the trade.  SPY is already up nearly 3% from where I bought it on Thursday morning.  One of these days I'll do some more formal backtesting and maximum-drawdown analysis so I can leverage this trade up, but for now I'm content to let it just time an unleveraged entry and exit.

The bad news (and here, my poker friend Missy will start snickering if she's still reading) is that I discovered on Thursday that my spreadsheet that does all the calculations and boils the numbers down to Long/Hold/Exit/Short had some serious flaws that caused CS|MACO to miss two entry signals for smallish winning trades this fall.  Oops.  A craftsman is only as good as his tools, I guess.

The Condor Has Landed

My April Iron Condor managed to finish legging out of its bullish wing at a reasonably good price on Friday, completing the exit of the trade and profiting a nice solid $1.10/contract.  I never had to take any risk-management positions - just reduce quantity on the initial position as I worked my way out.  I'm looking for a good entry point for the May IC, but volatility is back down in the doldrums again.  I'll have to wait until the market gets skittery about something again - if that means skipping until June, so be it.

23 March 2011

CS|MACO... Finally!

Mea Culpa

First, I need to relate a painful but valuable lesson I learned last week.  In my previous post, I said that the CiG trade had fired a Buy signal on S&P Futures.  As a fade strategy, the CiG trade frequently signals trades that I view as bat-shit crazy.  It takes some teeth-gritting and reminding myself that this is fake money in order for me to be able to enter the trade sometimes.  Last Wednesday was one of those times.

I dutifully entered the trade, but I put a $500/contract stop-loss order in, instead of the $1000 that the script calls for.  I congratulated myself a couple of hours later when my stop-loss was hit, closing me out for a $500 loss, on saving the other $500 dollars.  Well... go look at a chart for S&P Futures.  My max unrealized loss that evening would have been about $700, and over the next two days we had a sizable rally.  By the time the exit signal arrived, the trade as designed would have been up over $2000/contract, a big return.  Instead, I was sitting on the sidelines with a $500 loss.  My "judgement", in this case, cost me a total of $2500/contract.  Ouch.

So why did I go against the trade as back-tested by NeighborTrader?  My rationale at the time was that this was a fundamental market move, and we were in uncharted territory that couldn't possibly be handled by back-testing.  OK, fair enough, and that's what judgement is for.  But I took the wrong action based on that judgement: instead of tightening my stop, which cut my max loss by 50% but increased my probability of experiencing that loss by far more than 100%, I should have opted not to place the trade at all.  If my comfort level with the risk is insufficient to execute the trade as designed, I should avoid the trade entirely - not cripple it and damn it to fail.

My conclusion was invalid, even if my assertion (these unprecedented times are likely to cause the trade not to work) was valid.  But what about my assertion?  If we want to look at unprecedented times, let's look at May 7, 2010, the day after the "Flash Crash" (I hate this term, by the way).  CiG would have similarly fired a Buy signal at the end of the day that day, and the exit signal would have come two trading days later, for a profit of over $2200/contract.  And here's the thing: NT back-tested this trade before May 7, 2010.  That's out-of-sample data, and thus can't be discarded as sample bias in his back-testing.

So my assertion -- unprecedented times invalidates the trade signal -- was invalid, and my conclusion on how to act on it -- tighten the stop -- was invalid as well.  Look, I'm not perfect, but if I had gotten either thing right, I'd feel a lot better about it.  Anyway, $2500 lesson learned: either follow the trade, or don't do the trade - don't adjust the trade on the fly based on my gut.

Oh, and you may recall me mentioning that "by rights, I should be short Ten Year Futures, too". That trade, if entered, would have made another $1250/contract over the course of three trading days.  Sigh.


Last Wednesday night, not long after my stop-out, AAII's sentiment survey for March 17 was posted, and those inversely prophetic investors had some pretty negative things to say about the market.  Bullishness dropped all the way to 28.5%, just below the CS Buy signal level of 31.5.  With SPY trading between its 25SMA and its 200SMA, the MACO component was giving a hearty "meh" signal.  Buy + don't-care = Buy.  So I bought a unit of SPY the next morning... at 128.  SPY is still in MACO's "meh" territory, but up 1.66/share from my buy price; AAII publishes another weekly survey overnight tonight.  If my individual investor peers recognize the cessation of the downtrend last week and get more bullish ("bullisher"?), I might find myself selling SPY on the open tomorrow morning.  But they'll have to get a lot "bullisher" - 41.5% or more - for me to take my profits and go home.  We'll see.

General Thoughts

As regular readers of this blog know, I run multiple trades in my paperMoney account at ThinkOrSwim.  Besides the ones mentioned above, I also have a bullish NDX option vertical spread on to simulate a collar, a bearish SPX option vertical spread, an Iron Condor in RUT (Russell 2000) and naked-long SPY puts.  I'm also looking for a dip in gold to buy back some GLD calls, after having exited my March calls before expiration.  The problem that I am starting to run into is that I have too many trades on the stock market - and many of them are nearly perfectly inversely correlated.  The worst offenders are the bearish SPX and bullish NDX spreads.  CiG and CS|MACO only hold positions once in a while - but the option spreads are there all month long, every month.

This false diversification doesn't benefit me at all - if they were real trades I would be spinning my wheels spending commission on an expectation of about 0 profit.  In a paperMoney account, this isn't so bad, because I can use the excuse that I am looking for profitable trades: the unprofitable ones will never "go pro" into a real money account.  But this is kind of a hollow argument, because any of these trades can be profitable or unprofitable, depending on the market conditions.

This issue bears more consideration.

And a Micro Rant

"They", whoever they are, changed the Nasdaq-100 ETF's symbol from QQQQ to QQQ last night.  WTF???  Didn't they just change it from QQQ to QQQQ a few years ago?  Make up your minds!

16 March 2011

Keep Your Head Back

Let's lead this one with a chart, courtesy of BigCharts.com.  I'm using SPY here as a proxy for the S&P 500... mostly because I couldn't figure out how to hide the volume, and the index's volume is empty and boring.  The shape is the same, so it doesn't matter.  It looks a lot like the first 60 seconds on an awesome roller coaster.

Let's put this in perspective.  This is a 6-month chart, so it goes back through mid-September.  SPY was somewhere around 112 back then, and it closed at 126.xx today.  That's a 12.5% return over 6 months, or 25% annualized.  Wow, what a great stock market!  OK, yes, from the high of 134.xx one month ago on February 18, SPY is down 6%, or 72% annualized -- but of course if you really think it's going to continue at this pace for 11 more months, I have some swampland to sell you.  But let's look at the last month, shall we?

  • Major unrest in the Middle East, including full-scale revolt in many of our oil suppliers, has caused Crude Oil futures to shoot up above $100/bbl (only $98/bbl today - what a bargain): well into production-drag territory;
  • Japan suffered the worst earthquake in... what? forever? a long freaking time, anyway, and its nuclear plants are about to unleash a glowing hell on the Pacific Rim;
  • The festering pimples in the European economy are starting to look like they're about to pop one after another: Ireland, Portugal, Greece, etc;
  • The Federal Reserve's credibility is finally starting to be questioned, and major indications have started surfacing that inflation will be a bigger problem than people have been assuming;
  • And Charlie Sheen, OMG.

Watching the activity in the market on Feb 23, I started worrying that we were about to see another Flash-Crash-type event.  The spreads were widening and the markets were looking really jittery.  I bought some puts on SPY, expiring in April.  I still have them, and I see no reason to sell them just yet.  I also have a bullish option spread that simulates a collar in NDX.  It's pretty deep underwater (duh), but this is a continuation of the collar trade I've been running for a long time, and I won't be changing it now.

Besides the stock market, what have been the other financial effects over the last month or so?  And just for fun, I'll talk about my activities where appropriate.

  • The Canadian Dollar roared up and then slunk back, since the Fed-bashing started early on, but the flight-to-quality has taken over the last few days.
    • I bought FXC (the Canadian Dollar ETF) today.
  • The Ten Year Note, in a strong downtrend at the end of the year and trading sideways-to-down through mid-February, suddenly pointed its nose at the sky as of the end of last week and turned on the after-burners.
    • By rights, the CiG trade should be short the ten-year note futures, but I opted for buying S&P futures instead, reasoning that the return on S&P should be more extreme than on Ten Years.  I was right.  I bought S&P on the close, and was just stopped out for my max loss a moment ago.
  • Crude Oil futures traded as high as $107/bbl on March 7, and are back down to $97/bbl now in a pretty (but meaningless) isosceles triangle pattern on the chart.  Daily ranges expanded big-time, as the market tried to constantly adjust to unfolding events in the Middle East.  It's back down now mostly on Dollar strength, I think, but 97 is still far above the 85 it started from in February.
  • Agriculture futures (corn, wheat, soybeans) all have the same triangle pattern as Crude Oil, without the big gap-up at the beginning.  Again, USD strength as everyone runs like hell into something "safe".
    • I hold DJP, which is a commodity ETF which holds 33% energy, 30% agriculture, and 31% metals.  This is a long-term play against the USD that I put on back in January.  I have no interest in selling it at this point -- I only wish I'd bought a long time ago.
  • Gold has traded pretty sideways recently, victim of the risk-on/risk-off tug-of-war that's been going on since Charlie Sheen started distracting us from trivial Middle Eastern matters.
    • I've had big gold positions on for a long time, and just today I sold some calls that are due to expire on Friday, taking a small loss.  When the nuclear crisis in Japan finally settles down, I'll buy some more, because the dollar will suddenly seem like a bad idea again.
Oh, I also had a bullish option spread on SPX that I liquidated today for just about max-loss.  Option spreads are great because they let you define your max profit-loss range and sleep well knowing that you will neither make nor lose more than that range.  I had been fighting the uptrend in the stock market for 6 months, and finally capitulated with this option spread.  I told myself when I suffered a loss I would reverse direction and start doing bearish spreads instead.  That's tomorrow's trade.

01 March 2011

Happy 1977 (and a little 1978)

The Year-a-Month project rolls on.  This month was 1977, and the albums on my list were:

ZZ Top - Tejas
Ted Nugent - Cat Scratch Fever
Judas Priest - Sin After Sin

I also picked up 1978's Judas Priest - Killing Machine because 1978 has six albums in it, and 1977 has only three.  Buying Killing Machine evens it out a bit.

I had trouble finding Sin After Sin at Amazon, which is my default music spot, so I took advantage of a coupon I had at eMusic: $12.50 credit for 14 days.  This was from an insert in a TicketMaster ticket delivery envelope.  The link above will take you to the promotion page in case you're interested.

eMusic is interesting... it has a fairly good selection (no Metallica, boo!), and the music is about 1/2 the price of Amazon.  The small catch is that it is a club - if you don't download anything, you still pay monthly.  The lowest subscription rate is $6.50/month, which is applied toward your purchases.  The big catch is that if you want to download more tracks than your subscription allows, you have to buy a "Booster Pack", good for 90 days, that "come in various increments"... but I couldn't get the website to tell me what increments.  Your monthly subscription credit does not roll over.  Use it or lose it.

I also didn't like that I couldn't browse their selection until I committed to starting my free trial.  This is the sort of behavior that you expect from a service that is ashamed of its selection.  They claim they have 9 million songs - that sounds like a lot, but I have no idea if it is or not.  The only songs that matter in that 9 million collection, as far as I'm concerned, are the ones I want to buy right now.  I looked for six of my late-70s albums, and found four.  That's not a terrible hit rate, but not fantastic, either.

Another downside is that they will re-charge you for a song or album that you previously bought and lost.  Technical problems involved in the download are solved gratis, but their FAQ implies that if I buy a bunch of music from them and then sometime later suffer a hard drive failure, I'm out of luck.  I prefer Amazon's digital purchase history and re-download capability.

All in all, eMusic could save me a little money on this project.  The fact that I buy music at a fairly constant rate every month makes me a good candidate for their club.  But the savings is so small that it doesn't really overcome the downsides.  I think I'll stick to Amazon for now, unless I can't find something I'm looking for there and have to shop around.