As the year winds down the market turned in another quiet but generally up day today, with the Dow Industrials gaining 20 points to close at 11,575.54. The S&P 500 Index gained a few cents, up .08%, but the Nasdaq Composite fell .16%. Consumer confidence fell in December. Yesterday’s blizzard and cold weather pushed oil prices and energy shares higher.
China announced that it is reducing the amount of rare earths it will export next year by more than 10%, which helped push gold and silver prices much higher. AGQ, the levered silver ETF, gapped open higher and gained 6.69% today. GDXJ, the junior gold miners ETF, rose 5.38% on below-average volume and is back above its 50-day SMA. Yields jumped today and TBT, the levered inverse 20+ year Treasury Bond ETF, rallied 3.80% after pulling back to and holding at its 20-day EMA. This was below the 200-day SMA, however, so I believe holding at the EMA is coincidental. UNG, the natural gas ETF, floated 3.55% higher on above-average volume. Please click on the symbols for details.
Yesterday I discussed how stepping back and looking at the bigger picture can be helpful. This same philosophy applies to buying and selling ETFs for longer holding periods, not just a quick swing trade, because the bigger picture takes out some of the noise found in daily trading. Two techniques I like to use are similar and you can use one or both to help keep you on the “right” side of a position: a 13-34 week EMA crossover and a 20-month SMA crossover.
The former is just what it sounds like – Go long when the 13-week EMA crosses above the 34-week EMA, and go short (or to cash) when it close below. Please look at the weekly chart of SPY, the S&P 500 SPDR, below. You can make it full-screen by clicking on it:
The upper portion of the chart shows the two EMAs, with the 34-week in blue and the 13-week in red. The lower portion of the chart is a 13-34 week MACD (Moving Average Convergence-Divergence) indicator; it makes seeing when the crossover occurred a little easier to read when the EMAs start whipsawing through each other, like they did this summer.
The first trade short trade would have been taken in early January, 2008 (far left red circle in the MACD). You would have been short the SPY from 141.31 down to 101.20, when you would have covered and gone long in early August 2009 (green circle). The gain on that trade was 28%, which you could have capitalized on by going long SH, the short S&P 500 ETF. If you were confident about the trade signal you could have gone long SDS, the levered short S&P 500 ETF. I don’t recommend buying levered ETFs for long holding periods, however, because of problems with them not tracking exactly with or against their benchmark.
Going long in early August 2009 you would have stayed long until early July of this year, for a 6.7% gain (second red circle). This gain could have been captured by buying SPY or if you felt confident about the signal, SSO, the levered S&P 500 Index ETF. Between July and early September of this year there were three trades, two short and one long, which were whipsawed and resulted in a 11.6% loss (yellow rectangle). This was followed by a bullish crossover in early September (second green circle) and going long has been a profitable open trade, up 11.86% as of today’s close.
So in the three years ending next week, just one buy and four round-trip buy-sell combinations generated total hypothetical profits of 35.32% before trading costs, compared to a buy & hold return of -10.94%.
Similar results can be achieved with even fewer trades using a 20-month SMA crossover. Buy SPY when it closes above the SMA at the end of the month and sell it/go short/go long an inverse ETF when it closes below the SMA. The chart below shows buys with blue up arrows and sells with red down arrows:
With only five round-trip trades and one opening short/inverse trade, this strategy realized hypothetical gains before transaction costs of 275% since November 1994, compared to a 176% return for a buy & hold strategy. That’s an average of one trade every three or so years.
Hypothetical means just that – these weren’t real trades and in practice, the returns might not have been this good. That notwithstanding you see how by taking a step back and looking at the bigger picture you can improve your trading by staying on the “right” side of the trend. This is essentially what my AAPTA colleague Dave Landry is doing with his Big Blue Arrow, and Larry Connors is doing by going long only when the ETF is trading above its 200-day SMA.
I’m taking the rest of this week and all of next week off to spend some time with friends and family. I wish all of my readers a happy and healthy new year! May your best trade of 2010 be your worst trade of 2011.