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Sunday, August 30, 2015

What a gyp

" Historically index moves up and down 10 to 30 percent at a clip without rhyme or reason... There is no dependable set of rules that would enable a person to ride every zig and zag." - iBergamot in 2014 (link)

In order to buy something, you have to sell something first. Its the same money.

In this century, Global Financial Crisis (GFS) and Tech Bubble / 911Tragedy recessions aside, every single drop in popular indexes had been a buying opportunity.
Each and every time the question is: which one is it? Is this a noise or big trouble ahead?
VIX on Friday August 21 - one day before crash
May be just medium size problems, like 1998 and 2011 wipe-outs caused by foreign problems. Asia and Russia started crashing in 1997 and (despite a big rally in between) finished here with a bloody drop in 1998. Greece and rest of ass of Europe in 2011 also ended here, but not until USgov credit was downgraded and MFGlobal blow up and took it's customer's funds with it. Both instances resolved in record rallies.

I did not trade prior to 2002, so don't have a personal experience of the 90's.
It was easy to predict housing collapse, as I was increasingly weary of speculation in real estate as early as 2006. Did I foresee a 50% bear market? Nope. While I significantly reduced stock holdings prior to crash, I never went completely into cash, so there where catastrophic losses on remaining positions by late 2008. Gains on my large US Treasuries holdings offset some of that. By the end of 2009 I was back to even.
Then, there is a flash-crash of 2010. I saw that one coming a mile away.
2011 was a surprise and very difficult time for me. LB account (the one I had long before and since) fully recovered and was making new highs in about a year off that bottom.
October 2014 last year started as a regular seasonal dip (I was expecting it) , but quickly turned really bad and felt really flash-crashy at some point. I pissed my pants at the lows and had to buy all that shit back at higher prices, effectively missing that bottom.
August of 2015... now they did it?... too early to tell. I try to buy the dip until it fails, but carefully. There could be a lower low. There could be many of lower lows... for the next 2 years...

Price action of  popular averages should not be over-analyzed based on technical analysis (TA) and historical precedence. We can't learned from history as much as we need for prediction of future, because history keeps constantly changing.

Plus, there is always a question: what part of history?
For example, they say that we haven't had a bear market since 2007-2009. This simply not true. 2011 was a real deal with S&P500 falling 21.58%, satisfying a -20% classical definition of  bear market. Small Cap stocks in Russell2000 index (RUT)  fell over 30%. Devastation was wide spread, coupled with near-recession economic conditions.
They also said that we haven't had a 10% correction in a market since 2011. Also wrong. S&P500 fell 10.94% in April-June 2012 and almost 10% (9.84) in October 2014, but Russell2000 (RUT) had these 10% drops twice in 2012 and 4 times in 2014. Rather than mulling over chaotic fluctuations of 2000 small stocks in RUT index, I prefer to remind that market cap of all of them combined is smaller than one AAPL.

Which brings me to most important question of all: WHAT IS 'MARKET' ?
Certainly its not S&Pee. S&P500 Large Cap growth index (SPX) may be the best representation of  US market, but only at single point of time. Because of constant changing of its components (and obscure weighting methodology) its hardly the same index as in 1987 or 2000. I prefer to consider SPX a System with certain entry rules  (buy the dip) and exit conditions (death). Over time index destined to increase, as long as US is OK and there is steady stream of new companies and new investors - all according to Dow Paradox (link).

Personally, i like to use NYA - a Composite index of everything trading on New York Stock Exchange, including real reporting common stocks, foreign ADR's,  REITs and more of god-knows-what. I think it's more realistic view of stock-centric financial markets, while still skewed by market-cap weighting, NYA displays different price dynamics than SPX. Observe below how NYA made much higher high than SPX in 2007 vs 2000, and how it failed to do so in 2014-2015 vs last top of 2007.

Really, the only conclusion is: market has been moving up and down over time, and reasonably expected to do so indefinitely into the future. This is what I SEE.

Stock Market (as it can be traded in USA today)  is  2130 stocks, priced over $5 with at least 300K shares daily volume.
Of them:
  • most split rather evenly over market cap size (26% Large; 40% Mid, rest is garbage)
  • a little over half are profitable
  • a little less than half pays dividends 
  • on 8/25/2015 (last bottom) 60% of them where down 20% or more, ie in bear market
What a gyp

One Hindu priest recently told me: "Everything happened before". Such a simple and beautiful concept, somewhat explained by Nietzsche "eternal recurrence" in 1882. Methinks, he got it from Ecclesiastes: "Everything that happens has happened before, and all that will be has already been— God does everything over and over again", but Poincare proved it mathematically as "recurrence theorem" in 1890... See, there are already three of us... and I am in a pretty good company...

Tuesday, August 18, 2015

System12 Plus. 8-2015

.this update covers activity from 8/17 to 11/28/2015.

I am making peace with a fact that original version of System12 is basically discontinued. There is no point in updating its spreadsheet, because it strayed away from MD Control index so much and for so long, its not even close. I continue to use it exclusively as high quality stock selection tool and timing entry/exit using weekly CSI (Composite Score Indicator). There isn't much else to do, with majority of MD stocks continuously dis-qualified or unavailable for most of this year. I don't complain much either, as CSI offers much better technique for intermediate (weeks to months) entry than original System12 rule-set and provides superior exit signal. Still there is hope that situation will improve when market rights itself.

Notably I'm using 'when', not 'if', although upward breakout is not a guarantee - it is a most likely conclusion of present sloppy sideways range. Could it be a huge distribution pattern, can we fall and correct by 5-10-20%? Sure. Anything can happen. That's why I am not about to bet the farm on this bullish notion, carry large cash balance, strictly adhering to CSI rules and position size limits, staying away from speculative and high risk issues, and waiting for some kind of a resolution to manifest itself. This posture served me well this year and prevented large losses I typically suffer in a volatile lateral grind.
I am not going to die on this hill (extra VietCong).

(Update 8/19: found error in calculation - should not have bought PG - no signal... fucking-fuck)

BOT: BRK on 8/20; AMZN on 8/26
SLD: AMZN on 10/21
DIVI received: WFC, PFE, PG, HD and HRL

This is MD:


MD Control: JPM out; FB in
Disqualified: AAPL, BRK, XOM, PTR
Earnings: PTR on Aug27

This is SD:
Oilers RDS and CVX out; financials BAC and V in
BABA continues to slip, but technically still #21
Some of stocks coming up: C and HSBC; KO and PEP; GILD and MRK; ORCL and IBM
also HD at #34 (I have HD in System9)


I'll add System9 to this consolidated systems update for better overview.
Although I call LB account System9, it really allocates only 25%  to it, but I have a discretion to increase it to 50%. May seem confusing, but splitting LB into different strategies is just as true representation of 'Theme Investing' as simply focusing on industry groups. Diversification is the key, but its difficult to keep these methods from overlapping.
LB presently holds some cash, gold, international markets, utilities, SPY_CSI, elements of S14, S12Select and original S9.

BOT: HD on 7/31; HRL on 8/26


 I wrote about S14 "The Equiponderator" in this post (link), while it was still in development. Can't say that its finished, as testing and implementation of long-term system takes a really long time (no shit). I deployed most of cash over this past year, and even went through my first rotation. Results are hard to judge - mainly because major trends in equities and bonds still persist, almost all positions remain open, while I continue to tweak strategy and make tactical changes.

All my methods stand on 'four pillars' - WHAT to buy, WHEN to do it, HOW to bet, and WHY to sell.
The first one turned out a bit more complex than I expected.

Stocks. S&P500 is an obvious choice (almost a no-brainer), as such I bought it first, but there is a problem. S&Pee is a system in itself. A very crude and inefficient, strangely weighted and with no risk control, but a system nevertheless. Continuous rebalancing of large cap growth stocks gives it an incredible edge over most active and passive strategies, but also makes it very hard to trade technically. As a matter of fact, its set up this way specifically to avoid any need for technical or fundamental analysis, and does a pretty good job at that.

I wanted to make a step further with more homogeneous group of domestic stocks I can analyze through ETFs, but trade using Vanguard mutual funds. The best approach I came up with is a combination of market cap with growth and value style in easy to use list: Market Cap Grid.
Lo and behold, I saw immediately that small-cap value VBR (that I had for months) is actually the worst performer, small caps are generally lagging this year, while mid caps deserve much more attention.


How about Harvard Management Co - the biggest college endowment out there.
Some unusual choices among their top holdings and big add's. 
Latest filing for second quarter, reported by 8/14/2015
also GOOGL, AAPL, FB, YHOO; and Vanguard etf's IVV (SP500), VEA developed, VWO emerging.