Momentum Trading Strategies Part V: Hot Hands ETFs Breakout Gains For November

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 |  Includes: BZQ, COPX, DRN, DRR, EDC, ERX, FAZ, IHE, ITB, NUGT, RUSL, SOXL, SPXL, THD, TMF, UCO, URTY, UYG, XPP, ZSL
by: Fredrik Arnold

<< Return to Part lV

This article is the fifth in a series summarizing and updating an ETF momentum trading strategy called "Hot Hands" by Courtney Smith. Courtney is not the blonde screen actress but a trader, author, money manager, educator, and trading advocate. 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 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 ETFs for purchase by going here. 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 atop the ETF Performance list to include short funds and, if you so choose, leveraged funds. Leveraged funds are optional to multiply 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 does not trend, it is not appropriate for momentum trading. If you don't understand the title of the fund, discard it, and also funds with underlying assets identical or similar to a fund already chosen, gold or silver, for example.

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, the RSf is not relevant.

The lists below are examples of charts of 10 ETFs from here, ranked high to low, sorted by one month returns as of 6/28/11; 8/12/11; 9/2/11; 9/30/11; 11/1/11; 12/1/11.

Click to enlarge

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 November 1, 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 November 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 using the same $.10 high/low margin for trade stops.

Conclusion Using Market Order Methodology in November

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 on November 1 and sold as a group at December 2 market close. There were 4 profitable trades in this group in November. Thus the $5000 investment resulted in a net loss of ($132.01) or (2.64%). Similarly, the $10,000 investment did little better but managed to cover a bigger portion of the broker fees resulting in a net loss of just ($64.03) or (0.64%).

Click to enlarge

Click to enlarge.

Conclusion Using Trend Analysis Methodology

From Tuesday, November 1, until Friday, December 2, the ETF Screen website provided the following list of ten new high performer ETFs . For risk protection, sell stops were placed at $.10 below recent swing lows for each. Gains/losses from those selections are now reviewed and new Hot Hands ETF selections for December are reported.

November Trades

The following trades are now reported for November. November proved to be a small bull trap capturing just one unsuspecting Chinese bull.

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Click to enlarge.

RUSL (Russia Bull) No trade

November 1 Buy stop set @ $61.63 ($.10 over 21 day high). Closing price at $42.81.

Buy stop never triggered. Will shift trade to new trending ETF.

ERX (Energy Bull) No trade

November 1 Buy stop set @ $56.36 ($.10 over 55 day high). Closing price at $43.80.

Buy stop never triggered. Will shift trade to new trending ETF.

DRN (Real Estate Bull) No trade

November 1 Buy stop set @ $58.08 ($.10 over 55 day high), Closing price at $49.47.

Buy stop never triggered. Will shift trade to new trending ETF.

EDC (Emerging Markets Bull) No trade

November 1 Buy stop set @ $116.05 ($.10 over 21 day high). Closing price at $50.50.

Buy stop never triggered. Will shift trade to new trending ETF.

XPP (China Ultra FTSE) Buy 11/8 - Sold 11/21 ($245.54 net loss includes $20 to broker).

November 1 buy stop set @ $57.04 ($.10 over 21 day high). Closing price $47.88.

November 8 new 21 day high set at 57.50. Buy stop triggered at $57.04.

Bought 18 shares at $57.04 = $1,026.72.

Set sell stop at 45.35 ($.10 below recent swing low of $45.45 set November 1.)

November 21 sell stop triggered at $44.51 open.

Sold 18 shares at $44.51 = $801.18

URTY (Russell Ultra) No trade

November 1 Buy stop set @ $58.97 ($.10 over 55 day high). Closing price at $46.51.

Buy stop never triggered. Will shift trade to new trending ETF.

BGU (Large Cap Bull) No trade

November 1 Buy stop set @ $68.31 ($.10 over 55 day high). Closing price at $56.99.

Buy stop never triggered. Will shift trade to new trending ETF.

SOXL (Semiconductor Bull) No trade

November 1 Buy stop set @ $36.01 ($.10 over 55 day high). Closing price at $29.73.

Buy stop never triggered. Will shift trade to new trending ETF.

COPX (Copper Miners) No trade

November 1 Buy stop set @ $15.85 ($.10 over 21 day high). Closing price at $14.02.

Buy stop never triggered. Will shift trade to new trending ETF.

UYG (Ultra Financials) No trade

November 1 Buy stop set @ $51.17 ($.10 over 55 day high). Closing price at $42.79.

Buy stop never triggered. Will shift trade to new trending ETF.

Here are the net returns from November 1 to December 2 using trend analysis trading technique. An even number of shares were bought costing closest to $1000 for any of the above ten selected exchange traded funds (ETFs) when triggered by buy stops set $.10 above recent swing highs. Results showed a ($245.54 net LOSS) (24.55%) on $1000 invested. There were NO winning (net profit) trades, ONE losing (net loss) trade, NINE trades not taken, and NO trades continuing into next months report.

The primary lesson demonstrated this month is the advantage of dumb luck in accidentally timing 40% winning trades in the market order strategy while only one buy stop was activated (for a loss) using trend analysis. The market order strategy with no stops lost just $64.03 for the month on $10,000 invested while the trend analysis method placing stops $.10 below the recent swing lows lost $245.54 or 385.21% more for the month. There's the "breakout" for November mentioned in the title.

December Trades

The following trades are now pending with results to be reported in January. Will November cross winds result in potluck wins including 2x long gold and 2x short silver? With a recent history of no sustained rallies nor slides longer than a few days, the prospects for gaining traction, let alone gaining momentum, look grim. Still one must be in it (or prepared to be in it) to win it. After all, November was a big improvement over the October Bear Trap, still not a winning month, however.

Click to enlarge

UCO (Crude Oil 2X Bull)

December 2 Buy stop set @ $45.05 ($.10 above 55 day high) with closing price at $43.19.

BZQ (Brazilian Market 2X Bear)

December 2 Buy stop set @ $22.61 ($.10 above 21 day high) with closing price at $17.93.

ITB (US Home Construction Bull)

December 2 Buy stop set @ $11.80 ($.10 above 55 day high) with closing price at $11.55.

DRR (Euro Double Short Bear)

December 2 Buy stop set @ $43.92 ($.10 above 21 day high) with closing price at $42.55.

ZSL (Silver Ultra Short)

December 2 Buy stop set @ $14.25 ($.10 above 21 day high) with closing price at $12.32.

IHE (US Pharmaceuticals Bull)

December 2 Buy stop set @ $74.32 ($.10 above 55 day high) with closing price at $73.58.

TMF (20 yr Treasuries 3x Bull)

December 2 Buy stop set @ $75.10 ($.10 above 21 day high) with closing price at $67.56.

THD (Thailand Market Index)

December 2 Buy stop set @ $62.67 ($.10 above 21 day high) with closing price at $61.65.

NUGT (Gold Miners 2X Bull)

December 2 Buy stop set @ $38.15 ($.10 above 21 day high) with closing price at $30.26.

FAZ (Financial 3X Bear)

December 2 Buy stop set @ $55.04 ($.10 above 21 day high) with closing price at $40.62.

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Click to enlarge.

January's report will include an accounting for previously reported trading activities from the first six monthly 2011 Hot Hands reports. This will be a six month look back attached to intended trading actions for the new year.

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 SEF, GLD.