Agenda Compare 4 alternative timing mechanisms (long and short the - - PowerPoint PPT Presentation

Agenda

• Compare 4 alternative timing mechanisms (long

and short the S&P 500)

– VectorVest confirmed ups and downs – EMA / RT combo – Timing Cube – Ride the Waves

• Show the results of using the best timing method

with a pair (long / short) of superior VectorVest searches with performance improving stops

– Explore some appropriate search options

• Small to medium portfolios
• Large portfolios

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Timing Comparison Methodology

• Compared 4 different timing methods
• Ran test from 6/15/01 (the date of the first

Timing Cube live call) to 12/9/04 (~ 3 ½ years that included several up and down markets)

• Isolated effect of timing only

– For all methods, bought SPY (surrogate for S&P 500)

• n buy calls and shorted SPY on sells

– Used 50 day EMA and RT on SPY for EMA / RT timing

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4 Timing Methods Compared

6/15/01 to 12/9/04 1) VectorVest confirmed ups and downs as shown on the MTI graph 2) EMA / RT combo

• Method shown by Ralph at November meeting
• Buy when:
• Price is above the 50 day EMA and RT > 1
• Sell (or go to cash) when
• Price is below the 50 day EMA and RT < 1
• It requires both occurrences to change the signal

3) Timing Cube – a timing company 4) Ride the Waves

• Uses the buy and sell signals in the VectorVest Views

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Timing Cube

• Sole purpose of the company is to time the market

– Issues buys and sells based purely on price / volume technical analysis (trend following system)

• About 3 to 4 direction changes a year
• First live call was on June 15, 2001

– Has backtested data much further back

• I started tracking their calls in early 2002

– Began using their calls for trades in early 2003 – Only a customer – no financial interest in company

• For the comparison test, I used only real time, verifiable

calls that were issued before the trades – no backtested data used

• Timing Cube usually trades the QQQQ ETF (Nasdaq

100) but claims their calls are also effective for SPY (S&P 500) and IWM (Russell 2000) ETF’s

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Visual History of VectorVest, EMA / RT, and Timing Cube Timing Calls

Long Short

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* * Occasionally, RtW traded QQQQ’s and IWM’s

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12 17 25 57 10 20 30 40 50 60 Timing Cube VV confirmed EMA RT Ride Waves

Numbers of Direction Changes 6/15/01 to 12/9/04

Does not include cash signals for Ride Waves - only buys and sells

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• 10
• 2

14 67 105

• 20

20 40 60 80 100 120 Ride Waves Buy & Hold VV confirmed EMA RT Timing Cube

% Compounded Returns from 6/17/01 to 12/9/04

Results are from buying or shorting SPY as S&P 500 surrogate

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• 37
• 31
• 20
• 12
• 11
• 40
• 35
• 30
• 25
• 20
• 15
• 10
• 5

Buy & Hold Ride Waves VV confirmed Timing Cube EMA RT

Max % Drawdowns from 6/17/01 to 12/9/04

Results are from buying or shorting SPY as S&P 500 surrogate

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Graphic Depiction of Timing Methods’ Results (S&P 500)

• 2%

Buy and Hold Ride the Waves

• 10%

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Graphic Depiction of Timing Methods’ Results (S&P 500)

• 2%

Buy and Hold VV confirmed +14%

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Graphic Depiction of Timing Methods’ Results (S&P 500)

• 2%

Buy and Hold +67% EMA / RT

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Graphic Depiction of Timing Methods’ Results (S&P 500)

• 2%

Buy and Hold +105% Timing Cube

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Conclusions

• Both Timing Cube and EMA / RT were highly effective

during the test period

• While the clear winner, Timing Cube costs ~ $400 per

year while EMA / RT is free to existing VectorVest users. Decision depends on portfolio size although breakeven can come with even a very small portfolio

• VV confirmed was marginally effective but was clearly
• utperformed by the two methods above
• Although Riding the Waves’ timing did reasonably well in

2004, over the entire test period it was actually

• counterproductive. Any actual positive performance (if

any) is due solely to the effectiveness of buying and shorting VectorVest searches vs. SPY

– Many VV searches tend to have a higher positive beta than negative

• This can offset some of the pure timing deficiency of Ride the

Waves

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Test of Best Timer (Timing Cube) coupled with VectorVest Searches Instead of SPY

• In the final test, I did not use any of the “canned”

VectorVest searches in Unisearch

– Almost none of them are tradable in their current form (they find stocks with small average daily $ volume traded) – None of them in their current form are appropriate “Ride the Waves” choices

• Not nearly enough $ volume to allow “piling on.”

– The tradable versions of the canned searches (i.e., with added $ volume criteria) did not perform nearly as well as some of my tradable searches

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Best Performing Views “Canned” Long Searches

Timing Cube Long Periods (No stops)

Must trade in the morning to get this If a search can’t beat the Rydex 2x fund, why bother?

I tested all the long and short searches mentioned in the Views in

• 2004. However, only Rob’s Raiders was evenly remotely tradable

and then only in a port of less than ~ $250k

Note: The Rydex 2x fund’s actual average performance is about 1.72x 16

None of the Best VV Performers are Tradable in Large Portfolios

For even a modest portfolio (~$250k), they require the purchase of too large a percentage (> 2.5%) of the average daily $ amount of stock traded for the smallest stock. They are only tradable in tiny portfolios (< $100k) Only Rob’s Raiders would be tradable in a small portfolio (< $250k). None are appropriate for “Ride the Waves” which would involve several VV users buying/selling at once.

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What Can Happen When Ride the Waves “Piles On”

Note the vast underperformance of Show Me the Money in the 10/27/04 to 12/9/04 period. It was the Ride the Waves choice during this entire period. Also note how much better it did in earlier periods when there was no piling on.

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* Still only in small portfolio. Added criterion: AvgVol * Actual Price > $1mil

*

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% Returns of Searches Tend to Go Down as the Required Minimum $ Volume of Shares Traded Daily Increase

“Ride the Waves” picks the highest return searches seemingly without regard to tradability

% R e t u r n Minimum Dollar Value of Shares Traded Daily

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Other Views “Canned” Long Searches

No stops

Although some outperformed RYVYX, they are not tradable and much better tradable searches are available

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Some Tradable Small Port Long Strategies

Timing Cube Long Periods (No stops)

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Best Performing Tradable Long Searches –Small Portfolios

2820% 1000% 1715%

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Best Small Port Long Strategy

Best Improvements with Stops

* * Sell any stock that gains 200%. A surprisingly large number of stocks actually hit the 200% gain threshold. All of the stops I tested that used losses (such as a 10% trailing stop loss) reduced returns and increased average and maximum drawdowns.

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Some Tradable Large Port Long Strategies

Timing Cube Long Periods

These searches restrict choices to S&P 500 stocks

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Best Performing Long Searches – Large Portfolios

752% 594% 515%

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Best Large Port Long Strategy

Best Improvements with Stops

* Sell any stock that gains 40%. These larger stocks are not as volatile as the small portfolio stocks. All of the stops I tested that used losses (such as a 10% trailing stop loss) reduced returns and increased average and maximum drawdowns. *

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Some Tradable Small Port Short Strategies

Timing Cube Short Periods

Because the VV canned short searches typically include a minimum stock price along with a # shares volume requirement, they tend to be tradable in small portfolios (but not in large ones and, unmodified, they are not appropriate as Ride the Waves searches)

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Best Performing Short Searches – Small Portfolios

339% 327%

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Some Tradable Large Port Short Strategies

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Best Performing Short Searches – Large Portfolios

187% 169%

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Best Large Port Short Strategy

Best Improvements with Stops

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Comparison of SP 500, Rydex Dynamic Funds, and VV Long/Short Search Pair Compound Results 6/15/01 to 12/9/04

• Started with $100,000
• Used Timing Cube long and short periods
• Used SPY as proxy for SP 500
• Used QQQQ with 172% margin as proxy for

Rydex Funds

• For VectorVest Searches:

– Long: RV / RT / ActPrice limited to the S&P 500 (to maintain similar liquidity) for the long search – Short: VST*RT*RV*CI Asc with a minimum $ traded

• f $16 million for the short search

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Stops

• Individual stock stops

– Long

• Sell any stock that closes with a 40% gain

– Short

• Cover any stock that closes with a 40% loss (40% short gain)
• Overall portfolio stop

– Use Timing Cubes total portfolio stop

• 9% loss on QQQQ from portfolio start or
• 15% trailing stop on QQQQ, whichever comes first

– This will likely result in larger losses for the VectorVest searches vs. QQQQ, however so far Timing Cube has never had a stop triggered.

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105%

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510%

Assumes trades placed at morning session – if placed in evening, compounded return is slightly less than 400%

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4,412%

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105 510 4412 500 1000 1500 2000 2500 3000 3500 4000 4500 SP 500 Rydex VV Searches*

Compounded % Returns: Long and Short 6/15/01 to 12/9/04

*Unlike the canned VectorVest searches, the ones used here contain sufficient trading volume to actually be attainable in the real world with a portfolio that grows as large as indicated

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Overall Conclusions

• VectorVest long and short searches can be enormously

effective at finding stocks that greatly outperform the market

– But appropriate volume adjustments must be made to fit portfolio size (most of the canned searches must be adjusted) – The search capability alone is more than worth VV’s fees

• There are at least two other timing methods available

(Timing Cube, EMA / RT) that are likely to be far more effective then VV timing (VV Confirmed, Ride the Waves)

– Coupling these more effective timing methods with VV searches can be highly profitable

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My Current Real World Strategy

Stock Selection

• I Maintain two taxable long / short portfolios

– A small portfolio that starts each long/short period with the same amount

• Profits are used to buy food, etc. and anything left over goes into

the large portfolio

• ~ the first 5 picks from the two best small portfolio searches (all with

$1 million volume minimums)

– Longs - VST / ActPrice, RV / RT / ActPrice – Shorts - VST * RT * RV * CI, Worst Stocks over $10

– A large portfolio that uses the same two short searches but with $16 million volume minimums. The long searches are limited to S&P 500 stocks and are RV / RT / ActPrice and VST / RT

• Again ~ the first five picks from each search
• Also a pair of IRA portfolios that use VV long searches

and the Rydex funds for short periods

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My Current Real World Strategy

Timing

• Essentially Timing Cube but:
• I reduce exposure (sell about ½ or switch to

lower beta ETF) when extremely overbought or

• versold times are reached

– I use Stockcharts to identify these as times when:

• The price of the QQQQ’s touches either the upper or lower

50 DMA, 2.5 standard deviation Bollinger Band, AND

• RSI is above 70 for overbought and below 30 for oversold,

AND

• Chaiken Moneyflow has recently been above .20 for
• verbought and below .20 for oversold

– Once prices return to the 40 DMA and then change direction again, I increase exposure

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Overbought Oversold

Current Projects

• Possible combination of Timing Cube, EMA / RT

and Stockcharts timing into one improved model

• Always looking for better searches

– Not just highest returns – Good ratios of up betas to down betas – High reward / risk (return vs. drawdown potential)

• Exploring using options instead of Rydex in

IRA’s and possibly instead of some or all stocks

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End