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<< Return to Part IX

This tenth article continues a series that investigates the momentum ETF trading strategy called "Hot Hands" as taught by Courtney Smith. Trader, author, money manager, educator, and trading advocate, Smith 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. Smith is unique in having a high ranked mutual fund, stock picking newsletter, futures newsletter, and hedge fund simultaneously. He's a busy guy.

To select and invest in the strongest performing ETFs, Hot Hands was traded monthly. Momentum trades reported aimed to enter the market at the start of large market moves to the upside (or downside) to make gains. Hot Hands trading was accomplished in three steps.

Hot Hands' Three Steps

Step One

ETFs were selected for purchase by going here. Finding the "Performance" sector (in a upper left tab on the ETF Screen main page) was a list of ETFs.

Filters were used at the top of the ETF Performance list to include short funds and, if so chosen, leveraged funds. Leveraged funds were optional to multiply potential rewards and risks in a fund by two or three times. The volume filter was used to choose funds trading in volumes over one million or over five hundred thousand shares. After making the selection of fund types and volume, clicking on the "update page button" updated the page.

The downward pointing arrow on the column labeled Rtn-1mo at the top of the Performance list of ETFs and ETNs was clicked to arrange the list so that all the exchange traded funds were ranked from high to low by last month's returns. Upon generating the list, useless titles were removed including VIX funds, unintelligible titles, and funds based on similar assets. The aim was to create a well-diversified list.

Note: The VIX Index measuring expected market volatility and, being a range trading index which does not trend, was not deemed appropriate for momentum trading. If the title of the fund was unintelligible it was discarded. Also funds with underlying assets identical or similar to a fund already chosen, platinum, gold, or silver, for example were narrowed to one with the highest monthly ranking.

The lists below show examples of charts of 10 ETFs from ETFScreen.com, ranked high to low, sorted by one month returns as of 2/6/12; 3/2/12; 4/4/12. Notice that four of the ten ETFs listed in February were repeated in March and three of the March listings carried through to April, along with one from February. Hopefully it was time to cash in some winners.

Click images to enlarge.

Step Two

ETFs were purchased based on how much was invested. A conservative $5,000 or $10,000 was invested in the ten funds selected as of March 2. The market order example below reports results from an even number of shares purchased at a price closest to $500 or $1,000 for each of the ten selected exchange traded funds. The broker was acknowledged with a commission of $10 per trade deducted from every transaction to reveal net income in the scenarios below. Smith has recommended investing no more than 1% of one's total investment portfolio in any single Hot Hand ETF or ETN.

Step Three

Using the market order method at least one month passed before selected funds were sold in favor of newly selected incoming strong performing funds as ranked by the ETF Screen website. In the current less volatile markets, funds have lingered in the top ten for several months as noted above.

When a channel breakout strategy was used, buy stops were set at $0.10 above the 55 day historic high for each fund selected and sell stops set at $0.10 below 20 day historic lows for each. When trades were made based on trend analysis, buy stops were set $0.10 above recent 20 day historic highs and sell stops $0.10 below most recent swing lows in price.

Conclusion Using Market Order Methodology in March

Preferred trading frequency was monthly. However, when one ETF was running strong momentum trading let profits run. The following chart shows price gains (losses) for the top ten from $500 or $1000 invested in each March 9 and sold as a group April 4 at market close. Four made profitable trades for the month. Six were losers. A $5000 investment resulted in a net loss of ($288.04) or (5.76%). Similarly, the $10,000 investment resulted in a net loss of ($376.07) or (3.76%). Proving once again that more money invested resulted in relatively less money lost.

Conclusions Using Channel Breakout and Trend Analysis Methodology through March

March trades were set up and results were as reported below. Also one trade remained open from December, along with one from January. The March list notably included trades in funds previously described in February: RUSL; YINN; FAS; LBJ. Graphs are from ProRealTime.

December Carryover Trade

The following trade was open from the December list.

ITB (US Home Construction Bull)

December 5: Buy stop triggered at $11.80. Bought 85 shares =$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).

March 16: New 55 day high of 15.44. Sell stop remains at $13.11. Remains open. April 4 closing price was $161.21.

January Carryover Trade

The following trade was open from the January list.

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).

April 2: Sell stop moved to $159.47 ($.10 below March 29 swing low to $159.57.

March 16: New 55 day high of 169.80. Sell stop remains at $159.47. Remains open. April 4 closing price was $161.21.

March Trades

GAZ (Natural Gas ETN)

March 19: Buy stop triggered @ $6.32. Bought 189 shares = $1194.48. Set sell stop at

March 20: Sell triggered at $4.96 =$937.44 -($20 + $1194.48) = ($277.04) net loss.

RUSL (Russia 3X Bull) March 9: Buy stop set @ $60.56. ($.10 above 20 day high) with closing price at $47.54. No Trade.

TYH (Technology 3X Bull)

March 15: Buy stop triggered @ $58.50 Bought 17 shares = $994.50. Set sell stop at $53.40 ($.10 below March 5 swing low of $53.59).

April 3: New 55 day high of 68.50. Sell stop reset at $62.35 ($.10 below March 23 swing low of $62.45). Remains open. April 4 closing price was $64.34.

TQQQ (Ultra NASDAQ)

March 13: Buy stop triggered @ $107.09. Bought 9 shares = $963.81. Set sell stop at $97.84 ($.10 below March 6 swing low of $97.95).

April 3: New 55 day high of $124.97. Sell stop reset at $117.67 ($.10 below March 23 swing low of $117.77).

April 4: Sell triggered at $117.67 =$1059.03 -($20 + $963.81) = $75.22 net gain.

VNM (Vietnam ETF) March 9: Buy stop set @ $21.15 ($.10 above 20 day high) with closing price at $20.14. No Trade.

YCS (UltraShort Yen)

March 13: Buy stop triggered @ $47.03 Bought 21 shares = $987.63. Set sell stop at $44.56 ($.10 below March 6 swing low of $44.66).

March 21: New 55 day high of $48.46. Sell stop reset at $47.44 ($.10 below March 16 swing low of $47.54).

March 22: Sell triggered at $47.26 market opening =$992.46 -($20 + $987.63) = ($15.17) net loss.

YINN (China Market 3X Bull)

March 13: Buy stop set @ $26.46 ($.10 above 20 day high) with closing price at $24.01. No Trade.

FAS (Financial 3X Bull)

March 13: Buy stop triggered @ $95.10 Bought 11 shares = $1046.10. Set sell stop at $85.52 ($.10 below March 6 swing low of $86.62).

March 27: New 55 day high of $113.49. Sell stop reset at $104.20 ($.10 below March 23 swing low of $104.30).

April 4: Sell triggered at $104.20 =$1146.20 -($20 + $1046.10) = $80.10 net gain.

UPRO (Ultra S&P 500)

March 13: Buy stop triggered @ $79.81 Bought 13 shares = $1037.53. Set sell stop at $73.06 ($.10 below March 6 swing low of $73.16).

April 2: New 55 day high of $87.61 reached. Sell stop reset at $81.89 ($.10 below March 29 swing low of $81.99). Remains open. April 4 closing price was $83.38.

LBJ (3X Long Latin America) March 9: Buy stop set @ $112.52 ($.10 above 20 day high) with closing price at $100.36. No Trade.

March Trade Conclusions

Market order strategy with no stops lost ($375.79) or (3.376%) for the month on $10,000 invested in 10 trades.

Trend analysis method placing stops $.10 below recent swing lows lost at most ($82.76) on $6,000 invested in 6 trades for (1.379%) with two trades still open within the March collection. A GAZ spike March 19 followed by a precipitous drop March 20 triggered most of the loss.

April Trades in Place

The following April trades were set up for results to be reported in May. One trade remains open from December, along with one from January. Those open trade results will be reported along with the following ten (with TYH & UPRO carried over).

Here are the ten trades for April:

DUST (Gold Miner 2X Bear) April 4: Buy stop set @ $51.11 ($.10 above 55 day high) with closing price at $49.21.

KOLD (Ultra Short Natural Gas) April 4: Buy stop set @ $152.03. ($.10 above 55 day high) with closing price at $145.12

TYH (Technology 3X Bull) March 15: Buy stop triggered @ $58.50 Bought 17 shares = $994.50. Set sell stop at $53.40 ($.10 below March 5 swing low of $53.59). April 3: New 55 day high of 68.50. Sell stop reset at $62.35 ($.10 below March 23 swing low of $62.45). Remains open. April 4 closing price was $64.34.

FAS (Financial 3X Bull) April 4: Buy stop set @ $113.59 ($.10 above 55 day high) with closing price at $105.50.

TMV (20+yr Treasury 3X Bear) April 4: Buy stop set @ $87.38 ($.10 above 55 day high) with closing price at $80.56.

RUSS (Russia 3X Bear) April 4: Buy stop set @ $23.69 ($.10 above 20 day high) with closing price at $22.56.

DRN (3X Real Estate Bull) April 4: Buy stop set @ $70.30 ($.10 above 55 day high) with closing price at $66.87

BZQ (Ultra Short Brazil) April 4: Buy stop set @ $14.91 ($.10 above 20 day high) with closing price at $14.73.

URTY (Ultra Russell 2000) April 4: Buy stop set @ $74.00 ($.10 above 20 day high) with closing price at $66.99.

UPRO (Ultra S&P 500) March 13: Buy stop triggered @ $79.81 Bought 13 shares = $1037.53. Set sell stop at $73.06 ($.10 below March 6 swing low of $73.16). April 2: New 55 day high of $87.61 reached. Sell stop reset at $81.89 ($.10 below March 29 swing low of $81.99). Remains open. April 4 closing price was $83.38.

Hot Hands reports for May momentum will update the market movements detected here. Bears are apparently loose in Gold, Gas, Treasuries, Russia, and Brazil. Do bulls really romp in technology, financial, real rstate, Russell 2000, and S&P 500 markets? 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. Unless stated otherwise, 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 X: 'Hot Hands' ETFs Gassed In March