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This article is the fourth 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 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 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; 11/1/11 ranked high to low.

(Click charts 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 October 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. 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. There are no examples of such lingering funds in the October 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 October

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 (losses) for the top ten from $500 or $1000 invested in each September 30, and sold as a group at market close on October 28. There were no profitable trades in this group in October. Thus the $5000 investment resulted in a net loss of ($1920.81)(38.4%). Similarly the $10,000 investment did no better with a net loss of ($3557.95) or (35.6%).

Conclusion Using Trend Analysis Methodology

From Friday, September 30 until Friday October 28, the above list of ten new ETFs were put in place as high performers culled as instructed from the ETF Screen website. For risk protection, sell stops were placed at $.10 below recent swing lows for each. Losses from those selections are now reviewed and new Hot Hands ETF selections for November are reported.

September Trades

The following carryover trade is detailed.

HDGE buy 9/22 - sold 9/11 ($94.80 net loss).

  • 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.
  • October 11: Sell stop at $26.90 triggered by swing low to $26.74.
  • 34 shares sold @$26.90 = $914.60 less $20.00 broker fees = ($94.80)

October Trades

The following trades are reported below.

YANG buy 9/30 - sold 10/12 ($270.80 net loss).

  • 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.
  • October 12: Sell stop at $19.75 triggered by swing low to $18.88.
  • 38 shares sold at $19.75 = $750.50 less $20.00 broker fees = ($270.80).
  • LHB buy 10/3 - sold 10/11 ($262.76 net loss).
  • 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. Closing 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.
  • October 12: Sell stop at $22.46 triggered by swing low to $22.00.
  • 34 shares sold at $22.46 = $763.64 less $20.00 broker fees = ($262.76).
  • SMN buy 9/30 - sold 10/11 ($226.85 net loss).
  • 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.
  • October 12: Sell stop at $22.35 triggered by swing low to $22.35.
  • 35 shares sold at $22.35 = 782.25 less $20.00 broker fees = ($226.85)

TMF buy 10/4 - sold 10/12 ($ 223.06 net loss).

  • 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 September 28).
  • 13 shares bought 10/4 at $79.10 = $1028.30.
  • October 12: Sell stop at $63.48 triggered by swing low to $59.83.
  • 13 shares sold at $63.48 = $825.24 less $20.00 broker fees = ($223.06)

RTSA buy 10/4 - sold 10/12 ($ 279.42 net loss).

  • 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.
  • October 12: Sell stop at $53.68 triggered by swing low to $51.51.
  • 14 shares sold at $53.68 = $751.52 less $20.00 broker fees = ($279.42)

DPK buy 10/4 - sold 10/10 ($263.18 net loss).

  • 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 (recent swing low at $41.80 September 27).
  • 18 shares bought 10/4 at $54.29 = $977.22.
  • October 10: Sell at $40.78 triggered by market opening at $40.78.
  • 18 shares sold at $40.78 = $734.04 less $20.00 broker fees = ($263.18)

UBT buy 10/3 - sold 10/12 ($146.07 net loss).

  • 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 September 28).
  • 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.
  • October 12: Sell stop triggered at $122.55 during swing low to $118.19.
  • 7 shares sold at $122.55 = $857.85 less $20.00 broker fees = ($146.07).

SKF buy 10/4 - sold 10/10 ($222.29 net loss).

  • 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 September 27).
  • 11 shares bought 10/4 at $93.36 = $1026.96.
  • October 10: Sell stop triggered at $74.97 during swing low to $74.74.
  • 11 shares sold at $74.97 = $824.67 less $20.00 broker fees = ($222.29)

BGZ buy 10/3 - sold 10/10 ($216.40 net loss).

  • 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 September 27).
  • 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.
  • October 10: Sell stop triggered at $39.06 during swing low to $38.46.
  • 20 shares sold at $39.06 = $781.20 less $20.00 broker fees = ($216.40)

EUM buy 10/3 - sold 10/10 ($121.40 net loss).

  • 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.
  • October 10: Sell stop triggered at $34.98 during swing low to $34.92.
  • 26 shares sold at $34.98 = $909.48 less $20.00 broker fees = ($121.40)

Net returns to from September 30, to October 31, 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 were ($2,232.23 LOSS) (22.32%). There were NO winning (net profit) trades, ELEVEN losing (net loss) trades, including ONE carry over from September, NO trades not taken, and NO trades continuing into next months report.

The primary lesson demonstrated this month is the advantage of placing stop loses on all trades. The market order strategy with no stops lost $3,557.95 for the month while the trend analysis method placing stops $.10 below the recent swing lows lost $2,232.23 saving the investor $1,325.72 or 13.25% for the month.

October turned out to be a huge Bear trap in the ETF marketplace by all counts.

November Trades

The following trades are now pending with results to be reported in December. Will November prove to be a Bull trap?

RUSL (Russia Bull)

November 1 Buy stop set @ $61.53 (21 day high) with closing price at $42.81.

ERX (Energy Bull)

November 1 Buy stop set @ $56.26 (55 day high) with closing price at $43.80.

DRN (Real Estate Bull)

November 1 Buy stop set @ $57.98 (55 day high) with closing price at $49.47.

EDC (Emerging Markets Bull)

November 1 Buy stop set @ $115.95 (21 day high) with closing price at $50.50.

XPP (China Ultra FTSE)

November 1 Buy stop set @ $56.94 (21 day high) with closing price at $47.88.

URTY (Russell Ultra)

November 1 Buy stop set @ $58.87 (55 day high) with closing price at $46.51.

BGU (Large Cap Bull)

November 1 Buy stop set @ $68.21 (55 day high) with closing price at $56.99.

SOXL (Semiconductor Bull)

November 1 Buy stop set @ $35.91 (55 day high) with closing price at $29.73.

COPX (Copper MIners)

November 1 Buy stop set @ $15.75 (21 day high) with closing price at $14.02.

UYG (Ultra Financials)

November 1 Buy stop set @ $51.07 (55 day high) with closing price at $42.79.




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 IV: Hot Hands ETFs In October's Bear Trap