This article summarizes and updates the momentum trading strategy called "Hot Hands" by Courtney Smith. Courtney is not the blonde screen actress but a trader, author, money manager, educator, and speaker. He is the only person in history to have a high ranked mutual fund, stock picking newsletter, futures newsletter, and hedge fund. Courtney is the author of seven books, has appeared on over 1000 TV shows and spoken at hundreds of events.
Hot Hands aims to select and invest in the strongest performing exchange traded funds (ETFs) and is traded monthly. Momentum traders seek to enter the market at the start of large market moves to the upside (or downside). The Hot Hands trading method is accomplished in three steps.
Hot Hands in Three Steps
Select exchange traded funds (ETFs) for purchase by going here. There in the "Performance" sector (found in the upper left of the front page of ETF Screen main page) you will find a list of ETFs.
Use filters at the top of the ETF Performance listings to include short funds and if you so choose, leveraged funds. Leveraged funds are optional if you want to be able to multiply the potential rewards and risks in a fund by two or three times. Use the volume filter to choose funds trading in volumes over one million or over five hundred thousand shares. Be sure to click to update the page after you adjust the filters.
Click the downward pointing arrow on the column labeled Rtn-1mo at the top of the Performance list of ETFs and ETNs. This action will find the strongest performing exchange traded funds ranked from high to low by last month's returns. After generating the list, cull VIX funds, unintelligible titles, and funds with similar assets to create a well diversified list. The VIX Index is a measure of expected market volatility and since its underlying assets are not tangible and the index does not trend it is not appropriate for momentum trading. If you don't understand the title of the fund, discard it along with funds with underlying assets identical to a fund already chosen. The last cull is to discard all entries with a relative strength factor (RSf) less than 90%. The lists below are examples of charts of 10 ETFs from here, sorted by one month returns as of 6/28/11; 8/12/11; 9/2/11 ranked high to low.
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Determine how much to invest and how many selected ETFs to buy. Using a conservative $5,000 or $10,000 invested in the ten funds selected in the previous article as of August 12, the example below reports results from buying an even number of shares costing closest to $500 or $1000 for each of the ten selected exchange traded funds (ETFs). The broker is acknowledged with a commission of $10 per trade deducted from every transaction to reveal net income in the scenarios below. Courtney recommends investing no more than 1% of your total investment portfolio in any one Hot Hand ETF or ETN.
Wait one month before selling the selected funds in favor of a newly selected incoming group of stronger performing funds as ranked by monthly returns reported on the ETF Screen website. In less volatile markets the funds can linger in the top ten for several months. SEF, HDGE, & CORN are examples of such lingering funds in the charts below. Set buy stops at $.10 above 50 day historic high for each fund selected and set sell stops at $.10 below 20 day historic lows for each. Or trade based on trend analysis, setting stops based on recent swing highs and swing lows in price.
Conclusion Using Market Order Methodology in August
The preferred trading frequency is monthly. However when one ETF is running strong it is best to let profits run. The following chart shows price gains for the top ten from $500 or $100 invested in each on August then sold as a group September 2. All profits from $500 invested in each ETF were wiped out by Broker commissions. Thus the $5000 investment resulted in a net loss of ($85.66)(1.7%). In contrast the $10,000 investment did a little better than break even with a net gain of $40.96 or .04%.
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As of Tuesday 9/6/11, ten new ETFs are in place as high performers until October 1 from the following list of 10 culled as instructed from the ETF Screen website. For risk protection sell stops were placed at 20 day lows for each. After October 1 gains or losses from these selections will be reviewed and new Hot Hands ETF selections for October will be reported.
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Conclusion Using Trend Analysis Methodology in July and August
SGG B 7/1 - S 8/2 $20.26 net
Jun 30 Placed buy stop @ 91.54 (55 day hi 91.44)
Jul 1 Order filled @ 91.62 closing price. Set sell stop @ 80.40 (.10 below previous swing low of 80.50)
July 22 new 55 day high set @106.27. Move sell stop to 95.19 (.10 below previous swing low of 95.29)
Aug 2 SGG SOLD triggering sell stop at 95.19 in move down to 94.40.
11 shares @ 91.54 = $1006.94 bought 7/1
11 shares @ 95.20 = $1047.20 sold 8/2= $40.26 GP - $20 BC= $20..26 Net
COW No trade
July 1 Order buy stop @ 32.31 (55 day high 32.41) placed 6/30 with closing price at 29.85
July 14 Buy stop moved to 31.13 day after swing high to 31.03 Closing price @ 30.11.
Aug 12 closing price @ 30.33. Buy stop never triggered. Will shift trade to new trending ETF.
DFJ B 6/30 - S 8/2 ($.68) net
June 29 Set buy stop @ 43.67 (55 day hi 43.57)
June 30 Buy triggered @ 43.67 with closing price at 43.73 place sell stop @ 41.34 (.10 below previous swing low of 41.44)
July 22 Closing price @ 45.64
Aug 1 Sell stop moved to 44.51 (,10 below previous swing low of 44.61)
Aug 2 DFJ sold at 44.51with swing low to 44.47
23 shares @ 43.67 = $1004.41 bought 6/30
23 shares @ 44.51 = $1023.73 sold 8/2 =$19.32 GP - $20 BC = ($0.68) net
These first two stocks were selected in July but never hit their buy trigger prices until early August.
SFSA B 8/3 - S8/26 $224.66 net
Jun 30 Order buy stop @ 39.03 (55 day hi 38.93) closing price @ 28.42
July 22 SFSA closing price @ 27.62
Aug 1 SFSA closing price @ 35.15
Aug 3 Buy triggered at 39.03 when new 55 day high is set at 41.43 Closing price @ 38.39.
Sell stop set at 27.37 (.10 below previous swing low of 27.47)
Aug 9 New 55 day high set @ 58.30 close at 50.70
Aug 16 Move sell stop to 45.00 (.10 below previous swing low of 45.10)
Aug 19 SFSA closing price @ 55.00 new 55 day hi set @ 59.00
Aug 25 Move sell stop to 48.44 (.10 below previous swing low of 48.54)
Aug 26 SELL triggered at 48.44 in market move to 48.04 low.
26 shares @ 39.03 = $1014.78 bought 8/3
26 shares @ 48.44 = $1259.44 soldl 8/26=$244.66 GP -20BC = $224..66 Net
SZO B 8/4 - S 8/31 $18.01 net
Jun 30 Order buy stop @ 46.63 (55 day hi 46.53). Closing price at 44.40
July 22 Closing price @ 42.94
Aug 4 SZO buy order filled @ 46.63 as new 55 day hi set @ 48.67
SZO closes @ 48.67 sell stop set @ 42.04 (.10 below previous swing low @42.14)
Aug 9 SZO closes @ 51,41 after setting new 55 day high at 53.62
sell stop stays set @ 42.14
Aug 20 Swing high to 51.31 Sell stop moved to 47.44 (.10 below previous swing low @47.54)
Aug 31 SZO sell stop triggered @47.44 in market move down to 47.01
21 shares @ 46.63 = $979.23 bought 8/4
21 shares @ 48.44 = $1017.24 sold 8/31=$38.01 GP -20BC = $18..01 Net
EDV B 8/18 - no S (carryover to next report)
Aug 12 Order buy stop set @ 102.47 (55 day hi 102.37) with closing price at 96.92
Aug 18 Buy triggered @ 102.47 in gap up to 107.38 Closing price @ 104.9. Sell stop set @ 82.07 (recent swing Lo @ 81.97)
Aug 22 New 55 day hi set @ 111.00
EDV closes @ 106.15
Aug 25 Sell stop moved to 99.12 (recent swing low @ 99.02
Sep 2 EDV closes @ 109,41
Sep 6 EDV closes at 110.85 after setting new 55 day hi at 113.26. Sell stop still@ 99.12
10 shares @ 102.47 = $1024.70 bought 8/18
HDGE B 8./18 - S 8/29 ($98.40) net
Aug 12 Order buy stop set @ 28.55 (55 day hi 28.45) with closing price at 27.07
Aug 18 Buy triggered @ 28.55 in gap up to 28.56 Closing price @ 28.28. Sell stop set @ 26.31 (recent swing Lo @ 26.41)
Aug 29 Sell stop triggered @ 26.31 on gap down to 26.29
HDGE closes @ 26.29
35 shares @ 28.55 = $999.25 bought 8/18
35 shares @ 26.31 sold 8/29 = $920.85 = ($78.40 GP - $20 BC = ($98.40) net
IAU B 8/18 - no S (carryover to next report)
Aug 12 Order buy stop set @ 17.66 (55 day hi 17.56) with closing price at 17.04
Aug 18 Buy triggered @ 17.66 in gap open toClosing price @ 17.82. Sell stop set @ 16.52 (recent swing Lo @ 16.62)
Aug 22 New 55 day hi set @ 18.53 IAU closes @ 18.50
Aug 26 Sell stop set @ 15.54 (recent swing Lo @ 15.64)
Sep 2 IAU closes @ 18,37
Sep 6 IAU closes at 18.34 after setting new 55 day hi at 18.63. Sell stop email@example.com (recent swing Lo @ 15.64)
Sep 9 Sell stop moved to 17.39 (recent swing Lo @ 17.49)
57 shares @17.66= $1006.62 bought 8/18
SEF No trade
Aug 12 Order buy stop set @ 45.21 (55 day hi 45.11) with closing price at 41.70
Aug 18 Closing price @ 42.94.
Aug 25 SEF closes @ 41.94
Sep 2 SEF closes @ 41.90
Sep 6 EDV closes at 42.50 Buy stop never triggered. Will shift trade to new trending ETF.
CORN B 8/15 - S 9/9 ($11.60) net
Aug 12 Order buy stop set @ 47.80 (recent swing hi 47.70) with closing price at 47.27
Aug 15 Buy triggered @ 47.80 in move to 47.90 high Closing price @ 47.81.Sell stop set @ 44.95 (recent swing low to 45.05).
Aug 19 Sell stop moved to 46.90 (after previous day swing low to 47.00)
Aug 22 New 55 day hi set @ 48.59. CORN closes @ 48.55
Aug 29 New 55 day hi set @ 50.69.
Sep 2 Sell stop moved to 48.20 (after previous day swing low to 48.30)
Sep 6 CORN closes at 49.49 with pennant formation tapering.
Sep 8 Sell stop nearly triggered at days low of 48.22
21 shares @ 47.80 = $1003.80 buy 8/15
21 shares @ 48.20 = $1012.20 sell 9/9=$8.60 GP -20BC = ($11.60) Net
Net returns to from June 30 to September 6 using trend analysis trading technique buying an even number of shares costing closest to $1000 for each of the above ten selected exchange traded funds (ETFs) were $152.25 (1.9%) from $8000 actually invested. There were three winning (net profit) trades, three losing (net loss) trades, two trades not taken, and two trades continuing into next months report.
The following trades (in addition to the two carryover AED & IAU trades noted above) are now pending with results to be reported in October.
Sep 6 Buy stop set @ 74.33 (55 day hi 74.23) with closing price at 71.80
Sep 6 Buy stop set @ 52.43 (recent swing high 52.33) with closing price at 50.72
TLT B 9/6 - no sale
Sep 6 Buy@ 114.42 Opening Price. (55 day hi set today @114.93) with closing price at 113.68.
Sell stop exit at 105.98 (recent swing low to 106.08).
9 shares @ 114.42 = $1029.78 bought 9/6
REZ B 9/8 - no sale
Sep 6 Set Buy stop @44.54 (recent swing high at 44.44) closing price @ 42.87
Sep 8 Buy triggered @44.54 on uptick to 44.72. Close @ 44.25 Set sell stop @ 41.40 (recent sing low @ 41.50)
22 shares @ 44.54 = $979.880 bought 9/8
Sep 6 Buy stop set @34.18 (recent swing high to 34.08 and 55 day high @ 34.11)
Sep 8 XLU close @ 33.48
Sep 8 Place Buy stop at 101.88 .10 above recent swing high of 101.78.
Disclaimer: This article is for informational and educational purposes only and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security.
Disclosure: I am long GLD, SEF.