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<<Back to Part II

This article is the third in a series summarizing and updating 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 and 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

Step One:

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 it is a range trading index and it 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 or similar to a fund already chosen.

In articles I & II you were advised to "discard all entries with a relative strength factor (RSf) less than 90%". Clarification from Courtney advises that relative strength is based on annual returns. Since this strategy deals with one month returns, it is not relevant.

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; 9/30/11 ranked high to low.

Click to enlarge:



Step Two:

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 September 2, 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.

Step Three

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 55 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 September

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 $1000 invested in each September 2 and sold as a group at market close on September 30. Four profitable holdings were offset by bigger losses on the other six. Thus the $5000 investment resulted in a net loss of ($337.30)(6.7%). Similarly the $10,000 investment did no better with a net loss of ($635.54) or (6.4%).



From Friday, September 30 until Friday October 31, ten new ETFs are in place as high performers from the following list of 10. These were culled as instructed from the ETF Screen website. For risk protection, sell stops are placed at $.10 below recent swing lows for each. After October 31, gains or losses from these selections will be reviewed and new Hot Hands ETF selections for November will be reported.



Conclusion Using Trend Analysis Methodology in August and September

August Trades:

EDV buy 8/18 and sell 10/4 for $255.30 net gain.

  • August 12: Buy stop set at $102.47 (55 day high at $102.37) with closing price at $96.92.

  • August 18: Buy triggered at $102.47 during gap up to $107.38. Closing price at $104.9. Sell stop set at $82.07 (due to recent swing low at $81.97).

  • August 22: New 55 day high set at $111.00. EDV closes at $106.15.

  • August 25: Sell stop moved to $98.92 (due to recent swing low at $99.02).

  • September 2: EDV closes at $109.41.

  • September 6: EDV closes at $110.85 after setting new 55 day high at $113.26. Sell stop remains at $99.12.

  • September 15: EDV closes at $108.36. Sell stop moved to $107.61 (due to recent swing low at $107.71).

  • September 20: New 55 day high set at $113.05. EDV closes at $113.05.

  • September 21: New 55 day high set at $119.98. EDV closes at $119.75.

  • September 22: New 55 day high set at $133.75. EDV closes at $127.75. Sell stop remains at $107.61.

  • September 29: EDV closes at $118.53. Sell stop moved to $114.20 (due to recent swing low at $114.30).

  • October 3: EDV closes at $124.50. Sell stop remains at $114.20. Place market order to sell at next day open.

  • 10 shares bought 8/18 at $102.47 = $1024.70.

  • 10 shares sold 10/4 at $130.00 = $1300.00 for $275.30 gross (- $20 broker fee) = $255.30 net gain.

IAU buy 8/18 and sell 9/15 for ($35.59) net loss.

  • August 12: Buy stop set at $17.66 (55 day high is $17.56) with closing price at $17.04.

  • August 18: Buy triggered at $17.66 at open. Closing price at $17.82. Sell stop set at $16.52 (recent swing low reached $16.62).

  • August 22: New 55 day hiigh set at $18.53. IAU closes at $18.50.

  • August 26: Sell stop set at $15.54 (recent swing low reached $15.64).

  • September 2: IAU closes at $18.37.

  • September 6: IAU closes at $18.34 after setting new 55 day high at $18.63. Sell stop remains at $15.54.

  • September 9: Sell stop moved to $17.39 (recent swing low reached $17.49).

  • September 15: Market low reaches $17.30 triggering sell stop at $17.39.

  • 57 shares bought 8/18 at $17.66= $1006.62.

  • 57 shares sold 9/15 at $17.39= $991.23. = ($15.59) gross (-$20 broker fee) =($35.59) net loss.

September Trades

The following trades (in addition to the two carryover AED & IAU trades noted above) are detailed.

JO not traded.

  • September 6: Buy stop set at $74.33 (55 day high at $74.23) with closing price at $71.80.

  • Buy stop never triggered. Shifting trade to new trending ETFin October.

UGA not traded.

  • September 6: Buy stop set at $52.43 (recent swing high at $52.33) with closing price at $50.72.

  • September 8: Swing high reached $52.20 market fell back thereafter.

  • Buy stop never triggered. Shifting trade to new trending ETF in October.

TLT buy 9/6 and sell 10/3 for $47.14 net gain.

  • September 6: Bought at $ 114.42 opening price. (55 day high set today at $114.93) with closing price at $113.68. Sell stop set at $105.98 (due to recent swing low to $106.08).

  • September 19: Sell stop moved to $111.15 (recent swing low reached $111.25). New 55 day high set at $115.19. Close at $114.38.

  • September 21: New 55 day high set at $118.79. Close at $118.66.

  • September 22: New 55 day high set at $123.87. Close at $123.12.

  • September 29: Sell stop moved to $115.66 (recent swing low to $115.76). Close at $117.84.

  • September 30: Close at $120.80. Place market order to sell at 10/3 opening price.

  • October 3: Sell 9 shares at $121.88.

  • 9 shares bought 9/6 at $114.42 = $1029.78.

  • 9 shares Sold 10/3 at $121.88 = $1096.92 for $67.14 gross (- $20 broker fee) = $47.14 net gain.

REZ buy 9/8 and sell 9/21 for ($74.56) net loss.

  • September 6: Set buy stop at $44.54 (recent swing high at $44.44) closing price at $42.87.

  • September 8: Buy triggered at $44.54 on move up to $44.72. Close at $44.25. Set sell stop at $41.40 (recent swing low reached $41.50).

  • September 13: Sell stop moved to $42.06 (recent swing low at $42.16). Closing price at $43.26.

  • September 16: Close at $43.98. Sell stop still at $42.06.

  • September 21: Sell stop triggered at $42.06 as market price moves down to close at low of $40.44

  • 22 shares bought 9/8 at $44.54 = $979.88.

  • 22 shares sold 9/21 at $42.06 = $925.32 for ($54.56) gross (-$20 broker fee) =($74.56) net loss.

XLU not traded.

  • September 6: Buy stop set at $34.21 (55 day high at $34.11).

  • September 8: XLU closes at $33.48.

  • September 15: Buy stop never triggered. Shifting trade to new trending ETF in October.

SGG not traded.

  • September 8: Buy stop at $101.88 ($.10 above recent swing high of $101.78).

  • September 9: SGG closes at $96.45.

  • September 15: Buy stop never triggered. Will shift trade to new trending ETF in October.

CORN not traded.

  • Previous month's trade: [August 15 bought 21 shares at $47.80 = $1003.80. Sell 9/9 @ 48.20 = $1012.20 for =$8.60 gross (-$20 broker fee) = ($11.60)net loss.]

  • September 9: Though listed again for September, CORN market fell away and buy stop was never triggered. Will shift trade to new trending ETF in October.

HDGE buy 9./22 - not sold (carrying over to next report).

  • September 6: Buy stop at $29.10 (due to 55 day high at $29.00). Close at $27.57.

  • September 22: Buy stop triggered in move to new 55 day high of $29.48 at open. Close at $29.30. Sell stop set at $26.23 (recent swing low at $26.33).

  • September 28: Move sell stop to $26.90 (recent swing low at $27.00).

  • October 4: New 55 day high achieved at $30.76.

  • 34 shares bought 9/22 at $29.10 = $989.40 pending October trades.

Net returns from September 6 to October 6 using trend analysis trading technique buying an even number of shares costing closest to $1000 for five of the above ten selected exchange traded funds (ETFs) were $192.29 (3.85%) on $5,000 invested. There were two winning (net profit) trades, two losing (net loss) trades, five trades not taken, and one trade continuing onto next months report.

October Trades

The following trades (in addition to the one carryover HDGE trade noted above) are now pending with results to be reported in November.

YANG buy 9/30 - remains open.

  • September 30: Buy at $26.35 (the 55 day high) closing price. Set sell stop at $19.75 (due to recent swing low to $19.85).

  • October 4: New 55 day high set at $32.00 . YANG closes at $27.21.

  • 38 shares bought 9/30 at $26.35 = $1001.30 pending October trades.

LHB buy 10/3 - remains open.

  • September 30: Buy stop set at $29.60 (due to recent swing high $29.50) with closing price at $28.25.

  • October 3: Buy triggered at $29.60 on uptick to $30.53. Closin price at $30.50. Set sell stop at $22.46 (due to recent swing low to $22.56).

  • October 4: New 55 day high set at $33.11. LHB closes at $29.33.

  • 34 shares bought 10/3 at $29.60 = $1006.40 pending October trades.

SMN buy 9/30 - remains open.

  • September 30: Buy at $28.26 (55 day high) closing price. Sell stop set at $22.35 (due to recent swing low at $22.45).

  • October 4: New 55 day high set at $32.15. SMN closes at $27.93.

  • 35 shares bought 9/30 at $28.26 = $989.10 pending October trades.

TMF buy 10/4 - remains open.

  • September 30: Set buy stop at $78.07 (recent swing high at $77.97) closing price at $72.02.

  • October 4: Buy triggered at $79.10 opening. Closing price at $75.20. Set sell stop at $63.48 (recent swing low $63.58)

  • 13 shares bought 10/4 at $79.10 = $1028.30 pending October trades.

RTSA buy 10/4 - remains open.

  • September 30: Set Buy stop at $71.10 (due to recent swing high at $71.00). Closing price at $64.18.

  • October 4: Buy triggered at $72.21 opening. Close at $63.70. Set sell stop at $53.68 (due to recent sing low at $53.78).

  • 14 shares bought 10/4 at $72.21 = $1010.94 pending October trades.

DPK buy 10/4 - remains open.

  • September 30: Set buy stop at $54.29 (due to recent swing high at $54.19). Closing price at $51.91.

  • October 4: Buy triggered at $54.29 due to $53.74 opening price moving to daily high of $55.41 (new 55 day high). Closing price at $49.36. Set sell stop at $41.70 (due to recent swing low at $41.80).

  • 18 shares bought 10/4 at $54.29 = $977.22 pending October trades.

UBT buy 10/3 - remains open.

  • September 30: Set buy stop at $140.56 (due to 55 day high being at $140.36). Closing price at $133.43.

  • October 3: Buy triggered at $140.56 after $136.71 opening price moves up to $140.60 (new 55 day high). Close in price at $140.52. Set sell stop at $122.55 (due to recent swing low at $122.65).

  • October 4: New 55 day high set at $143.54. Sell stop remains at $122.55.

  • 7 shares bought 10/3 at $140.56 = $983.92 pending October trades.

SKF buy 10/4 - remains open.

  • September 30: Set Buy stop at $93.36 (due to 55 day high at $93.26). Closing price at $84.39.

  • October 4: Buy triggered at $94.14 opening price. (New 55 day hi set @ 97.20). Close at $84.72. Set sell stop at $74.97 (recent swing low at $75.07).

  • 11 shares bought 10/4 at $93.36 = $1026.96 pending October trades.

BGZ buy 10/3 - remains open.

  • September 30: Set Buy stop at $48.88 (20 day high at $48.78). Closing price at $46.28.

  • October 3: Buy triggered at $48.88 after $47.28 opening moves up to $50.76 (new 55 day hi). Close at $50.67. Set sell stop at $39.06 (due to recent swing low at $39.16).

  • October 4: New 20 day high set @ 54.14. Close at $47.18. Sell stop still at $39.06.

  • 20 shares bought 10/3 at $48.88 = $977.60 pending October trades.

EUM buy 10/3 - remains open.

  • September 30: Set buy stop at $38.88 (due to 55 day high at 38.78). Closing price at $38.12.

  • October 3: Buy triggered at $38.88 after $38.22 opening moving up to $39.00 (new 55 day high). Close at $38.92. Set sell stop at $34.98 (due to recent swing low at $35.08).

  • October 4: New 55 day high set at $39.99. Close at $38.33. Sell stop remains at $34.98.

  • 26 shares bought 10/3 at $38.88 = $1010.88 pending October trades.

Results of all the above trades will be reported in Seeking Alpha after October 31.

Disclosure: I am long SEF, GLD.

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.

Source: Momentum Trading Strategies Part III: Hot Hands ETFs for October