We skipped the light fandango, Turned cartwheels 'cross the floor, I was feeling kinda seasick, But the crowd called out for more… A Whiter Shade of Pale - Procol Harum
My research is based on the theory that price movement is best explained by finite states instead of continuous time. Finite state theory as applied to equity markets is not well known or understood, probably because the concept is original. This series of articles offers objective proof that finite states are indeed important and it behooves an investor to pay attention to them.
Turn $1 Into $2500 in 10 years was the latest of a series of articles that have demonstrated how a properly constructed logical engine can consistently identify favorable and unfavorable market conditions.
The article showed that Specter/FF5 with Trend Following allowed an investor to double their capital many times during a 10 year period. SOXL was able to double more than an astounding 11 times in less than 10 years.
How much time it takes to double your money is the single most important financial metric. Consistently doubling your money every year is considered impossible. My research has shown that this achievement is possible when using Specter/FF5 buy signals with the 3x Bulls.
The column LCC shows the natural log of the total daily return when the strategies are long. The simplest way to get compound yearly return is to divide the LCC numbers by 10. If the result of the division is .69 or greater, money is at least doubling every year. Note that this is the case with SOXL and TQQQ. Note that the other returns are quite considerable, a compound annual return of over natural log .45 with TNA is the lowest, that converts (EXP Function) to a 57% average annual return.
This article discusses a significant enhancement to this strategy. FNGU and LABU will be included in the symbol universe. FNGU was created relatively recently, so the time frame analyzed will be a little less than two years.
These strategies are designed for a 401(k). Mostly because a taxable account would have tax and paperwork issues that I would rather not consider.
Of course, you don't want to commit a lot of money, as a percent of your account, to these strategies. In any case, back office issues mean that money from selling a position that is held overnight will not be available for trading until the next day.
That means that all your cash cannot be 100% committed at any one time even if you are crazy enough to want to do that. Accounting for the cash component might lower the theoretical return numbers; but at some point, those arguments can get anal retentive.
3xWushu is a trading style where the trader goes long the 3x Bull on Specter/FF5 buy signals and long the 3x Bear on Specter/FF5 flat signals. In normal equity trading, the semi-rational trader generally goes flat in unfavorable situations. Equities have a clear upside bias. Finding yourself flat in a rising market is punishment enough for most traders, having a short position adds injury to insult.
"... man will resign himself each day to new abominations ... " Jorge Luis Borges
I've written some unflattering things about 3x Bears in the past, and was probably being too nice. Buy and hold returns for the 3x Bull and Bears for about 10 years are shown below:
SDOW is the best performing 3x bear for the period. Every $ invested in a position taken in SDOW at the start date would be worth slightly over one half cent today.
The 3x Bulls on the other hand have done OK with buy and hold. Keep in mind though, that the numbers look much better than they would have in mid-March.
The buy and hold numbers for approximately the last 2 years are shown below. We can now add LABU and FNGU to the mix.
The 3x Bear numbers are the disaster we've come to expect, but the 3x Bull numbers are not that good either. FNGU, TQQQ, and SOXL did OK. Note TQQQ manages to double in the two years while FNGU almost triples. SOXL shows, as they say in horse racing.
Since the 3x Bears perform in an opposite manner to 3x Bulls, it makes sense to see how they perform with respect to the signals produced by Specter/FF5. In this case, a flat signal for a 3x Bull is a long signal for a 3x Bear.
All of the 3x Bears more than double the initial investment in less than two years if they are purchased during the 188 days of Specter/FF5/noTF flat periods.
Showing any possibility of profit with 3x Bears for a reasonable length of time is probably a unique achievement, but these numbers are questionable. This is not because of the usual dubious statistical platitudes, but for objective, concrete factors.
The negative numbers in all the CO columns strongly suggest holding overnight should be avoided. The OC (Open to Close) returns can be derived by subtracting CO from LCC. For example, FNGD OC is:
LCC - CO = OC. 1.13 - (-1.64) = 2.77
A 2.77 natural log means each invested dollar is now worth $16.
Maybe if Adam and Eve somehow avoided eating the apple such things could happen. My research suggests that stronger return performance is directly associated with CO and HLd strength. I don't think the chachams of finance have figured that out yet, not to mention HLd.
The negative COs are accompanied by negative numbers in all the HLd columns. Weakness in CO and HLd is showing that these are not safe places to take a position.
Much of the CO weakness in 3x Bears perhaps can be explained by extra CO strength in 3x Bulls. A kind of Yin Yang effect.
The weird CO numbers probably expose a clear structural defect of the product. I'm still wondering how good the SEC due diligence was in approving these in 2006. Anyway, the statute of limitations has expired. Maybe it was sort of a paid 3 year vacation for the participants. Hopefully goofing off during financial projects isn't a major crime; otherwise I'd be on the 10 most wanted list.
Each of those components is explained in detail in my previous articles. The 2500x article is a convenient place to find links.
"You don't need a weatherman to know which way the wind blows." Subterranean Homesick Blues - Bob Dylan
3x Bulls have two major states based on whether the position for a day is long or flat. If the 3x Bulls are flat, the 3x Bears are long. Since the major state is stored as a single code, L indicates the 3x Bulls are long, and S indicates that the 3x Bears are long.
A 3x Bull can be paired with any 3x Bear but we will just consider the natural pairings here.
One of the many cool features of natural logs is that SCC + LCC has the same effect as $SCC * $LCC. Even though $SCC is "only" 5.10 for FNGD, that gets multiplied by 38.62 assuming always reinvesting your whole stash every time.
For FNGU/FNGD the current value of each $ invested is $196.84. Doubling your money 7 times in a row would give you $128 for each $ invested, $256 is 8 doubling times in a row. The $196.84 is doubling your money about every 3.x months.
Note that the weakest combination TNA/TZA made $16.57. That's an easy one, the pokey puppy is only doubling its money every 6 months.
"A dimension is a terrible thing to waste." The author
It's pretty funny when you think about it. When colors were introduced to monitors as a byproduct of the PC introduction, the general idea was to make things look better, like a color TV does compared to black and white. That seemed to define what colors were good for.
An example of the power of colors is the traffic signal.
Traffic lights, traffic signals, ... are signalling devices positioned at road intersections, pedestrian crossings, and other locations to control flows of traffic.
The most common form is that red and green define a two state system, with yellow warning of an imminent state transition. Then there are various possible combinations; flashing, two on at the same time, etc.
Everybody understands this, it is a universal finite state language based on colors.
These rules can be incorporated into performance analysis. They can also be tuned to show detail important to the individual investor.
The optimum result is colored green. The worst result is colored red. Green and Red should have some clear logical relationship. I define Green as the long period makes a profit and the flat periods make 0 or below. Red is the long period loses and the flat periods are profitable.
Yellow would be everything else in a three color setup. I split yellow into blue and yellow. Blue means both the long and the flat periods made a profit and the long period made more. Yellow means both periods made a profit and the long period made less, or the long period had a loss.
There is only one day available in September 2018 and I don't get paid enough to color the first FNGU line, never said I was perfect.
This is complicated information but it is easy to see that the only truly annoying period was February 2019. It can be seen the FNGU is clearly quite playable on its own. There aren't any really irritating things happening except, ironically, for this month which is colored blue.
Note that blue on one side tends to be paired with yellow on the other. Greens tend to be paired with greens and reds with reds.
The extra risk taken on by FNGD is easy to see with the predominance of yellows. However, major wins tend to overwhelm the relatively minor losses.
I'm beginning to think that my articles have presented overwhelming evidence that data driven finite state analysis is an effective and unique way of looking at equity price movements.
This article was written by
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in FNGU over the next 72 hours. 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.