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This is the eighth article in a series investigating an ETF momentum trading strategy called "Hot Hands" taught by Courtney Smith. Courtney is a trader, author, money manager, educator, and trading advocate who bears no resemblance to the blonde screen actress, except by name. He has authored seven books, appeared on countless TV shows and spoken at hundreds of events. Courtney is unique in having a high ranked mutual fund, stock picking newsletter, futures newsletter and hedge fund.

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 the ETF Screen main page) is a list of ETFs.

Use filters at the top of 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, 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, platinum, 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 12/1/11; 1/12/12; 2/6/12. Notice that five of the 10 ETFs listed in January are repeated in February. This is the first hint of the mojo mentioned in the title of this article.
(Click charts to enlarge)

Step Two

Determine how many selected ETFs to buy based on how much you want to invest. Using a conservative $5,000 or $10,000 invested in the 10 funds selected in the previous article as of January 13, the example below reports results from buying an even number of shares costing closest to $500 or $1000 for each of the 10 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 at least 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 10 for several months. There are two examples of such lingering funds in the December charts and 10 lingerers in the January charts below.

When using a channel breakout strategy, set buy stops at $.10 above the 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 buy stops based on recent 20-day historic highs and sell stops based on swing lows in price using the same $.10 high/low margins.

Conclusion Using Market Order Methodology in January

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 10from $500 or $1000 invested in each January 13, and sold as a group February 6, at market close. All 10 made profitable trades for the month. This is the second example of mojo mentioned in the title. A $5000 investment resulted in a net gain of $795.50 or 15.91%. Similarly, the $10,000 investment resulted in a net gain of $1791.00 or 17.91%.

December 1, the list of 10 high performer ETFs below was provided by the ETF Screen website. As trades were placed, sell stops were placed at $.10 below recent swing lows for for risk protection. Gains/losses from four carryover selections are now reviewed and new Hot Hands ETF selections for January are reported.

December Carryover Trades

The following results can now be reported from the December list.

ITB (US Home Construction Bull) Buy stop triggered. Bought 85 shares December 5 at $11.80 =$1003.00. Trade remains open. Sell stop at $11.39. January 12 closing price was $13.29. Sell stop moved to $12.94 January 26. February 6 closing price was $14.06

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

December 5 new 21-day high set @ $11.94 close. Buy stop triggered at $11.80. Bought 85 shares =$1003.00. Sell stop set at $10.28 ($.10 below recent swing low $10.38 on November 23.)

December 7 new 55-day high set at $12.06

January 3 to Jan 19 new 55-day highs set at $12.36 to $13.73. Moved sell stop to $11.39 as of Jan 3.($.10 below swing low $11.49 set December 28).

January 26 new 55 day high set at $13.92. Move sell stop to $12.94 $10 below 13.04 swing low of January 24.

Remains open. February 6 closing price was $14.06

DRR (Euro Double Short Bear) Buy stop triggered. Bought 23 shares December 12 at $43.92 =$1010.16. Sell 23 shares January 19 at $46.01. Net gain = $29.12

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

December 12: New 21-day high set @ $44.08. Buy stop triggered at $43.92. Bought 23 shares =$1010.16. Sell stop set at $41.78 ($.10 below recent swing low $41.88 on December 1.)

December 29: New 55-day high set at $46.04. Sell stop reset at $44.15 ($.10 below swing low of $44.25 December 20).

January 11: New 55-day high set at $47.65. Sell stop reset to $44.65 ($.10 below swing low of $44.75 January 3).

January 12 Closing price at $46.43

January 13: New 55-day high set at 47.99. Sell stop reset to $46.23 ($.10 below swing low $46.33 January 12).

January 19 Sell stop triggered at gap down opening at $46.01. Net gain = $29.12

TMF (20 yr Treasuries 3x Bull) Buy stop triggered. Bought 13 shares December 19 at $75.10 =$1010.16. Trade remains open. Sell stop at $62.78. January 12 closing price was $68.71. February 6 sell at closing price $65.43. Net loss ($145.71)

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

December 19: new 55-day high set at $76.18. Buy stop triggered at $75.10. Bought 13 shares = $978.30. Sell stop set at $62.78 ($.10 below recent swing low $62.88 on December 1.)

January 12 Closing price at $68.71

February 6 sell at closing price $65.43. Net loss ($145.71)

THD (Thailand Market Index) Buy stop triggered. Bought 16 shares December 6 at $62.67 =$1002.72. Trade remains open. Sell stop at $61.16. January 12 closing price was $68.71.

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

December 6: New 55-day high set at $63.05. Buy stop triggered at $62.67. Bought 16 shares = $1002.72. Sell stop set at $56.46 ($.10 below recent swing low $56.56 on November 21.)

Remains open. January 12 Closing price at $61.40

January 27: New 55-day high set at $64.61 move sell stop to $.10 below recent swing low $61.26

Remains open. February 6 Closing price at $66.32

December Trend Trade Summary

Net returns from December 1 to February 6 using trend analysis trading technique showed a 1.2% loss in January that stretched to a 3.5% loss in February with to of six trades made still open. An even number of shares were bought costing closest to $1000 for six of the above 10 selected exchange traded funds when triggered by buy stops set $.10 above recent swing highs. Results showed a ($24.56 net LOSS) (1.228%) on $2000 invested as of January 12 and a ($145.71 net LOSS) on $4000 invested as of February 6. There was ONE winning (net profit) trade, THREE losing (net loss) trade, FOUR trades not taken, and TWO trades continuing into NEXT month's report.

The primary lesson demonstrated using trend analysis so far is the return of a three-month bull rally for two ETFs: ITB in Home Construction; THD in Thailand. The market order strategy with no stops lost ($361.85) or (3.62%) for the month on $10,000 invested while the trend analysis method placing stops $.10 below the recent swing lows lost just ($145.71) on FOUR trades for 3.5% for the DECEMBER collection. Two open trades could bring profits come March. We'll see.

January Trades

The following trades are now ready to report. Since two trades remain open from December, only the top eight Hot Hands selections are set up with buy stops as of 1/13/12. However, all 10 are listed below.

FAS (Financial Bull) January 19 Buy stop triggered. Bought 13 shares at $77.73 =$1010.49. Sell stop set at $72.77. ($.10 below January 19 swing low of 72.87). Trade remains open with sell stop at $76.71. February 6 closing price was $89.72.

February 1: new 55-day high set at $84.34. Sell stop moved to $76.71 ($.10 below January 30 swing low of $76.81).

February 3: new 55-day high set at $90.81.

Remains open. February 6 closing price was $89.72

RUSL (Russia 3X Bull) January 17: Buy stop triggered @ $37.00 open. Bought 27 shares for $999.00. Sell stop set at $33.92 ($.10 below January 13 swing low to $34.02). Trade remains open with sell stop at $41.82. February 6 closing price was $51.02.

February 1: new 55-day high set at $49.24. Sell stop moved to $41.82 ($.10 below January 30 swing low of $41.92).

February 3: new 55-day high set at $51.87.

Remains open. February 6 closing price was $51.02

SOXL (Semiconductor 3X Bull) January 18: Buy stop triggered @ $32.42 on swing high to $35.27. Bought 31 shares for $1005.02. Set sell stop at $29.83 ($.10 below January 13 swing low). Trade remains open with sell stop at $34.90. February 6 closing price was $39.82.

February 1: new 55-day high set at $39.60. Sell stop moved to $34.90 ($.10 below January 30 swing low of $35.00).

February 3: new 55-day high set at $41.71.

Remains open. February 6 closing price was $39.82

FBT (Biotech Index) January 13: Market order placed at 55 day high of $37.17 and closing price at $37.12. Bought 27 shares January 14 at $37.07 opening price = $1000.89. Sell stop set at $32.71 ($.10 below January 4 swing low of $32.81). Trade remains open with sell stop at $36.47. February 6 closing price was $42.51.

January 31: new 55-day high set at $39.81. Sell stop moved to $36.47 ($.10 below January 30 swing low of $36.57).

February 6: new 55-day high set at $42.57.

Remains open. February 6 closing price was $42.51.

UYM (Ultra Basic Materials) January 18: Buy stop triggered @ $37.76 on swing high to $38.20. Bought 26 shares for $981.76. Set sell stop at $31.08 ($.10 below January 29 swing low to $31.18). Trade remains open with sell stop at $38.45. February 6 closing price was $41.79.

February 1: new 55-day high set at $41.04. Sell stop moved to $38.45 ($.10 below January 30 swing low of $38.55).

February 3: new 55-day high set at $42.10.

Remains open. February 6 closing price was $41.51

TAN (Global Solar Energy) January 19: Buy stop triggered @ $3.26 on swing high to $3.29. Bought 307 shares for $1000.82. Set sell stop at $2.46 ($.10 below January 6 swing low to $2.56). Trade remains open with sell stop at $2.92. February 6 closing price was $3.31.

February 6: new 55-day high set at $3.33. Sell stop moved to $2.92 ($.10 below January 31 swing low to $3.02.

Remains open. February 6 closing price was $3.31

DRN (Daily Real Estate 3X Bull) January 20: Buy stop triggered @ $56.03 on swing high to 55 day high at $56.70. Bought 18 shares for $1008.54. Set sell stop at $50.38 ($.10 below January 13 swing low to $50.48). Trade remains open with sell stop at $59.80. February 6 closing price was $65.89.

February 3: new 55-day high set at $66.71. Sell stop moved to $59.80 ($.10 below January 30 swing low to $59.90.

Remains open. February 6 closing price was $65.89.

EPHE (Philippines Market) January 17: Buy stop triggered @ $25.63 market open heading for 55 day high at $26.00. Bought 39 shares for $999.57. Set sell stop at $22.86 ($.10 below December 28 swing low to $22.96). Trade remains open with sell stop at $25.38. February 6 closing price was $27.18.

February 3: new 55-day high set at $27.25. Sell stop moved to $25.38 ($.10 below January 30 swing low to $25.48.

Remains open. February 6 closing price was $27.18.

YINN (China Market 3X Bull) January 18: Buy stop triggered @ $20.20 market high. Bought 50 shares for $1010.00. Set sell stop at $16.90 ($.10 below January 5 swing low to $17.00). Trade remains open with sell stop at $21.08. February 6 closing price was $25.20.

February 6: new 55-day high set at $25.20. Sell stop moved to $21.08 ($.10 below January 30 swing low to $21.18.

Remains open. February 6 closing price was $25.20

UDOW (Ultra Dow Index) January 17: Buy stop triggered @ $140.76 market open. Bought 7 shares for $985.32. Set sell stop at $133.62 ($.10 below January 17 swing low of $133.72). Trade remains open with sell stop at $140.81. February 6 closing price was $151.70.

February 3: new 55-day high set at $152.25. Sell stop moved to $140.81 ($.10 below January 30 swing low to $140.91.

Remains open. February 6 closing price was $151.70.

February Trades

The following trades would now be pending with results to be reported in March. However two trades remain open from December, along with all ten from January. As the twelve open trades close, this selection list will be mined for replacements. This is the third example of mojo mentioned in the title: five of the trades listed for February are repeated from the January list: SOXL; RUSL; YINN; DRN; FAS.

ere are the five unrepeated trades set to go for February when space is available:

USLV (3X Long Silver) February 6: Buy stop set @ $51.23 ($.10 above 20 day high) with closing price at $47.96.

URTY (Ultra Russell 2000 Index) February 6: Buy stop set @ $70.51 ($.10 above 20 day high) with closing price at $69.16.

KOLD (Ultra Short DJ-UBS Natural Gas) February 6: Buy stop set @ $112.85 ($.10 above 20 day high) with closing price at $86.07.

LBJ (3X Long Latin America) February 6: Buy stop set @ $106.66 $.10 above 20 day high) with closing price at $104.97.

FBT (Biotech) February 6: Buy stop set @ $42.67 ($.10 above 20 day high) with closing price at $42.51.

The March Hot Hands report will certainly elaborate on the reality or unreality of the market mojo detected here. Stay tuned.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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. Prices and returns on equities in this article are listed without consideration of fees, commissions, taxes, penalties, or interest payable due to purchasing, holding or selling same.

Source: Momentum Trading Strategies Part VIII: Hot Hands ETFs Find Mojo In January