Update To XLE Trade

The signal on Aug 8 to buy the XLE resulted in a loss as the XLE dropped from 69.35 to 67.20, a 3.1 % loss. The position would've been closed on Tuesday after the two week holding period.

Updated Indicator Test

I just reanalyzed the relation between the XLE 0.1 ema and the SPY 10 days later for the period 4/20/04 to 8/21/07 (today is the 23rd). I also analyzed the 20 day after SPY results.



The 10 day correlation is -.27. The 20 day correlation is -.32. These are quite high and encouraging.



There also was a perfectly monotonically increasing return 10 days later in the SPY as the XLE 10 day e.m.a. decreased, and a fairly good increasing return 20 days later:



XLE 0.1 ema ----------------------SPY 10 days later----SPY 20 days later


< -.56 ____________________ 1.45 %____________2.98%

< -.44 & > -.56 ______________1.06 % ____________1.80%

< -.31 & > -.44 ______________0.97 % _____________2.01%

.14 & > -.31 ________________ 0.86 %_____________1.39%

< .45 & > .14 _______________ -0.04 %_____________0.12%

< .53 & > .45 _______________-0.24 %_____________0.69%

< .62 & > .53 _______________ -0.39 %____________-0.28%

> .62 ____________________-0.49 %____________-1.27%

Average 10 day SPY return 0.4 %. Average 20 day return 0.8 %.


As of today's close, the XLE 0.1 ema is 0.01 so we are slightly positive (by interpolation).

XLE Buy Signal

My oil stock indicator will flash a buy on the close today (its now 1:50 PM EST). In the past four years, the XLE gained 2.7% over the next two weeks after a buy signal, which is above the 1.0% average return - a 1.7% above average return!

The Buyback Letter (by David Fried) has a few oil stocks in its portfolio:
* Valero (VLO)
* Marathon (MRO)
* Nabors (NBR)
* Exxon (XOM)
* Royal Dutch Shell (RDSA)
* Sunoco (SUN)

McDep says Chevron(CVX) and Conoco(COP) are good values, as are the two giant Russian companies Gazprom and Lukoil.

I'll go with recently underperforming MRO.

Updated Option Article Through Bear Market

http://faculty.london.edu/mchernov/Papers/BCJ2.pdf

Note especially table 1 on page 9.

It turns out that returns on index put options are also quite negative if we include the bear market from 2000 to 2003

Options Are Overpriced

I just skimmed a good study on options: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=424384


A Portfolio Perspective on Option Pricing Anomalies
JOOST DRIESSEN University of Amsterdam Business SchoolPASCAL J. MAENHOUT INSEAD - Finance
October 2004AFA 2004 San Diego Meetings; EFA 2003 Annual Conference Paper No. 916

Abstract: We empirically study the economic benefits of giving investors access to index options in the context of the standard asset allocation problem. We analyze both expected-utility and non-expected-utility investors in order to understand who optimally buys and sells in option markets. We solve the portfolio problem with a flexible empirical methodology that does not rely on specific assumptions about the process of the underlying equity index. Using data on S&P 500 index options (1987-2001) we consider returns on OTM put options and ATM straddles. CRRA investors find it always optimal to short put options and straddles, regardless of their risk aversion. The option positions are economically and statistically significant and robust to corrections for transaction costs, margin requirements, and Peso problems. Surprisingly, loss-averse and disappointment-averse investors also optimally hold short positions in puts and straddles. Because derivatives are in zero net supply, this suggests that generating empirically relevant option prices in an equilibrium model is a challenging task, even with investor heterogeneity and even with commonly-studied behavioral preferences. Only when loss aversion is combined with highly distorted probability assessments, can we obtain positive portfolio weights for puts and straddles.

A Study on XLE

My first study compares 20 day changes in the market (SPY) and oil (using the oil ETF XLE) with subsequent changes in the market 5/17/04 to 3/16/07 (713 days). My results:

All periods 20 day average SPY price change : 0.86%

Subsequent SPY 20 day return
XLE outperforms SPY over 20 days by 5%: 0.22%
SPY outperforms XLE " " " 5%: 2.49%
Both are up " " " > 5%: 1.05%
Both are down " " " > 5%: 2.51% (small sample of four)
Both are down > 3%: 2.28%
SPY up > 3% and XLE up 4% more than SPY: -0.4%

These findings confirm and extend Steenbarger's results to a 20 day period. (see his column http://traderfeed.blogspot.com/2007/01/xle-when-energy-sector-spyders-are.html)

Trades and Rationales

The market was up handesomely today, and I swept out the system trade stocks a half day early to get the jump on any other system traders.

Sold

CHB $10.68 The one week hold was almost over and the stock was up large today.
GERN $7.41 This my baby was up 5 days in a row, and yet was still below its 200 dma.
RSC $17.37 A good rebound for this illiquid stock, also due out tomorrow morning.

Bought

CKFR 500 @ $34.13 One week rebound play for this Buyback Newsletter stock
EML 500 @ $26.725 Ibid, only this most actives plunger dropped 5% more immediately after
purchase, so its already underwater.

Mark Hulbert

Mark Hulbert recently pointed out that newsletter sentiment is not bullish, despite the market recovery, and that this bodes well for prices. He is a wise and hard working analyst, and I subscribe to his "Hulbert's Digest" and read his columns in MarketWatch.

Here is a link to his latest article:

http://www.marketwatch.com/News/Story/Story.aspx?guid={C85B5CD0-BD39-4789-A646-76F967A05BFB}&siteid=mktw&dist=nbc

Just Dodged A Bullet

Adolor reported today that results of their latest study on Alvimopan show that it increases the chance of cardiovascular events. They also said that they, and partner Glaxo-Smithkline, are halting all clinical trials on the drug. Predictably the stock price of ADLR cratered, dropping
57% to $3.75. I think it will drop more, I am damn glad to have gotten out of the stock just last week, for it has been a favorite of mine - the market for opoids that do not affect the gastro-intestinal system is just huge.

What this shows is how risky one trick biotech stocks are, and how well deserved any success is that comes their way. In the meantime, Progenics (PGNX) is the other pure play biotech company with a product designed to meet the same needs as Alvimopan.

Trading Summary And Analysis

I've just completed my analysis for Feb 22 to an intraday time today, April 3:

Benchmarks: SPY -1.43% QLD -6.31% Russell 1000 Value -.83%

My stocks showed a profit of $1270.5 net of commissions: $1030.5 (24 trades).
Since my starting amount was $112 437 (includes the add on) this is 0.9%

I used six basic strategies, grouped post hoc with average results as follows:

a) Buyback and value: -3.7% seven trades
b) Buyback and > 3% one day drop and > 200 day avg: 2.2% three trades
c) other <5%> 200 day avg: -28.4% one trade
d) Subjective story: 11.8% averaged over five trades!
e) Sentimentrader timing trade: 1.4% over three trades
f) 5/1 plus value plus 5/1 industry: 4.5% one trade

These were most of my trades, a few are omitted because I'm not sure why I made them.

These are my conclusions:

Foremost seems to be the large loss I had buying TSTC, a high flying small cap stock that had a large one day drop due to disappointing earnings. It just kept going down. I'll make sure the stock has a low PE if the news is bad earnings, and stay away from blogging chartists' recommendations.

The other bad area was the poor performance of my Buyback passive portfolio. I'm not sure what to do about this, perhaps it is just the large variance, but perhaps the buyback stocks don't do well unless they are moving a lot already, up or down. My adjustment will be to hold fewer stocks but to put more money in them, and to trade situations more.

On the positive side was the standout performance of my subjective selections. LEND and ADLR deserve remembering, and it shows how being interested in stocks and their stories can pay off big time.

Also worth noting is CTB, a value down 5 year/ up one year stock. It is doing well so far.

Also doing well was the strategy of buying stocks that are down large but are in one of my lists (like Fry or 5/1), and the strategy of buying indiscriminately when Sentimentrader gives unequivocal signals.

I must fine tune the Hulbert signals for gold - finding a reliable vehicle - and the short selling strategy I've devised from his newsletter data.

Event Fade Trade

I dumped my 250 QLD Ultra QQQ shares at $83.62 just before the close.

My thinking is that the market spiked today ostensibly on the Fed release. This is a big event, and we can expect the market to reverse over the next three days, as per the findings in Ben Warwick's book Event Trading. By the way, has anyone heard of this guy lately?

Note the drop in VIX - it is now down to 12.12, showing how volatile volatility is.

Post note added: ENCY sold at $2.79 and TWX sold at $19.35.

Sold SID

I sold 400 shares of SID at $37.60. This liquidation is a day earlier than planned, but the stock has surpassed my gain target for a rebound trade. Perhaps I should have waited one more day - after all tomorrow is a favorable calendar day, the end of the favorable period for March.

I will think about this some more, perhaps this is too discretionary.

Sales in The Morning, Buys Near The Close

I sold Adolor (ADLR) at $9.05 and bought 400 shares of Companhia Siderurgica (SID) at $35.36 and 500 shares of Time Warner (TWX) at $19.42.

The new purchases are to be held three days, during which time the market should rebound from this third 10:1 downside to upside volume day in three weeks. (That according to SentimenTrader.com.)

Month End Calendar Pattern Reverses

The amazing month end/start of the month stock market decades long overperformance may have just ended. The carnage we just witnessed embraced exactly that time span, and moreover, came after a nasty drop on Feb 27th, the 2nd last day of February. Many trading strategies (eg. Zweig and Ben Warwick) go long S&P futures whenever we hit the month end with the market under its 5 day moving average.

Many other recent tendencies have failed to hold recently (see sentimentrader.com) and so, like the old up Friday/down Monday pattern that got reversed in the '80s, we may be at the start of a huge change here too. Next month I will play this reversal with puts for the month end and calls for the 4th trading day - and I'll put that on my calendar right now.

Study On Big Down Days

Brett Steenbarger, the writer, trading coach and analyst extraordinaire, did a study showing that the market can be expected to perform really well in the near term. He is a must read for any stock market student:

http://www.traderfeed.blogspot.com/

His market insights will allow me to sleep tonight.

Market Crashing

Wow, China's Shanghai market dropped about 8% overnight and now US markets are down around 2%. Given that it is month end, we can expect a healthy rebound starting either tomorrow or Wednesday, and lasting for a couple days. I'd bet tomorrow isn't too good in the morning because breadth is really bad now, but the afternoon might bring in the month end buyers.