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This series of (now eleven) articles has investigated a momentum ETF trading strategy called "Hot Hands" as taught by Courtney Smith. Courtney bears no resemblance to the blonde screen actress, except by name. He is an author, money manager, educator and trading advocate. 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 simultaneously. He's a busy guy.

Traded monthly, Hot Hands was created to select the strongest performing ETFs in which to invest. The momentum trades reported i this series all aimed to enter the market at the start of large market moves to the upside (or downside) to harvest gains. Hot Hands trading in April 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 3/2/12; 4/4/12; 5/4/12. Notice that three of the ten ETFs listed in March (tinted blue) were repeated in April and three new April listings carried through to May. Maybe it was time to cash in some winners.

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Step Two

Two investing strategies were tested. The market order strategy below reports results from an even number of shares purchased at a price closest to $500 or $1000 for each of the ten selected exchange traded funds. Thus a conservative $5,000 or $10,000 was invested in the ten funds selected as of April 4. The broker was acknowledged with a commission of $10 per trade deducted from every transaction to reveal net income in the scenarios below. Courtney has recommended investing no more than 1% of one's total investment portfolio in any single Hot Hand ETF or ETN. He does not recommend trading without stops as shown in the market order examples.

Step Three

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

When Courtney's channel breakout (cb) strategy was used, buy stops were set at $.10 above the 55-day historic high for each fund selected and sell stops set at $.10 below 20-day historic lows for each. When trades were made based on his trend analysis ((NYSE:TA)) approach, buy stops were set $.10 above recent 20-day historic highs and sell stops $.10 below most recent swing lows in price. An even number of shares totaling closest to $1000 funded each cb or ta trade

Conclusion Using Market Order Methodology in April

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 ($158.10) or (3.162%). Similarly, the $10,000 investment resulted in a net loss of ($116.20) or (1.162%). Proving once again that more money invested resulted in less money lost due to broker fees charged for losing trades.

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Conclusions Using Channel Breakout and Trend Analysis Methodology through April

April trades were set up and results were as reported below. Also one trade remained open from December, while one from January closed at a profit. The April list notably included three trades in funds previously described in February: RUSL; YINN; FAS; LBJ.

December Carryover Trade

The following trade was open from the December list and remains so.

ITB (US Home Construction Bull)

December 5: Buy stop triggered at $11.80. Bought 85 shares =$1003.00. Sell stop set at $11.39. Sell stops moved to $.10 below most recent swing low whenever a new 55 day high was reached: $12.90 on February 3; $13.11 on March 9; 13.90 on April 27.

Remains open. April 4 closing price was $15.58. (HOT HANDS Rank 12/1/11 results in a $113.11 pending profit from trend trade if $13.90 sell stop is triggered.)

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January Carryover Trade

The following trade was closed in April from the January list.

UDOW (Ultra Dow Index)

January 17: Buy stop triggered @ $140.76 opening. Bought 7 shares for $985.32. Sell stop set at $133.62 Sell stops moved to $.10 below most recent swing low whenever a new 55 day high was reached: $140.81 on February 3; 148.70 on February 29; $149.01 on March 16; $159.47 on April 2.

Closed. April 9: Sell stop triggered at $155.55 opening price = $1088.85 - ($20 + $985.32) = $83.53 net gain.

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March Carryover Trades

TYH (Technology 3X Bull)

March 15: Buy stop triggered @ $58.50 Bought 17 shares = $994.50. Set sell stop set at $53.40. Sell stops moved to $.10 below most recent swing low whenever a new 55-day high was reached: $62.35 on April 3.

Closed. April 10: Sell stop triggered at $62.35 = $1059.95 - ($20 + $994.50) = $47.14 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. Sell stops moved to $.10 below most recent swing low whenever a new 55-day high was reached: $81.89 on April 2.

Closed. April 9: Sell stop triggered at $81.89 = $1064.57 - ($20 + $1037.53) = $7.04 net gain.

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April Trades

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Here are the ten trades for April:

DUST (Gold Miner 2X Bear) April 5: Buy stop triggered @ $51.11. Bought 20 shares = $1,022.20. Set sell stop @ 38.76. Sell stops moved to $.10 below most recent swing low whenever a new 55-day high was reached: $43.76 on April 12; $46.57 on May 3. Remains open. May 4 closing price was $56.55.

KOLD (Ultrashort Natural Gas) April 9: Buy stop triggered @ $152.03. Bought 7 shares = $1,064.21. Set sell stop @ 137.21. Sell stops moved to $.10 below most recent swing low whenever a new 55-day high was reached: $152.90 on April 19.

Closed April 26: Sell triggered at $149.15 market opening =$1,044.05 -($20 + $1,064.21) = ($40.16) net loss.

TYH (Technology 3X Bull)

March 13: Buy stop triggered @ $58.50 Bought 17 shares = $994.50. Set sell stop at $53.40. Sell stops moved to $.10 below most recent swing low whenever a new 55-day high was reached: $62.35 on March 23;

Closed. April 10: Sell stop triggered at $62.35 = $1059.95 - ($20 + $994.50) = $45.45 net gain.

FAS (Financial 3X Bull) April 4: Buy stop set @ $113.59 ($.10 above 55-day high) with closing price at $105.50. No Trade.

TMV (20+yr Treasury 3X Bear) April 4: Buy stop set @ $87.38 ($.10 above 55-day high) with closing price at $80.56. No Trade.

RUSS (Russia 3X Bear) April 9: Buy stop triggered @ $23.69. Bought 44 shares = $1,042.36. Sell stop set @ $20.86. Sell stops moved to $.10 below most recent swing low whenever a new 55-day high was reached: $22.30 on May 3. Remains open. May 4 closing price was $28.80.

DRN (3X Real Estate Bull) April 25: Buy stop triggered @ $70.30. Bought 15 shares = $1,054.50. Sell stop set @ $69.60. Sell stops moved to $.10 below most recent swing low whenever a new 55-day high was reached: 65.60 on May 1. Remains open. May 4 closing price was $73.18.

BZQ (UltraShort Brazil) April 5: Buy stop triggered @ $14.91. Bought 68 shares = $1,013.88. Sell stop set @ $13.71. Sell stops moved to $.10 below most recent swing low whenever a new 55-day high was reached: $14.98 on April 23; $15.48 on May3. Remains open. May 4 closing price was $17.17.

URTY (Ultra Russell 2000) April 4: Buy stop set @ $74.00 ($.10 above 20-day high) with closing price at $66.99. No Trade.

UPRO (Ultra S&P 500) March 13: Buy stop triggered @ $79.81 Bought 13 shares = $1037.53. Sell stop set @ $73.06. Sell stops moved to $.10 below most recent swing low whenever a new 55-day high was reached: $81.05 on March 27; $81.89 on April 2.

Closed April 9: Sell triggered at $79.99 market opening =$1,039.87 -($20 + $1,037.53) = ($17.66) net loss.

April Trade Conclusions

Market order strategy with no stops made four profitable trades for the month. Six were losers. A $5000 investment resulted in a net loss of ($158.10) or (3.162%). Similarly, the $10,000 investment resulted in a net loss of ($116.20) or (1.162%). More money invested resulted in less money lost due to broker fees.

Trend analysis method placing stops $.10 below recent swing lows lost at most ($12.37) on $3,000 invested in three trades for (.4123%) with four trades still open within the April collection.

May Trades in Place

The following May trades were set up for results to be reported in June. One trade remains open from December. That open trade results will be reported along with the following six (with RUSS, BZQ, DUST, & DRN carried over).

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Here are the six new trades for May:

TMF (20+Yr Treasury 3X Bull) May 4: Buy stop set @ $67.65 ($.10 above 55-day high) with closing price at $66.26.

TYP (Technology 3X Bear) May 4: Buy stop set @ $10.37 ($.10 above 20-day high) with closing price at $10.00.

NIB (Cocoa TR Sub Idx) May 4: Buy stop set @ $32.20 ($.10 above 20-day high) with closing price at $31.08.

ERY (Energy 3X Bear) May 4: Buy stop set @ $11.46 ($.10 above 55-day high) with closing price at $11.08.

TZA (Small Cap 3X Bear) May 4: Buy stop set @ $20.98 ($.10 above 20-day high) with closing price at $19.81.

BUNT (German Bund Futures 3X Bull) May 4: Buy stop triggered @ $32.72. Bought 31 shares = $1,014.32. Sell stop set @ $31.24.

Hot Hands reports for June momentum will update the market movements detected here. Bears are apparently loose in Russia, Brazil, Gold, Technology, Energy & Small Caps. Do bulls really romp in Treasuries, Cocoa, & Germany?

June marks the one-year anniversary of this series so a month-by-month annual reckoning of wins and losses will be featured.

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 XI: Hot Hands ETFs In April