Power Dips for Thursday

Another slew of Power Dips are set up for Thursday’s open. The model portfolio only has room for two.

Here are the picks:

Gran Tierra Energy Inc. [[GTE]] SPX Corporation [[SPW]] True Religion Apparel, Inc. [[TRLG]] Advance Auto Parts, Inc. [[AAP]] [[EZA]] U.S. Gold Corporation [[UXG]] TAM S.A. (ADR) [[TAM]] Omnicom Group Inc. [[OMC]] Axis Capital Holdings Limited [[AXS]] Venoco, Inc. [[VQ]] Gerdau SA (ADR) [[GGB]]

My money is going to be placed with the auto parts supplier and the manufacturer of designer jeans, but there are plenty of other good-looking pullbacks from which to choose.

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Today’s weakness brought forth a plethora of Power Dips for Thursday’s open. Look for the post tomorrow morning with the picks.

The spreadsheet shows the latest purchases. The system has eight positions, with room for two more. Normally I would not take more than eight or nine positions, but I have a gut feeling that says, “Max out yer cash.”  Therefore I will go long two more Power Dips from tomorrow’s list.

Due to egregiously poor timing from the Powers That Be, I was unable to close my [[ORLY]] trade before this evening’s earnings report. (Here is the report). Maybe my luck is turning because the ER was good and the stock is up in the after-hours market.

I am now taking positions in Tradestation and Interactive Brokers accounts. This is a pain, but also helpful due to the redundancy it allows. It also lets me see who is giving me the best fills. So far, it is Tradestation with the best fills, for what it is worth.

Maybe I’m just wishing, but the equity curve looks like it wants to break out!

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The market continues to soften, which means more dip-buying opportunities. The following stocks made the screen last night.

STMicroelectronics N.V. (ADR) [[STM]] Smith & Wesson Holding Corporation Smith & Wesson Holding Corporation [[SWHC]] Aeropostale, Inc. [[ARO]] ON Semiconductor Corp. [[ONNN]] Union Pacific Corporation [[UNP]] Ritchie Bros. Auctioneers (USA) [[RBA]] [[AOD]]

Please be advised that some of these companies may have just reported, or will be reporting soon. As always, do your own research on these before jumping in blind.

[[ORLY]] (yesterday’s pick) reports tonight. Rather than gamble with earnings, my personal preference is to close the position out, regardless of whether the system gives an exit signal.

The system will now be holding eight positions in the model portfolio, meaning it is full. However, in my own account, I may allow up to ten positions. Again, these decisions should be made based on your own risk profile, not mine.

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Yesterday marked the first time since early 2008 that the 200 day simple moving average (dsma) of (SPY: 97.89 -0.47%) turned up.

As I noted yesterday, I had been waiting for that development to test a very simple trendfollowing strategy. The strategy will go long if the 200dsma is higher than the previous day and will sell the long position and go short if the 200dsma is lower than the previous day.

But before I get to this final test, I want to examine and discuss some variations.

The Method:

Variation 1: Buy the SPY if the close is above the 200dsma and the 200dsma is higher than the day before.

Results for Variation 1 are  here.

Variation 2: Buy the SPY if the close is X % or more above the 200dsma and the 200dsma is higher than the day before.

Variation 3: Buy the SPY if the 200dsma is higher than the day before. Sell short if the 200dsma is lower than the day before.

The exit signal is generated if the 200dsma is lower than the day before. For variation 3, the exit signal is also the short entry signal.

All variations compound gains (this is to make for an accurate comparison to buy-and-hold investing) but do not include commissions and slippage.

Variation 2:

The following graphs represent the results of buying this setup when price is stretched X% above the 200dsma. I have included this study because the close of the SPY was more than 10% above the 200dsma when the moving average turned up. Lets look at what this might mean for this particular trade. Of course, the usual caveats about a small sample size apply!

The numbers across the bottom represent the percentage that price was stretched above the moving average. 1.01 = 1% stretch.

It is fairly useless to look at Net Profit in this study due to the fact that Net Profit is simply the sum of the trades, and as the number of trades decreases the more that price is stretched above the average, we would expect Net Profit to fall off as a by-product of decreased opportunity. Why did I include the chart then? I don’t know.

The graph above shows us that there have been 3 other instances when this system entered with price stretched 10% or more above the 200dsma.

The graph above is the one I consider to be the most helpful. I assumed that the Avg. % Profit/Loss would decrease as the stretch above the moving average increases. I assumed this because it made intuitive sense (to me at least) that if the SPY ran up 10% above the 200dsma, that perhaps a large portion of any possible gain had already been achieved before entry.

The large increase corresponding to the 1.15 multiple (15% stretch) was only one trade and should be considered an outlier.

The big takeaway is that it certainly does not seem to hurt performance to enter this trade when price is stretched above the 200dsma.

Again, small samples, but price being stretched 10% or more above the 200dsma does not seem to hurt the % of Winners.

Summary:

Initially, I was concerned about allocating a small part of my capital to this trade, due to the price being stretched 10% above the 200dsma. However, based on the data, I’m not seeing that it makes that much difference.

I know that I said I would publish Variation 3 in Part 2, but it looks like Variation 3 will have its own post, which will be coming soon.

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The recent consolidation  in the market has brought one Power Dip setup for Tuesday morning.

On the open, the system will purchase [ORLY]. A 10% stop will be used.

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Today marks the first time since early 2008 that the 200 day simple moving average (dsma) of [[SPY]] has turned up.

I have been waiting for this development to test a very simple trendfollowing strategy. The strategy will go long if the 200dsma is higher than the previous day and will sell the long position and go short if the 200dsma is lower than the previous day.

But before I get to this final test, I want to examine and discuss some variations.

The Method:

Variation 1: Buy the SPY if the close is above the 200dsma and the 200dsma is higher than the day before.

Variation 2: Buy the SPY if the close is X % or more above the 200dsma and the 200dsma is higher than the day before.

Variation 3: Buy the SPY if the 200dsma is higher than the day before. Sell short if the 200dsma is lower than the day before.

***Edit*** I forgot this important bit of information…The exit signal is generated if the 200dsma is lower than the day before.

All variations compound gains (this is to make for an accurate comparison to buy-and-hold investing) but do not include commissions and slippage.

Variation 1:

Summary:

Of course this is a small sample size, so all the usual caveats apply.

The average winner is 38.92% and the average loser is -1.35%. That is fantastic.

Annualized rate of 9.55% beats buy and hold by 4.81% over the same period with 1/3 less exposure.

Max system % drawdown of -19.03% is significantly less than the buy and hold drawdown of -56.47%.

All in all, not a bad way to invest with a buy and hold mentality.

Tomorrow I will post the results of variations 2 and 3.

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In seeking to understand the significance of the latest rally, I ran a very simple test.

The Method:

Buy the close if  SPX rises more than 11% in 10 days (this would have one entering at the close on Friday).

Sell on X day close after entry.

100K per trade. Commissions and fees are not included, and gains were not compounded.

All data for the SPX was used: 1/4/1960 to the present.

Number of occurrences: 34

***Edit*** Jeff Pietsch of Market Rewind brought up a good point in the comments section. The 34 instances can only be achieved if after buying, one was to sell the next day and start the process over again. If instead one bought and help to the optimum 43 day exit, there would only be 9 trades. If this is confusing, let me know and I will try to flesh it out a bit more.

The Results:

The most important takeaway is that on average, the market continues to have a bullish disposition for 20 days after this set-up. If one can hold through some pullbacks/consolidation, there is an edge going out more than 40 days.

What is notable is that there was typically weakness a few days following the SPX being up more than 11% in 10 days.

Large drop in %Profitable about 3 days after the entry, but longer term, odds improve greatly.

The Win/Loss ratio is very interesting. While this setup is profitable, we continue to see a situation where any losses are likely to be much bigger than the winners. What we might extrapolate from this is that if going long here does not work, it is likely to result in a large losing trade. I further interpret this to show that the pullbacks from this setup can be brutal.

Does This Setup Occur Primarily in Bull or Bear Markets?

I added to the test the requirement that the SPX closes above its 200 day simple moving average. There were only 3 instances when the buy criteria was met when the index was trading above the 20odsma:

08/23/82

10/22/98

7/24/2009

This means this setup typically occurs in bearish environments (and therefore are usually considered be in the context of a Bear Market Rally).

Summary:

I’m still not seeing anything that points to a slam-dunk bearish edge. Really the only bearish edge I can find in this study is that the average losing trade is likely to be 25%-50% larger than the average winning trade.

Perhaps the other bearish consideration is that this setup has typically occurred beneath the 200dsma.

It is worthwhile to point out though that the 8/23/1982 occurrence marks the start of an 18 year bull market.

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