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Since June 2011, this series of articles (designated by numerals I, II, III, IV, V, VI, VII, VIII, IX, X, XI, and XII) has reported results of a momentum ETF trading strategy called "Hot Hands" as taught by Courtney Smith.

Smith is an author, money manager, educator, and trading advocate, He has authored numerous books, made countless TV appearances, and spoken at hundreds of events. He 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. (Smith is not the blonde screen actress.)

Traded monthly, Hot Hands selected the strongest performing ETFs for investment. The momentum trades reported in this series intended to enter the market at the start of large market moves to the upside (or downside) to harvest gains. Hot Hands' trading in June was accomplished in three steps.

Step One

ETFs and ETNs were selected for purchase by going here. Finding the "Performance" sector (in a upper left tab on the ETF screen main page) revealed 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 500,000 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 the previous 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.

The VIX Index measuring expected market volatility and, being a range trading index that 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 the charts of 10 ETFs or ETNs from ETFScreen.com, ranked high to low, sorted by one-month returns as of April 4, 2012, May 4, 2012, June 8, 2012, and July 13, 2012. Notice one of the 10 ETFs listed in April (NYSEARCA:RUSS) repeated through to June. That is the kind of momentum this system seeks. Note, however, Russia Bear 3x Shares ETF for June was replaced by Russia Bull 3x Shares ETF for July. There goes the momentum in another direction.

Click to enlarge all images.

Step Two

Two investing strategies were tested. The market order strategy below reported results from an even number of shares purchased at a price closest to $500 or $1,000 for each of the 10 selected exchange traded funds. Thus, a conservative $5,000 or $10,000 was invested in the 10 funds selected as of June 8. The broker was acknowledged with a commission of $10 per trade deducted from every transaction completed July 13 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. 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 markets, some funds lingered in the top 10 for several months, as noted above.

When Smith's channel breakout (CB) 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 his trend analysis ((NYSE:TA)) approach, buy stops were set $0.10 above recent 20-day historic highs and sell stops $0.10 below most recent swing lows in price. An even number of shares totaling closest to $1,000 funded each CB or TA trade.

Conclusions Using Market Order Methodology in June

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 10 from $500 or $1,000 invested in each June 8 and sold as a group July 13 at market close. One profitable market order trade was made for the month. Nine were losers. A $5,000 investment resulted in a net loss of $899.68, or 17.99%. Similarly, the $10,000 investment resulted in a net loss of $1599.35, or 15.99%. That proved, once again, that more money invested resulted in relatively less money lost due to broker fees spread over a larger order.

Conclusions Using Trend Analysis Methodology Through June

May Carryover Trend Analysis Trade

The following trade was open from the May list and remains open as of July 13:

TMF (20+Yr Trs 3X Bull) May 8: Buy stop triggered at $67.65. Bought 15 shares = $1,014.75. Sell stop set at $62.86. Sell stops moved to $0.10 below most recent swing low whenever a new 20-day high was reached: $65 on May 11; $72.78 on May 30; and $76.26 on July 6. Remains open. July 13 closing price was $86.34.

June Trend Analysis Trading Actions

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

Here are the nine new trades for June:

NatGas Related Bear 2x (NYSEARCA:GASX) -- June 8: Buy stop set at $32.47 ($0.10 above 55-day high) with closing price at $26.50. No Trade.

Daily China Bear 3x (NYSEARCA:YANG) -- June 8: Buy stop set at $20.10 ($0.10 above 20-day high) with closing price at $16.38. No Trade.

Daily Gold Miners Bull 2x (NYSEARCA:NUGT) -- June 8: Buy stop set at $14.51 ($0.10 above 20-day high) with closing price at $12.37. No Trade.

Latin America 3X Bear (NYSE:LHB) -- June 8: Buy stop set at $19.60 ($0.10 above 55-day high) with closing price at $17.18. No Trade.

Financial 3X Bear (NYSEARCA:FAZ) -- June 8: Buy stop set at $31.10 ($0.10 above 55-day high) with closing price at $25.95. No Trade.

Russia 3X Bear (RUSS) -- June 8: Buy stop set at $46.06 ($0.10 above 55-day high) with closing price at $35.36. No Trade.

Agriculture 2X Short (NYSEARCA:AGA) -- June 13: Buy stop triggered at at $22.46. Bought 45 shares = $1,010.70. Sell stop set at $18.22 ($0.10 below most recent swing low). Closed. June 19 sell stop triggered at $19.22 x 45 shares = $864.90 - ($20 + $1010.70) = $165.80 net loss.

UltraShort MSCI Europe (NYSEARCA:EPV) -- June 8: Buy stop set at $49.57 ($0.10 above 55-day high) with closing price at $49.08. No Trade.

Technology 3X Bear (NYSEARCA:TECS) -- June 8: Buy stop set at $13.00 ($0.10 above 55-day high) with closing price at $11.05. No Trade. (Despite the fund manager changing the ticker symbol from TYP to TECS as of June 29.)

Annual Results

June marked the one-year anniversary of this series, so a month by month final annual reckoning of wins and losses is as follows:

Market Order Results

Since last July, $1,000 was invested in each fund of 10 selected for each trading date listed with a market order at the opening price that day. No more than $10,000 total was invested each month. The broker was acknowledged with a commission of $10 per trade deducted from every transaction completed at the closing price one month later to reveal net income for the market order method. From July 2011 to June 2012, the market order method resulted in a 34.44% net loss. However, for 2012 the market order method has a 9.55% gain since January.

Trend Analysis Results

Since last July, $1,000 was set aside to invest in each of 10 exchange traded funds selected monthly at buy stops set $0.10 above recent 20-day historic highs. After buys were triggered, sell stops were set $0.10 below most recent swing lows in price. These sell stops were then moved to $0.10 below the most recent swing low whenever a new 20-day high was reached. No more than $10,000 total was invested each month. Whenever a sell stop was triggered, a commission of $10 per trade was deducted from every transaction completed to reveal net income. From July 2011 to June 2012, the trend analysis method resulted in a 7.19% net loss. However, for 2012 the trend analysis method has a 12.54% gain since January.

July Trades in Place

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

Here are the nine new trades for July:

3X Long Nat Gas ETN (NYSEARCA:UGAZ) -- July 13: Buy stop set at $35.13 ($0.10 above 20-day high) with closing price at $29.55.

DB Agriculture Dbl Long ETN (NYSEARCA:DAG) -- July 13: Buy stop set at $13.58 ($0.10 above 20-day high) with closing price at $13.31.

Gold Miners Bear 2X Shrs (NYSEARCA:DUST) -- July 13: Buy stop set at $61.42 ($0.10 above 20-day high) with closing price at $53.97.

Real Estate Bull 3X Shrs (NYSEARCA:DRN) -- July 13: Buy stop set at $78.47 ($0.10 above 20-day high) with closing price at $78.07.

Coffee TR Sub-Idx ETN (NYSEARCA:JO) -- July 13: Buy stop set at $46.15 ($0.10 above 20-day high) with closing price at $44.91.

UltraPro Russell 2000 (NYSEARCA:URTY) -- July 13: Buy stop set at $65.24 ($0.10 above 20-day high) with closing price at $60.24.

Financial Bull 3X Shares (NYSEARCA:FAS) -- July 13: Buy stop set at $93.49 ($0.10 above 20-day high) with closing price at $90.27.

Sugar TR Sub-Idx ETN (NYSEARCA:SGG) -- July 13: Buy stop set at $86.77 ($0.10 above 20-day high) with closing price at $85.64.

Russia Bull 3x Shares ETF (NYSEARCA:RUSL) -- July 13: Buy stop set at $28.46 ($0.10 above 55-day high) with closing price at $25.29.

Hot Hands reports for July momentum will update the market movements detected here come August. Bulls are back everywhere but in gold. Will momentum return to produce gains on this bullish side? 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 XIII: Hot Hands ETFs Up 12.54%