Happy (Belated) Birthday Power Dip!

Without much fanfare, on November 18th, PDS logged one year of trading.

The system has since closed another 15 trades or so, putting it over the 1,000 trade mark, and pushing the Avg. Trade Return to almost +0.90%.

The system is completely transparent, with buy signals published in the evening to be acted on at the next open. Each stock has an exit threshold, which is updated nightly. If the stock is going to close above the exit threshold, it gets sold at the close.

It is that simple, and effective.

I have written before about survivorship bias. Frank over at Engineering Returns has developed a survivor-free S&P500 database and further demonstrates the impact of survivorship on a simple RSI2 trading system.

Plainly speaking, anyone backtesting and not using de-listed data is going to have results that are not accurate.

While I have not tested this idea sufficiently enough for it to be more than a theory, I theorize that a short-term system which holds stocks for a few days to a week or so may indeed show improvement when using a survivor-free database. (However, Frank’s recent testing shows my theory may be incorrect.) Conversely, systems that are of the trend-following variety (and usually hold stocks for longer periods of time) seem to suffer worse when de-listed data is used. For a good example of this, see my started, but not-yet-finished-series on building a momentum rotational system. I was shocked at how much performance was degraded when adding de-listed data, to the extent that it stopped the series in its tracks.

While it should be obvious how survivorship bias will affect trading systems that trade a portfolio of stocks, what may not be as obvious is that it will also affect indicators. Specifically, an indicator like a breadth indicator, which uses the data from hundreds or thousands of stocks, is going to be affected by survivorship bias. If such an indicator is applied to a trading system which was developed with de-listed data, the impact of survivorship bias is compounded.

Inevitably, this type of post leads people to ask where I get my data. I use Norgate’s Premium Data, which offers a de-listed data base for a very low one-time fee.

I will preface this post with the disclosure that I am 100% long.

Based on past history, the current short-term setup is very bullish. We should be looking for a nice bounce. Past history also shows the intermediate time-frame to be bullish, and we should be looking for the uptrend continue.

But these predictions are based on the market technicals.

The fundamentals are telling a different story, and it may be time to overweight their influence.

If we turn our attention to the world’s stage, we see  Obama thoroughly rebuffed by the Group of 20. As if a loss of faith in American leadership is not bad enough, we learn that Ireland is being asked to take one for the Euro-team in order to avoid catastrophe in Portugal and Spain.

Back at home, we have the muni-bonds crashing, a GOP resurgence driven by fiscal conservatism, and a growing suspicion in the American populace that the Bearded One is out of his league. In the intermediate term, I cannot imagine that austerity is good for markets, and the muni-bond markets seem to agree. If the belief that the Fed is out of bullets gains traction, again, not good for markets.

What’s my point?

Fundamental factors, compared to technical ones, always seem to have a much slower affect on market gyrations. However, since the fundamentals are much more complex than the technicals, the professionals have a significant advantage. They may have weeks or months to position themselves before the rest of the planet catches up. In short, while you are buying an excellent dip and looking for a bounce off the 20 day moving average, they are quietly selling their shares to you.

The market and economic events of the past several years are not caused by one or two years of excesses, and they are not sorted out in one or two years. Most of the time we expect to see things move in cycles of roughly 17 years. By my count, we’ve still got another 7 years to go, give or take. Do not let your guards down here. Look around you. The confidence game is in full-effect. If that confidence is eroded, for a second time in as many years, do not make the mistake of thinking that it is just an acorn, falling from the tree. This time it may be the whole damn Oak..

After making some adjustments to the Advance/Decline indicator, I discovered some astonishing results. I posted the equity curves of those results here, but noted that the results seemed to too good to be true. I had some time this weekend to go through the trade-by-trades and I found an error which is allowing the the system to have more than one open position, even though there is only enough cash for one position. I believe that this error is what juiced the results.

Too often, equity curves that look to good to be true, usually are.

According to the vote tabulators, my chili was the overwhelming winner.

Truly, should you cook chili this winter season, you owe it to yourself to try the recipe. Mrs. Woodshedder did a calories/fat breakdown of the ingredients, and two bowls will get you about 350 calories and 10 grams of fat (without sour cream and cheese, of course). Incredible!

I modified the recipe slightly by adding about 1/3rd more garlic, slightly less cumin, coriander, and salt, and about 1tsp. more of Liquid Smoke. The Liquid Smoke is the secret. If you marinate the ingredients as the recipe calls for, in my opinion, you’ll need to add more Liquid Smoke once you get the chili cooking. You want just enough Liquid Smoke so you can smell it, but barely taste it. I used the hickory smoke variety. I also used an additional small can of chili beans, and used all of the crushed tomatoes.

The only bad part about the whole experience is that ALL of the chili was eaten, and I would really like a bowl right now.

I have spent the better part of tonight beginning my award-winning chili for this weekend’s neighborhood chili cook-off. I took second place last year, and my chili only cooked for about 1.5 hours before it entered the contest. This year, my steak, spicy sausage, green and poblano peppers, and garlic (of course) are all marinating in a little Worcestershire sauce and liquid smoke. Tomorrow evening, I will begin cooking it, and it will cook on low heat all night and into Saturday morning. I guarantee you, I will win the contest.

Here is the link to the recipe I use:  Award Winning Chili Recipe

I had hoped to have more time tonight to write about the Advance/Decline indicator. Based on a suggestion from a reader, I began walk-forward testing the indicator, and it yielded great results. Basically, if I loosen the entry and exit criteria so that it takes more trades, it really generates a great return.

At this point, it is almost in the “too good to be true” category, and so I will forward the code on to a friend or two to make sure I’m not crazy.

Perhaps the biggest limitation is that it closes trades at the close, which means it might be hard to replicate all the closes in real-time. I do believe this can be overcome. Anyway, here are some stats and equity curves. All stats include commissions of .01/share.

SPY- Compound Annual Rate of 30.99%

QQQQ- Compound Annual Rate of 35.09%

IWM- Compound Annual Rate of 46.75%

The initial results look promising, and it does well even in walk-forward testing. I’ll be writing more about it soon.

The advance/decline line indicator has issued a buy signal for Wednesday’s open. The green up arrows show the previous buys and the red down arrows show the corresponding sells.