Seeking Alpha
Dividend investing, growth, momentum
Profile| Send Message| ()  

It's been almost one full year of reports in this series. This makes the twelfth monthly installment of articles that investigated a momentum ETF trading strategy called "Hot Hands" as taught by Courtney Smith.

Courtney is not the blonde screen actress. He is an author, money manager, educator and trading advocate. He has authored numerous books, made countless TV appearances 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 and a dedicated teacher.

Traded monthly, Hot Hands was created to select the strongest performing ETFs in which to invest. The momentum trades reported in 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 May 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 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 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 the one with a higher 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 4/4/12; 5/4/12; 6/8/12. Notice one of the ten ETFs listed in April [RUSS] repeated through to June. That's the kind of momentum this system seeks.

(click to enlarge)

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 May 4. The broker was acknowledged with a commission of $10 per trade deducted from every transaction completed June 4 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 also 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 (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 May

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 May 4 and sold as a group June 4 at market close. Seven made profitable trades for the month. Three were losers. A $5000 investment resulted in a net gain of $490.47 or 9.8%. Similarly, the $10,000 investment resulted in a net gain of $1180.94 or 11.8%. This proves once again that more money invested resulted in more money gained due to broker fees spread over a larger order.

(click to enlarge)

Conclusions Using Channel Breakout and Trend Analysis Methodology through May

May trades were set up, and results were as reported below. Also one trade, ITB (ITB), remained open from December and closed at a profit. The May list notably included four trades in funds previously described in April with closings prices reported on that list: RUSS (RUSS); BZQ (BZQ); FAS (FAS); LBJ (LBJ).

December Carryover Trade

The following trade was open from the December list and closed May 31.

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; $15.30 on May 2.

Closed. May 17 sell stop triggered at $15.30 x 85 shares = $1300.50 - ($20 + 1003.00) = $277.50 net gain.

(click to enlarge)

April Carryover Trades

The following four trades were open from the April list and closed in May and June.

Gold Miner 2X Bear (DUST) 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 23; $46.57 on May 3; $56.56 on May 14.

Closed. May 22 sell stop triggered at $56.56 x 20 shares = $1131.20 - ($20 + $1,022.20) = $89.00 net gain.

Russia 3X Bear (RUSS) 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; 29.11 on May 14 $36.54 on May 31.

Closed. June 7 sell stop triggered at $36.54 x 44 shares = $1607.76 - ($20 + $1,042.36) = $545.40 net gain.

3X Real Estate Bull (DRN) 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 April 25; $72.35 on May 1.

Closed. May 7 sell stop triggered at $72.35 x 15 shares = $1085.25 - ($20 + $1054.50) = $10.75 net gain.

UltraShort Brazil (BZQ) April 10: Buy stop triggered @ $61.82. Bought 17 shares = $1,050.94. Sell stop set @ $55.06. Sell stops moved to $.10 below most recent swing low whenever a new 55 day high was reached: $62.22 on April 23; $63.10 on May 3; $82.76 on May 23.

Closed. May 29 sell stop triggered at $82.76 x 17 shares = $1406.92 - ($20 + $1050.94) = $335.98 net gain.

(click to enlarge)

May Trading Actions

The following May trades were set up for results to be reported now.

(click to enlarge)

Here were the six new trades for May:

20+Yr Trs 3X Bull (TMF) May 8: Buy stop triggered @ $67.65. Bought 15 shares = $1,014.75. Sell stop set @ $62.86. Sell stops moved to $.10 below most recent swing low whenever a new 55 day high was reached: $65 on May 11; $72.78 on May 30. Remains open. June 8 closing price was $78.63.

Technology 3X Bear (TYP) May 8: Buy stop triggered @ $10.37. Bought 100 shares = $1,037.00. Sell stop set @ $8.77. Sell stops moved to $.10 below most recent swing low whenever a new 55 day high was reached: $9.95 on May 17; $10.91 on June 1.

Closed. June 7 sell stop triggered at $10.91 x 100 shares = $1091.00 - ($20 + $1050.94) = $34.00 net gain.

Cocoa TR Sub Idx (NIB) May 4: Buy stop set @ $11.46 ($.10 above 20 day high) with closing price at $31.08. No Trade.

Energy 3X Bear (ERY) May 7: Buy stop set @ $11.46 Bought 90 shares = $1,031.40. Sell stop set @ $9.19. Sell stops moved to $.10 below most recent swing low whenever a new 55 day high was reached: $10.85 on May 14; $11.67 on May 31. Remains open. June 8 closing price was $12.67.

Small Cap 3X Bear (TZA) May 17: Buy stop triggered @ $20.98. Bought 50 shares = $1,049.00. Sell stop set @ $19.32. Sell stops moved to $.10 below most recent swing low whenever a new 55 day high was reached: $20.32 on June 1.

Closed. June 7 sell stop triggered at $20.32 x 50 shares = $1016.00 - ($20 + $1049.00) = ($53.00) net loss.

German Bund Futures 3X Bull (BUNT) May 4: Buy stop triggered @ $32.72. Bought 31 shares = $1,014.32. Sell stop set @ $31.24. Sell stops moved to $.10 below most recent swing low whenever a new 55 day high was reached: $32.79 on May 14; $33.01 on May 23; $33.04 on June 4.

Closed. June 7 sell stop triggered at $33.04 x 31 shares = $1024.24 - ($20 + $1014.32) = ($10.08) net loss.

May Trade Conclusions

Market order strategy as reported above with no stops made seven profitable trades for the month. Three were losers. A $5000 investment resulted in a net gain of $490.47 or 9.8%. Similarly, the $10,000 investment resulted in a net gain of $1180.94 or 11.8%.

Trend analysis method placing stops $.10 below recent swing lows resulted in at least a $26.77 net gain on $5,000 invested in five trades or .5354% plus an additional four trade gains of $881.69 on $4k invested for 22.04% reported as April carry over trades.

June Trades in Place

The following June trades were set up for results to be reported in July (with TMF carried over).

(click to enlarge)


Here are the nine new trades for June:

NatGas Related Bear 2x (GASX) June 8: Buy stop set @ $32.47 ($.10 above 55 day high) with closing price at $26.50.

Daily China Bear 3x (YANG) June 8: Buy stop set @ $20.10 ($.10 above 20 day high) with closing price at $16.38.

Daily Gold Miners Bull 2x (NUGT) June 8: Buy stop set @ $14.51 ($.10 above 20 day high) with closing price at $12.37.

Latin America 3X Bear (LHB) June 8: Buy stop set @ $19.60 ($.10 above 55 day high) with closing price at $17.18.

Financial 3X Bear (FAZ) June 8: Buy stop set @ $31.10 ($.10 above 55 day high) with closing price at $25.95.

Russia 3X Bear (RUSS) June 8: Buy stop set @ $46.06 ($.10 above 55 day high) with closing price at $35.36.

Agriculture 2X Short (AGA) June 8: Buy stop set @ $22.46 ($.10 above 55 day high) with closing price at $22.19.

UltraShort MSCI Europe (EPV) June 8: Buy stop set @ $49.57 ($.10 above 55 day high) with closing price at $49.08.

Technology 3X Bear (TYP) June 8: Buy stop set @ $13.00 ($.10 above 55 day high) with closing price at $11.05.

Hot Hands reports for June momentum will update the market movements detected here. Bears are apparently loose everywhere but Gold. Will bulls ever return to the market place?

Preliminary Annual Results

June marked the one year anniversary of this series, so a month by month annual reckoning of wins and losses is here. Unfortunately the June tally won't be complete until after July 1. So final reckoning will be posted next month. Meanwhile, here's where the market order vs trend analysis score stands for now:

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 XII: Hot Hands ETFs In May