'Moneyball' May 2012 Update

by: The Ugly Truth

As per the original Moneyball article published here,

The Plan

  • $25,000 starting equity; split into 5 "streams" of approximately $5,000 each.
  • Will use mostly leveraged ETFs, midcaps, and a few well-known large caps.
  • Goal is to take 10% to 15% per trade and let the money "compound" by repeating the same process with another stock.

I can't really take credit for being mostly in cash and holding short ETFs as per my previous Moneyball article. Aside from our system showing up with mostly "short" candidates, I knew I was going to be traveling for an extended period of time with limited access to the internet. I didn't think it would be prudent to have an open positions that you could not watch.

Hence, we were pretty much out of the market from April to May; our portfolio currently holds the following (plus a $15.35 in cash)...

The portfolio is up 36% YTD; Apple (NASDAQ:AAPL) started the year at $411.23 and was at $580.32 or up 41% YTD. Sadly, our portfolio did not outperform Apple in absolute terms. However, after 6 months of testing this system live, there are a few things I could improve on and may help you guys out as well.

As per my original article, I wrote that testing this system "live" posed some challenges; they were...

The challenge of this approach

  • Backtesting would be near impossible as it is not a pure mechanical entry and exit system.
  • Managing "greed" and "fear" - letting profits ride and selling at a predetermined stop level may be easier said than done!
  • No "fundamental" analysis done (except for the parameters used in our screener). It sure will be a challenge buying or selling stocks that we have a bias on [e.g. Research in Motion (RIMM)].
  • The timing of the article being published (may not be timely).
  • I'm stepping out of my "comfort zone" by buying/shorting more than three stocks that I may not know anything about in detail! My simple mind may be too lazy to follow the plan!

Given that I was a hardcore fundamental guy who usually went "all in" or "scaled" into trading ideas, I am struggling with my own self imposed rules...

  • I'm still struggling with my intended discipline to sell my gains when they hit my predetermined gain of 10% to 15%. Selling Direxion Financial Bull (NYSEARCA:FAS), Direxion Energy Bull (NYSEARCA:ERX), and Melco Entertainment (MPEL) after they hit the 10% gain was mentally challenging for me to say the least!
  • I'm still "free styling" too much...like picking up Facebook (NASDAQ:FB), Apple and Velocity Inverse (NASDAQ:XIV) BEFORE the system triggers a buy. The system did trigger a buy on Velocity Inverse and Apple (AAPL) but not Facebook as it failed the required rule of having at least one years' worth of price and volume data (and I knew that!).
  • I'm still not following my own allocation rules of $5,000 per trade.

In a nutshell, while I am happy with the results, I am not pleased with how I've gone about in testing the robustness of the strategy. I certainly don't want anyone to have the impression that the returns were purely system based. I am, however, happy with the signals (long or short) and will therefore continue the "live" experiment till the end of the year.

Update as of June 11, 2012: sold all positions for minimal gains; still holding Apple leaps.

Good trading to all.

Disclosure: I am long AAPL.