March 2011 Trading

March was another decent month.  Gains were above average, but alas, the streak is over.  For the last six months, I was able to improve on the previous years monthly gain, but I did not extend this streak into March.  I could have artificially extended the streak by doing some profit taking on NGG which is a relatively large holding and currently has unrealized gains exceeding 10%.  But I thought there were a few more dollars to squeezed out, so I elected to continue holding this stock.  We'll see if this proved to be a wise decision.

This month was also notable because of the significant increase in percent invested.  During the terrible tragedy in Japan, I made significant efforts to buy into the down market.  I bought into several individual stocks and finally bought into the oft-discussed index EFTs.  So I sit at 81.3% invested at the end of the month.

Sales this month.  The "premium" purchases continue to add to the gains:

• Abbott Laboratories - 7% gain, "premium" purchase only held for a month.
• Harris Corporation - 8.5% gain, "premium" stock turned around in only 12 days. 

Current holdings and unrealized gains/losses are as follows. Note six new holdings. Also note that National Grid, Entergy, Colgate Palmolive and Merck all were over the 5% threshold at some point in March.  So I'm not always aggressive about profit taking.  I think all were wise decisions except perhaps Entergy which has nuclear exposure which was obviously impacted by the situation in Japan.

The following dividends were collected.  In dollar terms, this is the biggest dividend month to date.

• Entergy Corporation
• FirstEnergy Corp
• Exelon Corporation
• Life Partners Holding, Inc
• iShares S&P 500 Index Fund

Index ETF Trading Strategy - Test Results

Well, it appears that I've not found the holy grail of technical trading that I'd hoped.  I tested four one year scenarios and one four year scenario and I've learned several things:

• I'm able to slightly out gain the market during a bear period
• I'm unable to match market performance during a bull period
• I'm unable to make modifications to the strategy that improved performance.
• I'm less enamoured with an all index strategy than I was this time last week.

Here are the raw results of my testing.  Note that in all cases, the period tested began on March 1st.  And for the first four scenarios, lasted one year.  In the last scenario, the period was four years.

As noted in the graph, I out gained the market in 2007 and 2008, but I was behind the market in 2009, 2010 and four the four year test.  And during 2009 when the opportunity for gains was greatest, I lagged the market by a significant margin.

So what usable knowledge did I gain from this?  

First, the proposed strategy seems to share the same characteristics of my current stock strategy in terms of lagging the market during bull periods.  But the lag seems to be much more significant and my ability to outpace the market during bear markets seems less, so my current strategy seems superior. 

Perhaps more surprising was the overall market results for the four year test.  A 100% index would have left me with very, very poor results had I utilized this approach.  I've been reading a lot of pro-index propaganda lately and was really starting to believe it.  So I guess this was a real set-back in my willingness to take such an approach.  I believe I'll continue my current dabbling in index ETFs, but I'm not ready to jump in with both feet.

Index ETF Trading Strategy

The traditional strategy for index funds is simply to buy and hold, reinvesting all dividends.  My concern is that such an approach is a roller coaster where you are 100% at risk 100% of the time and there is no opportunity to recognize gains. 

 

I’d like to try and leverage my existing trading strategy and utilize one or more index funds (ETFs).  I want to continue to maintain and pool of funds that will allow me to buy in incrementally when the price is low, but still maximize realized gain and minimize risk by holding cash whenever practical.

I’ve established a pool of rules/triggers below that I think will yield the desired results.  I will next test these triggers using historical date ranges of known bear, bull and stagnant markets.  After reviewing results, I’ll modify the triggers accordingly. 

Initial Set up:

First determine the funds that you have set aside for this purpose.  For purposes of this exercise, I’ll assume $200,000 as this is sufficient for buying round lots, but is also not enough to allow for an extreme number of buy-ins.  The initial buy-in should be 20% of the available funds at the current market price.  Of course, you can wait for a dip, but there’s a chance that the dip will never come and you’ve lost an opportunity, so I’d recommend immediate buy-in.

Triggers:

There are several items that are considered for the triggers.  Current percent invested level, what was the last transaction (buy or sell), last transaction price, number of consecutive buys/sales.

Buys triggers would be set whenever the price drops from the last transaction.  If the previous transaction was a sale, then the new buy price should be 5% less than the last sale price.  If the last transaction was a buy, then the buy price drops by 1% for each transaction.  So if the initial buy in is $100 (100%), then the second buy in is at $99 (99% or $100), the third is $97.02 (98% or $99), the fourth is $94.11 (97% or 97.03).

Buy amounts will be 20% or the total funds until the percentage invested is over 50%.  After that, buy-ins are 10% of total funds up to 90%.  After 90% invested, further buy-in should be done at your own discretion.

Sell triggers will increment at 6%.  However, the sell trigger should be based on the average buy-in price, not the last buy-in price.  If there are multiple consecutive sales and the average price is 100, then the first sell price is $106, the second is $112 and the third is $118.  If the last transaction was a buy, then the sale price reverts back to 106%.

Sale amounts will 30% of the held shares for the first two consecutive sales and 10% of held shares for subsequent sales.

Next step is to test and refine the strategy.  I’ve targeted the following date ranges for testing and will use the SPY ETF:

• 3/1/2007-3/1/2008 for bull market
• 3/1/2008-3/1/2009 for bear market
• 3/1/2010-3/1/2011 for stagnant market

Index Funds

Well, I finally did it.  On March 1st, I bought into my first index funds (SPY & IVV).  And since that time, I've doubled down to the point where almost 25% of my investable funds are in two S&P 500 ETF's. 

Although I've bought in, I'm not entirely sure what my strategy will be for these investments.  My original intent was to simply buy and hold.  But, I'm not sure if I'm happy with that approach.  In fact, the stock market correction from the recent earthquake/tsunami/nuclear crisis has made me quite skeptical of a buy and hold strategy because this strategy becomes a victim of a bear market, and does not allow you to take advantage of it.  As you might guess, the share I bought on March 1st have dropped significantly.

So I'm thinking that I should simply use these shares in the same way that I've I've used individual company stocks in the past.  So the strategy would look something like this.

• Funds would be invested with 40% of the index funds bought at a premium, 20% bought at a fair value and 40% bought at a discount...or some other similar breakdown.
• Profits will be taken as I see fit.  I will probably revert back to my greedy model and try to squeeze 10% out. 
• Sell in stages, do not sell out of entire position at once.  TO allow profits to be tracked, it would make sense to use multiple ETFs and/or multiple accounts.
• Maintain a lot of cash in preparation of a correction.  This will leave a lot of money uninvested during a bull run, impacting overall percentage return.  But this would carry less risk that investing 100% in an index with a buy and hold strategy.

I'd love to completely eliminate the individual stork portion of my portfolio in favor of this approach as it would improve diversity and eliminate the risk that an individual company might have a catastrophic event.  But I'm not sure that I could stay invested enough to earn the returns I'm used to.  As with my current strategy, only market volatility can drive my desired results.

February 2011 Trading

February was a pretty mediocre month.  I was able to maintain the streak of months where realized gains improved over the previous year.  February is the 6th straight month.  Also holding period was reduced by the quick turnover of a couple of "premium" holdings.  And I hover around 50% invested as I had another small CD called.

I'm in the red for unrealized positions, but a couple of holdings are near their sales price, so February should be a good month for realized gains too.  Alas, I'm not so sure that my percent invested will improve unless there is a significant correction.

Sales this month:

• Kellogg Company - 6% gain, held for a couple of dividend cycles.
• Universal Corporation - 6% gain, "premium" stock held for less than 30 days.
• Lorillard, Inc - 5% gain, "premium" stock held for less than 30 days.

Current holdings and unrealized gains/losses are as follows.

• Exelon Corporation - Down 4.2% (-2.5% in Jan, -4.5% in Dec, -9.7% in Nov, -9.3% in Oct, -5.4% in Sept, -9.6% in Aug, -7.1 in July and -15.7 in June).
• FirstEnergy Corp. - Up 3.8% (+6.0 in Jan, +0.3% in Dec, -4.8% in Nov, -2.7% in Oct, +1.8% in Sept, -3.5% in Aug, -0.4 in July and -6.9 in June).  Looks like I missed a great selling opportunity in January, because it did not reach the same prices in February.
• TeleCommunications Systems, Inc. - Down 4.0% (-8.0 in Jan, +5.0% in Dec, +4.1% in Nov, +21.9% in Oct, -12.1% in Sept, -30.7% in Aug, -26.4 in July and -31.5 in June).
• National Grid plc (ADR) - Up 7.2% (+3.3 in Jan, -0.5% in Dec, -1.4% in Nov, +6.4% in Oct, -4.2% in Sept, -5.5% in Aug, -9.0 in July and -17.4 in June). Has maintained a good price throughout February.  Have given serious consideration to selling, but have not yet.
• Colgate Palmolive Company - Up 1.8% (-1.9% in Jan)
• Life Partners Holding, Inc - Down 23.9% (-9.9% in Jan) - Seems to have found bottom of about $7.50 during February.  I've doubled up twice after my initial purchase but have fought the urge to throw more money in until some modest stability is demonstrated.  We may now be at this point.
• General Mills, Inc - Up 4.0% (-2.6% in Jan)
• Abbott Laboratories - Up 4.8% (-1.6% in Jan) - Missed opportunity to sell at 7% profit at end of month.  Hopefully the same opportunity will occur in early March.
• Intel Corporation - Up 0.2% - Only net new purchase of the month

The following dividends were collected:

• Colgate Palmolive Company
• Life Partners Holding, Inc - small dividend.  Only for the first small batch of shares purchased.