Market Timing 3x Bull ETFs

Summary

• Specter/FF5 makes a strong argument that equity markets can be timed.
• The market timing logic exposes potentially serious technical flaws in the structure of these products, resulting in absurdly large returns.
• It is unlikely that comparable strategies are not already in use.

Market Timing

Many investors, academics, and financial professionals believe it is impossible to time the market. Other investors, notably active traders, believe strongly in it. Thus, whether market timing is possible is a matter of opinion. What can be said with certainty is it is very difficult to time the market consistently over the long run successfully.

Gimli : Certainty of death. Small chance of success. What are we waiting for?

The Legend

The Specter/FF5 structure presents a serious challenge to the belief that it is impossible to time the market.

My two previous articles on FoxForce5 have shown performance results for a complex but relatively easy to understand trading strategy that determines favorable entry and exit points for most equities. The strategy is strong enough to beat long term buy and hold returns by something like 25% over long periods of time. That is (Strategy Return / Buy and Hold Return) = 1.25+. Data going back over 28 years confirm the persistence and consistency of the signals.

My articles have concentrated on returns over the last ten years or so. The strategy is at least as effective on individual stocks as equity ETFs. It is in the market about half the time and can go long or flat (at the close) several times a week. It can lag buy and hold during some periods, but in those cases, it generally makes less money rather than taking losses.

The current development stage can be characterized as advanced prototype. There is a clear and objective development path to improve performance.

Low self esteem is one issue I don't have relating to my work, so I hope the reader forgives me for saying that I think the strategy is world class. It won't get the active self directed investor/trader insanely wealthy, except perhaps for the particular equities that we will be discussing in this article.

Needless to say...

The accuracy of the numbers will eventually have to be verified.

I rewrote the logic engine after the Force to be Reckoned With article to see if it would produce the same results. Improved data manipulation vastly simplified the process, reduced coding complexity and the numbers remained the same. Can't say I won't be nervous while someone else looks at it though.

This and my previous article on 3x Bull ETFs use the new engine. Pivot tables have replaced the more code dependent reports that were used previously.

Nine Year Performance Summary

A drunkard's dream if I ever did see one.

Up on Cripple Creek - The Band

Created by the author with data from Norgate

The 1x ETFs (and $SOX) are sorted descending by strategy return which can be either green column. They are separated from the 3x ETFs which are sorted the same way.

Note that flat periods (the red columns) all had negative returns. The relation of $SOX with QQQ is interesting. QQQ did a little better with buy and hold, however the excess negative return $SOX took during the flat periods causes the long strategy results to do better with $SOX than QQQ.

It is easy to overlook the importance of that with the 1xs because the numbers don't look that wacky. The amplitude of that wiggle on the 3xs causes the ludicrous but apparently correct long strategy returns.

AI - A Computer Is Not Your BFF

This is a bit philosophical, but developers spend way too much effort on teaching computers to operate in a quasi human environment. A computer wants to know about your potential trades and look at charts with you about as much as it wants to know what happened on your prom date.

Try to treat the machine as an equal. Take the time to not confuse it with irrelevant information. Try to learn to speak it's language, it doesn't want to learn yours. You will both be happier in the end.

$SOX and TQQQ

Lucilla: This is a pleasant fiction, isn't it?

Gladiator

For mentally grasping outrageous returns, it helps to solve an equation for getting to $1 million dollars.

For TQQQ this would go:

85.25 * x = 1,000,000

x = 1,000,000 / 85.25 = 11,730.21

An initial investment of $11,731 in the Spectre/FF5 strategy with TQQQ would be worth $1,000,000 today.

I share the same math phobias with most Americans; the math in my articles might get to high school level now and then. A few months ago, I was surprised to learn trigonometry was about right triangles while watching a youtube... intriguing.

Solving for SOXL:

1,000,000 / 309.83 = 3,227.58

If, in 2011, you wanted to have $100,000,000 today, a $323,000 investment in playing Specter/FF5 on SOXL would have done nicely.

The Worst and Best Performers

You must choose, but choose wisely

Indiana Jones and the Lost Crusade

FAS - 3x Financial

He chose... poorly

Indiana Jones and the Lost Crusade

Created by the author with data from Norgate

The consequences of choosing poorly among the selections shown is not too unpleasant as that makes almost 11 times your initial investment. The table shows running totals of yearly returns. The green line is the long strategy return, the red is flat, and the blue is buy and hold. Note that buy and hold would have made a decent return if one had exited in early 2020.

Note that the running totals match the numbers for FAS above.

FAS with Specter/FF5 makes over twice what Specter/FF5 made on QQQ. 10.85 versus 5.24 (or 4.44 buy and hold). Worst performer is relative.

The Best Performer

SOXL - 3x Semiconductor

Created by the author with data from Norgate

That's how to make $100,000,000, almost looks like the foxes know what they are doing.

LABU - Botechnology

Originally I planned to look at performance over a 1250 day window, but then the 2500 day performance of SOXL would be ignored. LABU was also pretty cool though, so we can look at it here.

Created by the author with data from Norgate

This is an almost exact four year time slice, it starts at the close of 5/26/16.

This is what it looks like to more than double your money every year for four years.

Concluding Remarks

Now all the authorities, They just stand around and boast, How they blackmailed the sergeant-at-arms Into leaving his post, And picking up Angel who Just arrived here from the coast, Who looked so fine at first, But left looking just like a ghost

Just Like Tom Thumb's Blues, Bob Dylan

I don't have a big problem imagining that I'm the first person to notice this stuff, because my self esteem issues tend to error a few notches to the high side. However, it seems that these products are so seriously flawed, there are undoubtedly many ways to beat them. It definitely helps to have a decent timing system.

Anyway, I'm thinking of allocating a little capital. What's the worst that can happen?

Analyst’s Disclosure: I am/we are long QQQ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.