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This is the ninth article in a series investigating a momentum ETF trading strategy called "Hot Hands" taught by Courtney Smith. Trader, author, money manager, educator, and trading advocate, Courtney 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.

The lists below are examples of charts of 10 ETFs from the ETF screen site, ranked high to low, sorted by one-month returns as of 1/12/12; 2/6/12; 3/2/12 Notice that five of the 10 ETFs listed in January are repeated in February and three of the January listings carry through to March along with one from February. Looks like time to cash in some winners.

(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 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 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 ten for several months. There are two examples of such lingering funds in the December charts and ten 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 February

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 February 6 and sold as a group March 2 at market close. Five made profitable trades for the month. Five were losers. A $5000 investment resulted in a net loss of ($51.20) or (1.024%). Similarly, the $10,000 investment resulted in a net gain of $103.39 or 1.034%.

Conclusions Using Channel Breakout and Trend Analysis Methodology in December, January, & February

December 1, the list of ten 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 trades were open from the December list.

ITB (US Home Construction Bull) Buy stop triggered. Bought 85 shares December 5 at $11.80 =$1003.00. Sell stop at $11.39. Sell stop moved to $12.94 January 26. February 6 closing price was $14.06. March 9 New 55 day high of 14.74. Sell stop moved to $13.11 ($.10 below swing low of $13.21). Remains open. March 9 closing price was $14.57.

THD (Thailand Market Index) Buy stop triggered. Bought 16 shares December 6 at $62.67 =$1002.72. Sell stop at $56.46. January 27: New 55 day high set at $64.61. Moved sell stop to $61.26 ($.10 below recent swing low of $61.36 of January 25). March 1 new 55 day high set at $72.65. Moved sell stop to $69.84 ($.10 below swing low to $69.94 of February 27.) March 6: Sell triggered at $69.84 =$1117.44 -($20 + $1002.72) = $94.72 net gain.

December Trend Trade Summary

An even number of shares were bought costing closest to $1000 for six of the above ten selected exchange traded funds (ETFs) 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; a ($145.71 net LOSS)(3.64%) on $4000 invested as of February 6; a ($44.85 net LOSS) (.897%) on $5000 invested as of March 6. There were TWO winning (net profit) trades, THREE losing (net loss) trades, FOUR trades not taken, and ONE trade continued on to April's report with a stop loss set to make a minimum $91.35 net gain as of March 6.

The primary lesson demonstrated using trend analysis on the December collection 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 ($378.69) or (3.79%) for the month on $10,000 invested while the trend analysis method placing stops $.10 below the recent swing lows lost just ($45.39) on FIVE trades for (.908%) so far for the DECEMBER collection. ONE open trade will bring a minimum $45.96 net gain or .766% for the six trades come April. We'll see if Mr. Market will sweeten the gain.

January Trend Trades

The following trend trades are now ready to report. There were three winning trades, two losing trades, four trades continued into March and one trade carried forward to the April report. A $36.83 net gain is shown for the period with a sell stop set for the open trade to result in a minimum added gain of $35.58 or $72.41


AS]] (Financial Bull)

January 19 Buy stop triggered. Bought 13 shares at $77.73 =$1010.49. Sell stop moved to $85.77. ($.10 below February 16 swing low of $85.87). Trade results reported in February.

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). 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). March 2: new 55 day high set at $49.24. Sell stop moved to $48.47 ($.10 below February 22 swing low of $48.57). Trade results reported in February.

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). February 17: new 55 day high set at $44.76. Sell stop moved to $37.96 ($.10 below February 13 swing low of $38.06). Trade results reported in February.

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). 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 7: new 55 day high set at $42.57. Sell stop moved to $40.53 ($.10 below February 2 swing low of $40.63). Sell stop February 10 triggered at $40.53 x27 =$1094.31 -($20 + $1000.89) = $73.44 net gain.

UYM (Ultra Basic Materials)

January 18: Buy stop triggered @ $37.76 on swing high to $38.20. Bought 27 shares for $1019.52. Set sell stop at $31.08 ($.10 below January 29 swing low to $31.18). February 3: new 55 day high set at $42.10. Sell stop moved to $38.45 ($.10 below January 30 swing low of $38.55). Sell stop February 14 triggered at $38.45 x 27 =$1038.15 -($20 + $1019.52) = ($1.37) net loss.

TAN (Global Solar Energy)

January 19: Buy stop triggered @ $32.60 on swing high to $32.90. Bought 32 shares for $1043.20. Set sell stop at $25.40 ($.10 below January 6 swing low to $25.50). February 6: new 55 day high set at $33.30. Sell stop moved to $30.10 ($.10 below January 31 swing low to $30.20). Sell stop February 24 triggered at $30.10 x 32 =$963.20 -($20 + $1043.20) = ($100.00) net loss.

DRN (Daily Real Estate 3X Bull)

January 20: Buy stop triggered @ $56.03 on swing high to 55 day high at $56.70. Bought 19 shares for $1064.57. Set sell stop at $50.38 ($.10 below January 13 swing low to $50.48). 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. Sell stop February 21 triggered at $59.80 x 19 =$1136.20 -($20 + $1064.57) = $51.63 net gain.

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). February 22: new 55 day high set at $27.53. Sell stop moved to $26.48 ($.10 below February 15 swing low to $26.58). Sell stop February 21 triggered at $26.48 x 39 =$1032.72 -($20 + $999.57) = $13.15 net gain.

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). March 2: new 55 day high set at $26.36. Sell stop moved to $23.12 ($.10 below February 27 swing low of $23.12). Trade results reported in February.

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). February 29: new 55 day high set at $160.75. Sell stop moved to $148.70 ($.10 below February 10 swing low to $148.80. Remains open. March 9 closing price was $156.22.

January Trend Trade Summary

The market order strategy with no stops gained $1791.00 or (17.91%) for the month on $10,000 invested in 10 trades while the trend analysis method placing stops $.10 below the recent swing lows gained just $37.81 on $5,000 invested in 5 trades for (.756%) so far for the JAUARY collection. ONE open trade will bring a minimum $72.41 (1.207%) net gain for the six trades come April. We'll see if Mr. Market will sweeten the gain.

February Trend Trades

Six February trades were repeated from the January list: SOXL; RUSL; YINN; DRN; FAS; FBT. Results for FBT and DRN were reported on the January roster. The remaining four trades were held over to be reported below.

SOXL (Semiconductor 3X Bull)

January 18: Buy stop triggered @ $32.42 on swing high to $35.27. Bought 33 shares for $1069.86. Set sell stop at $29.83 ($.10 below January 13 swing low). February 17: new 55 day high set at $44.76. Sell stop moved to $37.96 ($.10 below February 13 swing low of $38.06). Sell stop triggered March 5 at $37.96 x 33 =$1252.68 -($20 + $1069.86) = $162.82 net gain.

RUSL (Russia 3X Bull)

January 17: Buy stop triggered @ $37.00 open. Bought 29 shares for $1073.00. Sell stop set at $33.92 ($.10 below January 13 swing low to $34.02). March 2: new 55 day high set at $60.46. Sell stop moved to $48.47. ($.10 below swing low to $48.57 of February 22.) Sell stop triggered March 6 at $48.47 x 29 =$1405.63 -($20 + $1073.00) = $312.63 net gain.

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). March 2: new 55 day high set at $26.36. Sell stop moved to $23.12 ($.10 below February 27 swing low to $23.22. Sell stop triggered March 6 at $23.12 x 50 =$1156.00 -($20 + $1010.00) = $126.00 net gain.

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). February 29: new 55 day high set at $95.00. Sell stop moved to $87.30 ($.10 below February 27 swing low of $87.40). Sell stop triggered March 6 at $87.30 x 13 =$1134.90 -($20 + $1010.49) = $104.41 net gain.

Five unrepeated trades set to go for February were:

USLV (3X Long Silver) February 6: Buy stop set @ $51.23 ($.10 above 20 day high). February 22 Buy stop triggered. Bought 21 shares at $51.23 =$1075.83. Sell stop set at $43.69. ($.10 below January 16 swing low of $43.79). February 29: new 55 day high set at $65.13. Sell stop moved to $47.72 ($.10 below February 29 low of $47.82). Sell stop triggered March 6 at $47.72 x 21 =$1002.12 -($20 + $1075.83) =($93.71) net loss.

URTY (Ultra Russell 2000 Index) February 6: Buy stop set @ $70.51 ($.10 above 20 day high) with closing price at $69.16. No Trade.

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. No Trade.

LBJ (3X Long Latin America) February 6: Buy stop set @ $106.66 ($.10 above 20 day high). February 7 Buy stop triggered. Bought 10 shares at $106.66 =$1066.60. Sell stop set at $89.72. ($.10 below January 30 swing low of $89.82). February 29: new 55 day high set at $112.24. Sell stop moved to $101.91 ($.10 below February 23 swing low of $102.01). Sell stop triggered March 6 at opening high $99.33 x 10 =$993.30 -($20 + $1066.60) =($93.30) net loss.

FBT (Biotech) February 6: Buy stop set @ $42.67 ($.10 above 20 day high) with closing price at $42.51. No Trade.

February Trend Trade Summary

The market order strategy with no stops gained $87.40 or (0.874%) for the month on $10,000 invested in 10 trades. Meanwhile, trend analysis method placing stops $.10 below the recent swing lows gained $521.35 on $6,000 invested in 6 trades for (8.69%) for the FEBRUARY collection.

March Trades in Place

The following March trades were set up with results to be reported in April. Furthermore one trade remained open from December, along with one from January. Those two open trade results will be reported along with the following ten which notably include three trades in funds previously described in February: RUSL; YINN; FAS; LBJ.

Here are the 10 trades for March:

GAZ (Natural Gas ETN) March 9: Buy stop set @ $6.32 ($.10 above 20 day high) with closing price at $5.29.

RUSL (Russia 3X Bull) March 9: Buy stop set @ $60.56. ($.10 above 20 day high) with closing price at $47.54

TYH (Technology 3X Bull) March 9: Buy stop set @ $58.50 ($.10 above 20 day high) with closing price at $57.34.

TQQQ (Ultra NASDAQ) March 9: Buy stop set @ $107.09 ($.10 above 20 day high) with closing price at $106.34.

VNM (Vietnam ETF) March 9: Buy stop set @ $21.15 ($.10 above 20 day high) with closing price at $20.14.

YCS (UltraShort Yen) March 9: Buy stop set @ $47.03 ($.10 above 20 day high) with closing price at $46.68.

YINN (China Market 3X Bull) March 9: Buy stop set @ $26.46 ($.10 above 20 day high) with closing price at $24.01.

FAS (Financial 3X Bull) March 9: Buy stop set @ $95.10 ($.10 above 20 day high) with closing price at $93.64.

UPRO (Ultra S&P 500) March 9: Buy stop set @ $26.46 ($.10 above 20 day high) with closing price at $78.49.

LBJ (3X Long Latin America) March 9: Buy stop set @ $112.52 ($.10 above 20 day high) with closing price at $100.36

The April Hot Hands report for March momentum will certainly elaborate on the market movements detected here. A bear may be loose in some quarters. Stay tuned.

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 Trades Part IX: Hot Hands ETFs Take Profits In February