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Tech ETFs: VGT, RYT, IYW, XLK. The Apple question.

10 Mar

I subscribe to several for-pay services.  Some I like more than others.  Ones that consistently rank high with me are Marketclub/INO,  Zacks and Bespoke Investment Group (“BIG”).  BIG is rather different to the other two.  If you like data-driven analysis, you’ll like BIG.  BIG is invariable professional.  You may see them frequently quoted in the financial press.  They recently reported the results of their first voluntary members’ survey, which is what piqued the impetus for this article.  The survey covered both individual and institutional investors.  Self-serving it may be, but I happen to think the paying customers of BIG are smarter than the average bear.  Key point for this article is that both the individual and institutional investors liked Technology as the best sector for the next six months.

As an investor with my own money, I tend to using ETFs, although I will take individual equity positions.  It depends on the term and portfolio I’m investing in.  I considered four broad-based technology ETFs to play a possible positive ride in the technology sector (click on the chart to enlarge):


tech etfs

The Rydex equal-weight ETF has romped away from the others, due largely, one supposes, because it has way less exposure to that laggard du jour, AAPL.  The AAPL percentages, BTW, are at 3/8/13 for RYT and 12/31/12 for the other ETFs.  The latter percentages may have changed some since 12/31 due to AAPL’s sell off and and increase in other portfolio stocks.  Be that as it may, some folk might think that with AAPL changing hands at a P/E of about 9, that as it hovers at a price somewhat above $400 it may be worth considering.  In which case, depending on your loving or loathing for all things AAPL, you may wish to consider which tech ETF best suits your purpose.  If you think AAPL will continue to be a loser then RYT is the way to go despite a healthy expense ratio of 0.5%.  Were I to want some AAPL exposure I would probably lean to VGT.  An alternative approach, trading costs be damned, might be to blend the two ETFs depending on how you love or loathe AAPL.  Your intended holding period would impact your decision, too.

The BIG members offered pretty mixed insight.  AAPL was the biggest long position in the portfolio of by far the most respondents.  On the other hand, it was also the stock that by far the most respondents were most bearish on.  Go figure. But, that probably sums up market sentiment on AAPL too.  You can check out free stuff (and there’s a lot of it) from BIG HERE.

One to watch: URI United Rentals Inc

9 Mar

A stock that just lately has been popping up on many of the sorts and filters that I run on several different watchlists is $URI, United Rentals.

Last week, URI actually lost just a little bit of money, and it has certainly had a good run from the lows of last year.  It is now making multi-year highs.  If you look at a weekly chart of URI its ascent is almost parabolic, leading one to wonder if it isn’t due for a bit of a sell-off.

I’ve placed the basic review charts that I use below for you to check out.  On the daily charts that I’ve shown below, maybe you will come to the same conclusion I do — that this is a stock that has had a great run-up, and is currently taking a pause.  The indicators aren’t calling for a buy today, but with URI floating to the top of so many watchlists, it is  stock I am going to keep a close eye on.

If you look at a weekly chart you may come to a slightly different conclusion.

Should you have any observations on URI please share them in the comments section for this post.



Market timing systems reviewed

29 Jan

The good folks over at Dark Liquidity have rounded up a great comparison of market timing systems, if you have an interest:

HSBC Hedge Fund Scorecard

7 Nov

This post from the excellent, if morose, Zero Hedge, is well worth your time to pick through.  It has a readable copy of HSBC’s EOM hedge fund scorecard.  Some of the lads at the hedge funds haven’t been doing too well:  

If you follow the line of thinking that the boyz in the quantz will need to pick it up some before year’s end, their less-than-stellar performance in October might augur well for a pickup in market action between now and 12/31.




Basic differences in Sector ETFs

27 Jun

Place Trades from Facebook
When we look at the results of the sector ETFs offered by each ETF house we have seen that sometime, the differences in performance can be substantial, even between ETFs claiming to be invested with the same focus.

For example, the technology sector did well today, and indeed all the sector ETFs tracking tech went up too, but we could hardly call the results similar:

  • Vanguard: +1.29%
  • SPDR: +1.34%
  • Rydex EW: +0.74%
  • iShares: +1.44%

At its most basic the answer lies in the fact that the different ETFs invest in either different stocks or in different weights. This sounds obvious when it’s written down but I do wonder how many of us do go to the ETF fact sheet to check what the holdings are before we purchase an ETF.  Sometimes the name doesn’t reflect what stocks the ETF actually holds, so it’s really worth checking that what you are really buying is what you meant to buy.  This is probably most true of HLDRs, particularly in technology.

Setting aside weighting for a moment the iShares family of ETFs is probably most different from the other three in that its assets are based on the Industry Classification Benchmark (ICB) system.  The other three — Rydex, SPDR and Vanguard — are based around some derivation of the Global Industry Classification Standard (GICS) put together by S&P and MSCI.

Vanguard uses a slightly modified GICS schema which is a MSCI 25/50 index.  This limits the size that any one holding can be withing an ETF.

Size is an important issue.  Sector SPDRs are designed to completely mimic the particular sector from the S&P500 that they are named after.  Therefore, the holdings are apportioned according to cap weight within that sector.  The Rydex EW (Equal Weight) ETFs hold the same companies as the Sector SPDRs but they are weighted equally in terms of capitalization.  Often this leads to better returns.

Just how much difference is there?

  • ICB: 10 Industries, 19 Supersectors, 41 Sectors, 114 Subsectors.
  • GICS: 10 Sectors, 24 Industry Groups, 68 Industries and 154 Sub-industries

There are other classification systems too, such as from Thomson Reuters.  Then there are also proprietary systems too, such as from Investors Business Daily, Zacks, etc.  I think VectorVest uses a derivation of Thomson Reuters but I have yet to mark that down.  I must say the proprietary schema leave me a bit grumpy as it isn’t exactly as if the main shema are deficient.

A useful illustration of how indices may differ is offered here by the NYSE: Comparison of Indexes (Having received Latin at school this plural of index still grates on me.  It should be indices.  Indexes is another word invented to accommodate the ignorant.)  You may be surprised at the differences in content and weight.

Take-home:  Check what you’re buying.  Building a decent portfolio is rather a difficult task if you don’t know.

Investor Psychology, Behavior and Management Pt. III of III. “Where’s the door?”

15 Jun

In starting part three of three of our series on investor psychology, behavior and management, let’ s revisit the magazine article that stimulated the series in the first place.

In the October 2010 edition of Advisor Today magazine, Stephan Cassidy’s article “The Psychology of Investing” contained the following statement that I cannot find any argument with whatsoever:

Behavioral mistakes caused by unchecked emotional responses to events are the single biggest reason most investors do not do well.

Stephan tells us that investors buy when it seems safe to do so — i.e., when the market is doing well — and sell when they are scared — i.e., market down. Hence, he says:

Investors are hard-wired to buy high and sell low.

We also learned in part one of our series that research among retail investors indicates that they would rather sell their winners than their losers. Clearly then, as individual investors we should divorce emotions from our investing decisions as much as possible. One way to do this is to adopt a system or plan that is rules-based and that we stick to the plan and rules.

In our second article we looked at several systems that moved us in and out of an investment, in that case the Wilshire 5000 index according to market conditions. Over the five-year period tested buy-and-hold was the worst performer, our Paladin 200-50 system was the best. Investors should adopt a system that will protect wealth in longer down-trending markets, yet allow re-entry without giving up too much of the upside. We feel that our Paladin 200-50 system achieves such a compromise. It is worth noting that at the time of writing none of the major market index ETFs would have been sold by our system during the recent downturn, although the Nasdaq composite did close below its 200-day SMA  today. The only sector SPDR ETF that would have gone on the block so far in this downturn is Financials — at the open on 6/8/11.  Technology and Materials are also below their 200-day SMA but have not triggered a sell yet. XLK, technology, may very well trigger tomorrow.

By the way, our Paladin 200-50 system beat buy and hold by 55.8% with one-eighth the drawdown and only twelve triggered trading events in five years.

Remembering that these models were directed solely at the long-term investor, how else might we implement procedures to save our portfolios from our unchecked emotions?  And so it is we come to this final chapter — exits.

I am certainly not the first writer to point this out but, I think it is fair to say that if investors, traders and trinvestors put as much work and effort into knowing when they would sell their holdings as they do in buying them, we would probably not be having this conversation now.  My guess is, they never will.  High-frequency traders might, and the ones who are actually making money almost certainly are.  Such traders generally have a pretty clear picture of when they will sell before they enter the trade.  As investors, maybe we can’t do this, because we don’t have a clear idea of where the top in our purchases is.

VectorVest has a facility in its backtesting model that allows a stop to be triggered on a pre-set profit percentage as well as a loss.  In a number of cases where, usually, a high portfolio turnover is expected — that is where the stocks meeting investable criteria change rapidly or frequently, somewhat like out IBD50 top-10 portfolio — this method works well.  But, invariably, some money is left on the table.  For example, in our model IBD50 portfolio, Netflix is still carrying a 42.57% gain over its purchase price on January 23rd.  As investors, why would we want to limit that gain?  But, we also have to protect our portfolios from losses.

Warren Buffet is attributed as saying that Rule One is never to lose money, and that Rule Two is always to remember Rule One.  Sadly, I cannot live up to Mr. Buffet’s expectations as I sometimes lose money, and it always hurts when that happens.  But, I try to limit the pain to manageable proportions and avoid portfolio-destroying losses. And to keep everything in perspective, this is not a game.  Many investors are in what I call the retirement minefield.  That is, roughly ten years to retirement and not enough money.  They can’t retreat to the safety of the bond market (if such a thing exists), but they can’t afford material or catastrophic losses either.

We can and should make a start in portfolio protection before we purchase a new position.  How is the market behaving? Steady trend, or some volatility?  Same question for the position to be acquired.  What’s our  expected holding period?  What are our expectations for this investment?  Let me give you an example.  One of my portfolios has a ten-year window.  I own some oil positions in it, because we can argue about the price of oil this year but I think we can all agree that it will be costing more in 2021.  So, I may set slacker stops in this case, having a very long-term and somewhat certain view, than I might say, for the oil ETFs I bought a while ago to park money for a new car I was going to buy. BUT, I always set a stop as soon as I execute a buy order.  (I had to learn this the hard way, for what it’s worth).  Typically I will set a hard 7% stop, and that is the default I use.  I may use higher or lower depending on volatility and trends, but I always set a stop.

So that’s done, but then what?  The first thing is, every investment you own should have a stop.  That doesn’t mean that each stop should be cast in stone — in fact they should be dynamic and you should review them routinely.  Unless we are in a period of market uncertainty, monthly should work.

Once you have built up a certain amount of gain, I typically transition from a hard stop to a percentage trailing stop.  The percentage can change and may be different for each position.  Maybe you are sensitive to not being whipsawed out of a position, particularly if it is in a taxable account.  Then, depending on how much profit you have accumulated, you may choose a larger trailing stop to accommodate some volatility.  Or, it may be that you are sensitive to protecting profits — I have taken this position during the current correction and most of my positions have liquidated leaving me with a profit.  I will pick back up when I see the market turning.

I have begun to use my TC2000 software from Worden Brothers as a real tool in managing my portfolios.  It has an alert system that will message you in the program if you are using it at the time and e-mail you at a primary and a secondary e-mail address.  But please remember, alerts are NOT a substitute for a stop.  What I suggest is that you set an alert above the stop so you have time to check what you want to do, although, frankly, if you set the stop properly the alert should be superfluous.  Where this becomes useful is in managing long-term holdings, particularly in a taxable account.

Where TC2000 really comes into its own is in both monitoring assets and in calculating and setting stops.  Below is a full-screen view of TC2000 as I have it set up to monitor a small portfolio: (click on the image to view it full-screen)

There is some key data highlighted on the screen.Particularly, I can see what size of gain I have accumulated in the position, critically, how close the position is to its 200-day SMA, whether it is above its 50-day SMA or not and its average true range (ATR) in this case, based on a 14-day period.  And news relevant to that position which may influence your stop calculation.

After I had decided the current market correction needed my attention I built an Excel spreadsheet, by portfolio, by position.  I calculated cost, market price and hence gain. Then I calculated stops at a range between 7% and 10%, and at 1x, 2x and 3x ATR.  I also calculated how much gain I would have left, by position, depending on which stop I selected.  I then judgmentally picked a stop by position and set it as a percentage trailing stop, guarding me to the downside but allowing for upwards movement too.  I revisited the calculation every week.  I’m happy with the profit protection that I have achieved.

One can also show, and adjust, volatility stops in TC2000, as illustrated:

But even at a basic level, assuming a long term view and the use of the 200-50 methodology, one should set a fallback stop set at x% or $x below the 200-day SMA price so that in the event of a sudden sell-off, your position has some protection.

Another tool that I have really come to like is Smartstops.  I cannot recommend strongly enough that you take a look at their service.  They do far more than I can relate in this article, but for the lazy or busy investor I really think they are the way to go, with a backup hard stop set should all else fail.  Many things go into calculating a Smartstop, but they are adjusted continually and respond to volatility.  You can even differentiate between short-term and long-term holdings and the stop calculation is adjusted accordingly. They also have many levels of service to pick from — at a Cadillac level you can have your orders populated at TDAmeritrade, if that is your broker.  But at a basic level, the service starts at $9.95 a month and quite frankly, for the price of a trade, I see this as simple and cheap portfolio insurance.    Smartstops will e-mail you an alert during the day if there is an alert, or if a Smartstop is triggered:

At the end of the day you will receive a comprehensive report on all the positions you are protecting at Smartstops.  This is part of one of the end-of day reports:

The arrow is pointing to something that really differentiates Smartstops and which in my opinion is extremely valuable.  That is a re-entry alert.  I think it was Stephanie Pomboy of MacroMaven who stated her dislike of stops because having been stopped out of a position, one doesn’t know when to re-enter the position.  If you are using the Paladin 200-50 system, then the system will dictate the re-entry point.  Other “crossing” systems will too.  But otherwise, it is a problem.  Smartstops has this solved as they will e-mail you a re-entry alert for a position they have stopped you out of, alerting you to the opportunity to buy back into your position:

If you are using Marketclub then a green monthly or weekly trade triangle could safely be used as a re-entry point.

Everything I have illustrated in this article using TC2000 or Smartstops you can absolutely do for yourself as there are plenty of free resources available to you on the Internet, it will just take more work.  But, the major take-homes really are:

  1. Set a protective stop immediately after purchasing an investment.
  2. Stops are dynamic and you should review and adjust them regularly.  We suggest at least monthly.  And once they are set, absent a major change, LET THEM DO THEIR WORK.

In closing, let me offer an opinion that is contrary to what you read in most guides.  When you set a stop I suggest you set it to execute at market.  I have had very good experiences with my broker getting me the best price available and did you know that market orders are executed ahead of limit and other orders?  Some say you should use limit orders to protect against too much downside — think the flash crash — but the first time you end up stuck in a position because your limit order stop didn’t execute and the price still went down leaving you in a hole you may think better of market priced stops.  As you can tell, it’s happened to me.  In a flash crash, it may be a problem, but otherwise, I think they are the safe option.



Investor psychology, behavior and management. Part I of III

18 May

This is the first chapter in what will be a three-part series on self-directed investment management.  This part deals with some issues of investor behavior that we should acknowledge and determine how we are going to handle.  Part II will deal with investment timing and various entry and exit strategies.  Part III will deal with stops and protective strategies.

In this article we are not addressing a high-frequency trading model, although that doesn’t mean the findings here don’t apply.  The article is aimed at investors or trinvestors — those who partially apply trading rules to their investment decisions.

This article first started to take shape in my mind while I was reading an article in a  magazine written for financial advisors.  The gist of the article was that most individual or retail investors are hard-wired to buy high and sell low.  The reasoning being that people will invest when they are comfortable with the investing environment, i.e. when the market is nearing a high.  But they will sell when they are uncomfortable or frightened, i.e. at or close to a market bottom.  While we may all protest loudly that we don’t indulge in such behavior, I think if we’re honest we’ll certainly admit to having acted that way in the past or feeling as if we want to act that way on occasion.  The assertion made a lot of sense to me, and I have observed such behavior in others.

Now fast-forward to the Money Show in Las Vegas, and the Investors Business Daily presentation.  Here the argument was that Buy Low, Sell High was not a workable strategy in many cases — or at least not optimal.  The reasoning being that when a stock is at its low, it has so much pressure from above — that is, from folk who bought a lot higher, hung on along the way down to the lows, and will nowsell on any desperation rally —  that a stock can remain in the doldrums for a long time before it can recover.  Better, say the folk from IBD, to Buy High and Sell Higher.  A rising stock, they argue has no pressure from above, in fact below, and therefore, properly selected stocks will give the investor enviable gains.  I somewhat buy this argument, and I’m a sucker for momentum plays anyway.  In any event, if we can ride market perception of a particular stock, industry or sector, we are going to be way better off than trying to fight the market.  I think the good folk at IBD would allow that there are both fundamental and technical components to their stock picks, as evidenced, for example, by the IBD50.

I will always be one of the first to argue that Buy-and-Hold investing really ought to go the way of the Dodo.  My personal contention is that the technological advances that have radically changed how we all trade and or invest are partially responsible, but apart from that we are still looking a decade with zero gains from the S&P500 (actually negative if you nix out the dividends), a bear market every five or so years that takes a long time to recover from, and more.  All that said, in this month’s AAIIJournal there is article  by newsletter guru Mark Hulbert that should make you stop and pause before you start turning over your portfolio .  Hulbert describes how he “freezes” advisors’ newsletter portfolios and then compares them to the traded or adjusted portfolios.  Hulbert reports that two-thirds of the portfolios would have done better if the hadn’t “traded” — and, in fact, the traded portfolios made, on qverage. 3.4% a year less in returns (actually a 19% delta).  Hulbert also refers to some research from UC Berkley and Davis (The Courage of Misguided Convictions: The Trading Behavior of Individual Investors).  The full article is available from this link to the abstract.  The authors, Barber and Odean, make this opening statement:

This paper highlights two common mistakes investors make; they tend to disproportionately hold onto their losing investments while selling their winners and they trade excessively. We argue that these systematic biases have their origins in human psychology.

The researchers go on to conclude, and by the way, they analyzed a lot of trades:

…the entire sample over a one year horizon the average market-adjusted return on a purchased stock is 3.2 percent lower than the average market-adjusted return on a stock sold.

So, if investors had held on to their original purchases they would have been better off.  Therefore it should come as no surprise when the authors conclude:

These investors are not making profitable trades.

And flying in the face of my condemnation of Buy-and-Hold that:

“….the quintile of households that trade most frequently underperform their “buy-and-hold” portfolios, on average, by 7.04 percent annually.”

By now you are probably asking what the heck is going on here.  We are going to come back to these behavioral issues in steps II and III — but the one conclusion that cannot be escaped from this piece of research is that many, no, the majority of investors surveyed, will more easily sell their winners than their losers.  Do you know anyone like that? Perhaps intimately?

We will come back to this article briefly in the other two parts of this article but the initial conclusion is that investors should not be left to their own devices, as they are more likely to decrease their portfolios than swell them.  And the cause of this? Emotions and flawed judgement, but you knew that all along, didn’t you?  But what’s the fix?  The inescapable conclusion is then, that emotions and flawed judgement have to be removed from the equation as much as possible.  In practical terms, this calls for  a mechanical rules-based investing methodology that the investor might develop, but then not mess with.  The fewer judgement calls involved, the better.

In the next chapter we will look at removing judgement from entries and exits.


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