My Hedged Fund - Another "Trend-Following" Post

Discussion in 'Journals' started by MyHedgedFund, Feb 5, 2011.

  1. Yet another trend-following post?

    I've been trading ETF's using trend-following techniques for some time now, and decided to make public my real-life trading activities starting this past January.

    Through this post I will be making public my trades as they happen, which is likely to be not more than 1-2 times per week. Only today did I decide on using EliteTrader for this purpose, so the reader is invited to visit by blog (http://myhedgedfund.typepad.com/my-hedged-fund/#tp) for background details and prior posts.


    Week 5 - Shorting ETF’s; theoretically easy to do…


    First some background, leveraged from the following sources:

    - Investopedia - Shorting ETFs: Profit Or Peril?
    - ETF Trends – Shorting ETFs Without the Risk, and
    - Index Universe - Shorting ETFs Misunderstood, Even By A Ph.D.

    The Basics of shorting ETF’s – as with stocks, shorting an ETF requires that you borrow the shares that you want to sell. The broker may borrow the securities from another client or from another firm, and the ETF is sold on the market. The hope of course is that the market will fall. The decline will cause the price to drop, allowing for the ETF to be repurchased at a lower price.


    Advantages of Shorting ETFs:

    - ETFs are said to be easier to short than stocks because they're not subject to the "uptick" rule, where shares cannot be shorted unless their prices first rise.
    - ETF’s also are not affected by short squeezes which occur when the price of the stock starts on a quick rise when the supply is lacking. Traders with short positions try to buy stocks to prevent losses, which only spikes the prices even further, making the losses of those who shorted and didn't close their positions even worse. ETFs don't suffer from this because of the number of shares that can be increased (theoretically) on any trading day.


    Disadvantages:

    - The process can be difficult to execute
    - Not all ETFs can be shorted, and some are hard to short, as it is difficult to do so in small quantities.


    Alternatives:

    - Use Inverse ETFs - Some people have gravitated to inverse ETFs, which are also known as short ETFs. They are of course designed to go up when a particular sector or index declines. These ETFs provide all the benefits of short selling, but don't require that you make a direct short sale.
    - If there is no 1X inverse available, one could trade half the dollar amount in a 2X inverse
    - Open multiple brokerage accounts for your shorts and use these other accounts for the times your primary broker does not have the ETF or stock available. 


    Why do I bring the topic up? It impacted me this past week of course.

    I’ve been watching the deterioration of EPI (India) for some time, creating a very nice trend. All indicators pointed towards a buy signal on the short side, which I received early in the week. I proceeded to place the order, which was “rejected” within a couple of minutes. I tried again, and was rejected again. After trying four times I called the broker directly who indicated that there were no shares available for sale, this with the “short interest” level at almost 4MM! My options were to either keep trying or to drop the interest in the short.

    To make a long story short (no pun intended), I was not successful in completing the transaction, opting instead for INDZ, an India inverse (and leveraged) ETF.

    Any readers come across similar challenges? What workaround, if any, have you been able to develop?



    Current Positions:

    I completed the following transactions last week:

    - Sold EWM (Malaysia) – completed sale signaled at the end of last week
    - Sold IYT (transportation) and EWW (Mexico) after hitting technical thresholds
    - Bought INDZ (India short) based on technical thresholds
    Added to FCG (natural gas exploration), XLI (industrials), DBA (agriculture), TMV (treasury bear), and NLR (nuclear energy) after receiving “pyramiding” buy signals.

    The pyramiding signals created a need for additional funds; I use a “relative strength” algorithm to prioritize sales in situations such as this. The algorithm considers distance between price and MA’s (the greater the better), distance between price and 52-week highs (the smaller the better), and the ETF’s standard deviation. The algorithm provided prioritized sales on KOL (coal), ITB (home construction) and TNA (Russell 2000); those funds were used to fund the additions listed above.

    The reader can see all my positions in more detail in my blog (http://myhedgedfund.typepad.com/my-hedged-fund/#tp)


    Current performance:

    Week 5 was the best week of the year so far, with the fund being up almost 8%. Currently invested in 26 assets, with all but one (biotech) showing gains. ERX has performed particularly well, up 24% YTD. Chart with some relevant benchmarks below:


    What Next Week May Bring:

    Only IBB (biotech) appears to be close to giving a sell signal. All other current investments are in what appear to be solid trends. Current investments in EWC (Canada), EWJ (Japan), EWT (Taiwan), FCG (natural gas exploration), JJG (grains) and NLR (nuclear energy) are close to providing additional pyramiding buy signals which could cause me to sell IAI (broker / dealers), XLY (consumer discretionary) and the aforementioned IBB. Any additions to FCG and NLR would "max them out" as per my risk management guidelines (ERX, MWJ and XLI are already maxed out.)

    Feedback and commentary are as always welcomed.

    Happy trading from Boston,



    Boston
     
  2. tonyalva

    tonyalva

    Is that you mike Covell?:D
     
  3. Week 6: Settling in...

    Current Positions:

    I completed the following transactions this week:

    - Sold my positions in Russia (RSX), Taiwan (EWT), South Korea (EWY), Palladium (PALL), Metals & Mining (XME) and Biotech (IBB). These sales were completed in all cases to fund additional purchases in the assets listed below. EWT and EWY would have seen sell signals during the week anyways.
    - Sold INDZ (India short) based on technical thresholds late in the week.
    - Added to UPRO (S&P 500) and JJG (Grains) after receiving “pyramiding” buy signals.
    - Bought UDOW with the INDZ proceeds based on technical signals.

    I am at this point holding "only" 20 positions, the lowest number possible as per the system. This happens only in situations of extended trends, with multiple assets signaling additional purchases. This results in basically selling "the weak" and giving the proceeds to "the strong."

    The reader can find all of my current positions in more detail here (http://myhedgedfund.typepad.com/my-hedged-fund/2011/02/week-6-settling-in.html).

    Current performance:

    Week 5 was yet again a good week, with the fund increasing in value by 1.89%; total return YTD stands at 9.23%. The investments in leveraged ETF's are paying off, with ERX (up 24%), Financials (up 12%), Midcaps (up 17%) and Nasdaq (up 11%) leading the way. Chart with some relevant benchmarks also included here (http://myhedgedfund.typepad.com/my-hedged-fund/2011/02/week-6-settling-in.html)

    Questions and comments always welcomed...

    Boston
     
  4. Week 7: When will the trend end?


    Bears are saying we're definitely over-extended, and that a correction is imminent, some bulls say this ride has barely started. While I may care about the answer, and as a true trend-follower would say, I do not have the slightest clue.

    Current Positions:

    I completed the following transactions this week:

    • Sold my positions in Grains (JJG), Nuclear Energy (NLR) and 30-Yr Treasuries Short (TMV)
    • Reduced my positions in Financial Services (FAS) and Agriculture (DBA).
    • Added to Nasdaq (TQQQ), Japan (EWJ), Canada (EWC) and the S&P 500 (UPRO) after receiving “pyramiding” buy signals.
    • Bought the Russell 2000 (TNA), Real Estate (IYR) and Metals & Mining (XME) after receiving technical buy signals.

    I continue to hold 20 positions, as well as some cash which I may use to add to my Consumer Discretionary (XLY), Water (PHO) and Materials (XLB) positions early next week.

    Current positions listed in more details here.

    Current performance:
    Week 7 saw a continuation of the trends observed throughout the entire year; following in general the rise in the US, Canada and Japan markets, as well as the Energy Sector. I am at this point (and have been for almost two weeks) totally out of the emerging markets arena.

    The fund increased in value by 3.02% during the week; total return YTD stands at 12.53%. Chart with some relevant benchmarks below:

    [​IMG]

    Current sector allocations below:

    [​IMG]

    Questions and comments always welcomed and often answered...

    Boston
     
  5. Week 7: When will the trend end?


    Bears are saying we're definitely over-extended, and that a correction is imminent, some bulls say this ride has barely started. While I may care about the answer, and as a true trend-follower would say, I do not have the slightest clue.

    Current Positions:

    I completed the following transactions this week:

    • Sold my positions in Grains (JJG), Nuclear Energy (NLR) and 30-Yr Treasuries Short (TMV)
    • Reduced my positions in Financial Services (FAS) and Agriculture (DBA).
    • Added to Nasdaq (TQQQ), Japan (EWJ), Canada (EWC) and the S&P 500 (UPRO) after receiving “pyramiding” buy signals.
    • Bought the Russell 2000 (TNA), Real Estate (IYR) and Metals & Mining (XME) after receiving technical buy signals.

    I continue to hold 20 positions, as well as some cash which I may use to add to my Consumer Discretionary (XLY), Water (PHO) and Materials (XLB) positions early next week.

    Current positions listed in more details here.

    Current performance:
    Week 7 saw a continuation of the trends observed throughout the entire year; following in general the rise in the US, Canada and Japan markets, as well as the Energy Sector. I am at this point (and have been for almost two weeks) totally out of the emerging markets arena.

    The fund increased in value by 3.02% during the week; total return YTD stands at 12.53%.

    Questions and comments always welcomed and often answered...

    Boston
     
  6. Week 8: Was this a "Head Fake"?​
    (Note: If the pictures do not work, please see them here..)

    Most trends saw a significant deterioration this past week. The "fundamental" explanation revolves around the concerns associated with the problems in oil-rich Lybia. A significant amount of the oil production coming from the area was shut down, resulting in a spike in oil prices. This tends to concern most investors as any significant increase in energy costs is expected to drive up costs for most industries; this concern translates into lower stock prices (simplification at its best). The market did come back on Friday, so the question lingers... was this the beginning of "The Correction," or just the typical geopolitical event with its typical market effects? Time will tell.



    So... Does trend following work with ETF's?

    Many of you have read the great white paper titled "Does Trendfollowing Work on Stocks" published by Blackstar Funds. Their paper of course concluded that trend following does work with stocks, with a very telling chart (see below) showing how most trades result in "little losses" suffered early on in the investment, with a few longer-term "big winners" making up for the little losses and more.

    [​IMG]

    Two months into the year, the Fund's chart is beginning to take on a similar look (see below). So does trend following work with ETF's? It's way too early... Time will tell.

    [​IMG]




    Current Positions

    I completed the following transactions this week:

    - Reduced my positions in the Materials sector (XLB), Broker-Dealers Index (IAI), Midcaps (MWJ), Nasdaq (TQQQ), S&P 500 (UPRO), Industrials (XLI), Water (PHO) and Consumer Discretionary (XLY).
    - I also shorted Chile (ECH) through a deep in the money option put.​

    The spike at the end of the week resulted in several buy signals and I bought single blocks in the following:

    - Bank Index (KBE), Grains (JJG), Copper (JJC), Media (PBS), Timber (CUT), Nuclear Energy (NLR) and Aerospace and Defense (ITA).​

    Current positions listed in more details here.

    Current performance

    The "head fake" was hard on trends this week, especially on leveraged positions. The Fund declined by 4.89% during the week. Most holdings declined in value, with the exception of the Energy sector, which continues to shine. Chart with some relevant benchmarks below:

    [​IMG]


    Current sector allocations below:

    [​IMG]


    Questions and comments always welcomed and often answered...

    Boston
     
  7. Week 9: A Quiet Week...​


    It was a quiet week for "My Hedged Fund," both from an activity and final weekly performance, although intra-weekly volatility was higher than normal. The Fund had a volatility similar to that of the SPY which ended the week up 0.11%, with an 1.7% up day and 1.7% down day in between.

    Current Positions

    I completed the following transactions this week:

    • - Sold the "Banks" position (KBE)
    • - Bought Russia (RSX), Silver (AGQ) and Gold (DGP)
    • - Added to my current Canada (EWC) position.

    Current positions listed in more details here.

    Current performance

    The Fund was up 0.43% for the week, currently up 7.45% YTD. Energy and commodity sectors continue to trend well, helping create trends in those countries with significant energy and commodity industries such as Canada and Russia. An example of a chart with a nice trend (Energy) can be seen below:
    [​IMG]


    Current chart with relevant benchmarks below:
    [​IMG]

    [​IMG]


    Current sector allocations below:
    [​IMG]

    Questions and comments always welcomed and often answered...

    Boston
     
  8. marketsurfer

    marketsurfer Vendor

    Great thread, Boston. Keep it up! Plus, i enjoy your blog--- nice comprehensive work.
     
  9. I'm assuming you've backtested this, at least over the last few years (realizing there isn't sufficient ETF history to go much further.) What do your backtested returns and drawdowns look like?
     
  10. Marketsurfer> I thought that you didn't believe in trends?
     
    #10     Mar 5, 2011