Both aggressive models continue to outperform SPY (+4.63%) and IWM (+4.40%).
20% of Equity per Trade
Net % Profit: 7.33%
Annualized: 49.73%
Average Trade: 0.92%
Winning %: 60.00%
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10% of Equity per Trade
Net % Profit: 1.71%
Annualized: 10.17%
Average Trade: 0.28%
Winning %: 63.38%
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ATR Position Sizing
Net % Profit: 6.03%
Annualized: 39.64%
Average Trade: 0.37%
Winning %: 64.15%
.01/share was included for commissions.
A free PDS trial is available.
I warned that the market was in the process of making lower highs and lower lows. Then we got a bounce and some must have wondered if Woodshedder had done gone and lost his mind. With the market again one day away from a lower low, review that post, because what I wrote still applies.
This is really not rocket surgery. The market will eventually break above or below one of the blue lines. If it closes below the bottom line, it will have made a lower low. A break above, and new highs will soon follow. In the meantime, follow your rules, or stay in cash.
We must watch the volume. There has been a lot of distribution on the down days and just average interest on the up days. Volume is suggesting that many traders are headed for the exits.
I fully expect SPY to touch the 50 day moving average, which is currently at $129.86. My crystal ball is looking for another large sell off which takes SPY beneath the 50 day moving average. In a perfect world, we would see the market firm up near the close and retrace most of the losses, closing near the 50 day average, and making a candle much like the one made on February 24th. It would be nice to see volume surge to near 300 million shares.
While some traders abhor volatility, if you know how to trade a volatile market, there is money to be made. Remember that overbought/oversold indicators will tend to be more accurate in a market with increasing (but not skyrocketing) volatility. My custom decliners indicator is signaling a buy for tomorrow while other ob/os indicators are not yet in the sweet spot, but they are close.
Comments »Volatility as measured by $VIX has made double digit percentage moves recently and has broken above its 50 day moving average. What might this mean for the market going forward?
After falling beneath its 50 day moving average in July 2010, $VIX has maintained a slow and steady downtrend. As volatility decreases, we expect stocks to trend upward, and that is indeed what has happened over the past 8 months.
On February 22nd, $VIX jumped over 26% and tacked on another 6% the following day. This surge vaulted the fear index firmly above its 50 day moving average. Since that day, the market has seen a minor correction and is continuing to consolidate.
Let’s take a look at what has happened in the past after $VIX has gained more than 20% in one day or has crossed above its 50 day moving average.
Rules:
All trades made at the close. No commissions or slippage is included. All SPY history was used.
Results:
Summary:
The graph shows (red line) that a one-day surge in $VIX has been bullish immediately after the event. As one would expect, the returns are volatile after such a surge. The near term performance (10 days out) tops out just above +1.5%, and then performance drops off sharply over days 11 – 23. In fact, this makes sense as a surge in volatility can signal that the market has been shaken awake from a low-volatility snooze fest. After the initial event is digested and any oversold conditions or technical concerns are worn away, the market tends to move back down as the fundamental picture emerges and is addressed.
The $VIX cross shows much less volatile returns, at least initially. Volatility does not present itself until roughly 35 days after the setup occurs. Looking at this setup on a chart, it appears that during a bull run, $VIX will trade beneath the MA50 for weeks at a time, and only surge above it on a market pullback. Thus, buying SPY after a $VIX cross above its own MA50 means that one will be buying dips and betting on volatility to mean-revert. This has been a good strategy over the years. In 2009, using this setup and selling 20 days after the buy resulted in gains greater than 60%.
Sometimes a picture is worth a thousand words. I figured I’d save myself 500 words and present a graph with arrows showing both setups. I adjusted the hold time for each trade to be 10 days.
Green up arrows show the buys and red down arrows show the sells.
What does it all mean?
On Friday, SPY closed pennies beneath the 20 day moving average. The bull run is certainly still intact. While a surge in volatility signals more volatility is ahead, it doesn’t seem to mean that the bull run is over. Both studies show that the SPY may shrug off this correction and get back to hitting new highs. An important caveat is that I did not include a surge in oil prices, nor did I include a revolution in the Middle-East. Either variable could have a significant effect on market performance going forward.
Comments »Tonight I experienced of one of the best seafood dinners of my lifetime. Since the market has been predictably predictable, I will not insult your intelligence by telling you what it will do tomorrow. Instead, I will tell you about my dinner.
Background: I grew up in Charleston, S.C. We were in the boat, touring around the barrier islands and marshes, almost every weekend. I had the salty monofilament of a four-foot cast net between my teeth long before I ever had the pleasure of a girl’s kiss. Throughout high school and college, I worked as a cook, in some really nasty and some really fantastic seafood restaurants. I know seafood.
And I know that Big Sams Inlet Cafe & Raw Bar in Virginia Beach is the real deal.
With a “local’s only” atmosphere and a great view of the marina, I knew when we walked in that if the food was good, we had struck seafood silver, or cotton, or name your inflated commodity. On a Wednesday night in the off-season, the place was packed.
The food was f!@#$%^ fantastic. I had the Chesapeake Bay Jumbo Lump Crab Cakes with Bay Fries and Cole Slaw and my wife had the Sesame Seared Yellow Fin Tuna, served over veggies in a soy and cashew reduction. Trust me, it doesn’t get any better.
Yes, that is the leaning tower of tuna. Don’t let the plastic cups fool you, the presentation was perfect. The phone picture doesn’t do it justice.
Look, if you ever find yourself in Virginia Beach, get off the beaten path, avoid the company of pasty fat slobs from the mid-west, and eat at Big Sams.
Comments »My dearest friends, let’s be honest with ourselves. We have a change in the trend.
While it has not happened yet, we are one day away from a confirmed series of lower highs and lower lows. While this is not a death-knell for the market, it does signal that the short-term trend is no longer up.
What you have witnessed is what I consider to be a classic start to a correction. We have a high-volume sell-off, and low volume over-sold bounce, and then more high-volume selling.
A week ago I wrote, “My crystal ball is saying that we will bounce and then have some volatility and consolidation.” Look for the volatility to continue. Once the volatility wanes, we’ll watch for consolidation.
Our first stop is at the 50 day moving average. Should we pierce it and trade beneath it for several days, our bearish brethren will emulate the Ursus americanus, meeting at the honey hole to fatten up after a long winter’s hibernation.
While the bears are rubbing the sleep from their eyes and sloughing off that disgusting fungus that grows on their paws during hibernation, I am listening to the sounds of the Atlantic Ocean and savoring the twinkling lights of fishing boats at sea.
As I gaze out over the balcony of this 3rd floor beach condo, my serenity will not be disturbed by the market. There is nothing like the beach to put things in perspective.
Blogging will be lighter than usual over the next three days.
Comments »March has consistently been a winning month for the S&P 500.
Click on the chart to enlarge.
From 1960 to 2010. Calculations start at the open of the first trading day of the month and end on the close of the last trading day.
March Statistics:
Profit Distributions:
Equity Curve:
For a simple seasonality setup, it sure makes a nice equity curve, generating a Sharpe Ratio of 0.88
The equity curve shows that results have been skewed because the last two years March has seen large gains of roughly 9% and 6%.
So, do we bet against March in 2011?
[polldaddy poll=4637640]
PDS loaded up on the dip. Here is tonight’s subscriber email which details the stocks that were sold at today’s close. It also lists the stocks that closed above their exit thresholds so that subscribers can sell them at tomorrow’s close. Tonight’s list shows an unusually high (~85%) number of winning trades. We typically expect about 70% of trades to be winners. (This number drops to approximately 67.5% once commissions are included).
Note that there are no new picks for tomorrow. The idea is to buy weakness, and sell strength. Thus, no new picks.
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Here’s a quick summary of today’s action:
The following positions were sold today at the closing bell:
Sold JNPR for a 6.64% gain.
Sold SNCR for a 6.63% gain.
Sold FIG for a 6.51% gain.
Sold BX for a 6.08% gain.
Sold KNL for a 5.62% gain.
Sold CELL for a 5.44% gain.
Sold FNSR for a 5.07% gain.
Sold CIEN for a 4.91% gain.
Sold RAS for a 4.91% gain.
Sold SIRO for a 4.84% gain.
Sold TM for a 4.74% gain.
Sold MDVN for a 4.66% gain.
Sold URBN for a 4.46% gain.
Sold ZOLT for a 4.43% gain.
Sold DIS for a 4.14% gain.
Sold SCI for a 4.01% gain.
Sold EMC for a 3.97% gain.
Sold VITA for a 3.93% gain.
Sold SNCR for a 3.50% gain.
Sold HGR for a 3.42% gain.
Sold OPEN for a 3.39% gain.
Sold KNL for a 3.35% gain.
Sold MDVN for a 3.35% gain.
Sold SCI for a 3.32% gain.
Sold CDNS for a 3.00% gain.
Sold CDNS for a 2.79% gain.
Sold KSU for a 2.59% gain.
Sold OIS for a 2.52% gain.
Sold DVA for a 2.00% gain.
Sold TIBX for a 1.99% gain.
Sold TM for a 1.94% gain.
Sold XRT for a 1.90% gain.
Sold CDNS for a 1.84% gain.
Sold RAS for a 1.79% gain.
Sold NATI for a 1.04% gain.
Sold SMCI for a -0.33% loss.
Sold DEPO for a -0.71% loss.
Sold TRI for a -1.72% loss.
Sold HILL for a -3.25% loss.
Sold SINA for a -7.52% loss.
Sold OPXA for a -29.66% loss.
The following positions closed above their exit thresholds today, and are scheduled to be sold at the next closing bell:
KCI
BLC
KCI
BECN
BECN
SFLY
SKT
GT
BECN
SPG
UA
SFLY
WFMI
YUM
ARE
SFLY
BWA
BG
LNT
BWA
CHTR
JLL
WAL
WYNN
No new picks were generated tonight.
-The Power Dip Team
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