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Wednesday, December 21, 2016

VIDEO: T Theory Observations 12-2016

Based on T-Theory concepts of Terry Laundry.

'Winter T' projects tops and bottoms for Stock Market in January and February 2017.
Upon closer inspection I discovered a T with center posts in November and possibly in December of this year. Because 'Winter T' is too short in duration, has questionable center post for 'Last Low' and some other concerns I explain in video - I don't consider these time projections as reliable for top placement. However, if Advance-Decline Line reverses and falls going into some of these dates - then there is a high chance that 'Time Symmetry' actually points to a bottom date and will be useful to find a buyable dip.

Considering that Rate T (post link) projects a Stock Market Lows in spring of 2017 and then again in summer, I think that there are opportunities ... for which cash will be needed.
I want to remind that T Theory is not a trading tool, but a 'range of options' that will have to be evaluated by other measures in real time.



Tuesday, December 20, 2016

VIDEO: T Theory Study 2012-2016

A 5 year study of T Theory - a method of analyzing general investment trends using time symmetry.
Based on T-Theory concepts of Terry Laundry.

From "A 1997 Introduction to T Theory" by Terrence Laundry:
'The Law of Matched Trend Time' basically states that duration over which investors can obtain 'superior equity returns' will always be equal to the previous time period in which returns were subnormal. A simpler way to put it is to say: the market can only 'make strong run' as long as it previously 'rested'.


As a result of this study... we run out of T...
 ...unless...

Sunday, December 18, 2016

VIDEO: Rate T Report. 2015 Study

Completed 2015 Rate T correctly forecast 2016 market lows, by providing multiple estimates over period of time when buyable dips are likely to appear in S&P500.

This is based on T-Theory concepts of Terry Laundry, who discovered these Rate T's back in 1970's (I think) and used this concept quite successfully for many years. Generally it states that a period of time it takes for interest Rates to fall from high to low is approximately equal to period of time from interest Rate low to important low in Stocks.
He acknowledged difficulties with accuracy of these projections since rates went into historic downtrend in 1980's and also during times of heavy intervention.


1st High to 1st Low in Rate = 1st Bottom in Stocks (in 2015)
Highest High to Panic Low in Rate = 1st Bottom in Stocks (in 2015)
Last High to Lowest Low in Rate = Final Lowest Low in Stocks (in 2016)



Friday, December 9, 2016

Faber 25

This is to test a persistent investment allocation recommendation by famous prognosticator, commentator extraordinaire and Asian night life connoisseur (secretly pony-tailed) Mark Faber aka Dr. Doom. For as long as I can remember, he advised to put equally 25% into stocks, bonds, real estate and gold and maintain it indefinitely.

For the purpose of this experiment I pick SPY, TLT, IYR, GDX, but I will be first to admit that his advise needs to be taken more broadly to be used sensibly. Obviously, his real estate holdings are mostly actual ownership of rental and vacation properties and not a REIT ETF (IYR) - stocks of real-estate investment trusts, which also include prisons, nursing homes, land and more of god knows what. Faber's recommendations about gold couldn't be more specific - physical ownership in immediate possession or in a vault outside of US (rich people shit). And I'm sure that stocks and bonds are more diversified than just S&P500 and US Treasuries 20+ years to maturity. Having acknowledge all this, my interest is in systematic investment strategies using financial instruments only, preferably in tax-efficient account (IRA, 401k etc), using low cost mutual funds if possible.

I start back-testing from January 3, 2012, as I have vivid memories of this recent period as well as my own real-life records and results to compare against. Symbols picked for portfolio have adjusted prices available, so they already have dividend income build into historical prices, and closely resemble actual gains or losses. There will be a noticeable difference in Treasuries and REIT's mutual funds actual account balance vs these simulated results, but only if held continuously for more than a year. Mutual fund will actually make more money, because of more efficient re-investment of dividends - basically investor makes money on the money faster.

Part 1. Straight 25.
     If I put equal amount into SPY, TLT, IYR, GDX on 1/3/2012 and held until today, I would make about 25% profit in total. This is not annualized. It's all of it. Minimum Standard Position size $3000, for 12K initial investment, grows to a bit over 15K. Mind you that S&P doubled over this period, and even Bond Fund had a 50% move. Clearly it was a Gold fund that torpedoed investment results. Even recent rally in gold shares was unable to turn a tide here - gold fund is only about 8% of allocation now, and sits a whopping 60% lower than 5 years ago (it was down 75%)... some store of value... he-he.
http://stockcharts.com/freecharts/perf.php?SPY,TLT,IYR,GDX&n=1243&O=011000
     Even more alarming is how this sad state of affairs came to be. See, for a first year Faber's Straight 25 was fine, even up about 10% by September 2012, but when Gold market took a turn for the worst, all gains were lost and account was in a red a year later. These 10% gains will not be seen again until spring of 2014, after which portfolio rose rather steadily and was up about 40% at some point in August of 2016. Clearly, it would be idiotic to sit on such mis-allocation for a better part of 5 years without at-least an attempt to re-balance or alter investment mix.

Part 2. Five for 25.
     Traditional approach to asset allocation is to re-balance as soon as 1 or more components deviate by more than 5% from a model. Of course it was a Gold fund that caused first re-balance during summer of 2012 by falling to 19% of portfolio for 2 consecutive weeks. Second re-balance came in Spring of 2013. This time not only Gold fund fell as low as 16% allocation, but also S&P rose to 31%. As a result of this, the big winner was cannibalized to replenish a worst loser. And it would not be a last time. End of 2013 brought back exactly the same kind of rotation, only this time account balance was actually DOWN -5.7%.
     2013 was one of those fantastic years when everything went up... except gold... and it took Faber's 25 with it. Gold remained the cause of portfolio re-balancing in 2014 and 2015, during which time account showed temporary gains of about 10%, but ended about flat for the beginning of rip-roaring 2016. Now, we are talking YEARS with nothing to show for it.
     2016 was kind to Dr. Faber. After briefly dipping in a red (again), portfolio took off with powerful gold rally and was up 40% by summer. There it needed a re-balancing, only this time gold was largest position in portfolio and S&P smallest. Pay attention... same 40% as Straight 25 version from above. This re-balanced portfolio now sits just shy of 15K total... Basically, re-balance or don't, you are fakt (german accent).

Part 3. Supply 25 Plus 5.
     What is this crazy infatuation with Gold? Or trust in Bonds? Or hatred of Stocks? Why not think independently and let a collective wisdom of market place to guide ... and blah-blah-blah. Since re-balance naturally comes at-least once a year, I can use a long moving average to avoid a fund in downtrend. Ones a fund goes under - it's sold and money supplied to remaining positions. Trade will require 2 weeks away from average to trigger, at which point entire account will re-balance to accommodate equally each position in portfolio. A deviation of 5% will also cause portfolio to re-balance. Mutual funds are perfect for this, as they allow fractional share count and don't have any trading costs (they also require 1 month hold, but it's not a problem - rather a benefit, and I proved it previously).

     I have an actual experience in what happened here and will rely on it in my estimates, but only as a confirmation. Selling Bonds in 2013 and buying them back in 2014 was as evident back then, as it clearly shows in the chart. Only I was short bonds in 2013 ;-). Both Stocks and REIT's corrected in 2015-2016, but didn't break the moving average, just as my bullish bias in System 14 didn't break over this invisible bear market of 14-16. All this would be even easier with 'Supply-25' portfolio that steadily risen at over 10% per annum and stood at 50% gains back in 2015 (give or take some).
     Clearly, Gold was knocked out by 2013 and I used late exit in my back-test. I actually sold all gold stocks back in 2011 and was generally cold to it for a while. Gold was no longer an option until 2016, but even that trade yielded no profit in back-test. My experience with Gold stocks in 2013-2016 had been wildly different, considering that I bought dips and managed to sell enough during summer 2016 run-up that what's left costs me practically nothing....
But it's not a part of this exercise...

video
http://stockcharts.com/h-sc/ui?s=SPY&p=W&yr=5&mn=0&dy=0&id=p40313652174
http://stockcharts.com/freecharts/candleglance.html?SPY,IWM,EEM,TLT,HYG,IYR,GDX|D|A1,126,1|0
http://stockcharts.com/freecharts/perf.php?SPY,IWM,EEM,TLT,HYG,IYR,GDX

Wednesday, December 7, 2016

FMSUP Shuffle

This post is to update watch-list for Utilities Portfolio (FMSUP).

read this FMSUP article (post link) to understand what is going on.

There was one important change to portfolio construction. It was started with 6 positions, but represented 20% of my account, which proved to be too much. At some point in the beginning of the year the whole thing felt like one giant utility position with tech and industrial kicker. Of course it's not normal and immediate remedy required was a reduction of utilities portfolio. Since I couldn't cut position size, I decided to go with 4 stocks instead of 6.

Two positions sold (PPL in Feb and ES in June) more than covered a deficit that darn mr. Simmons left me, so I felt it was fair to put whole ordeal behind and just continue with sensible portfolio management. Although I would prefer to diversify into 6 or (even better) 10 stocks, FMSUP seems to be doing just fine even with smaller number of positions, and leads me to believe that I can safely
Forget Mr Simmons Utility Portfolio
and just do my own thing.

BTW, I beat the pants off him, XLU and Ass-n-Pee index too... ;-)

FMSUP as of 12/7/16 (this will change soon - I'm rotating)
http://stockcharts.com/freecharts/candleglance.html?SPY,XLU,FSUTX,PNW,PCG,ES,exc|B|P5,3,3|0

Presently, there are still about 50 companies that satisfy selection criteria, but I noticed that I'm pretty much shuffling thru the same stocks. They just seem to come up no matter how I look at a pool of possible candidates. So in a coming weeks and months, I will use this Shuffle List to (hopefully) streamline rotation process in order to further increase returns.
FinViz Link

http://stockcharts.com/freecharts/candleglance.html?XLU,FSUTX,PCG,PNW,ES,EXC,SO,ATO,AWK,NEE,DUK,D|B|J[XLU]|0
http://stockcharts.com/freecharts/candleglance.html?AGR,NYLD,HE,ETR,OGE,SJI,DTE,SCG,AEE,PPL,PEG,NWE|B|J[XLU]|0

I expect that Shuffle list will change in the future, as we are scraping a bottom of barrel here in utilities. Monster rally that started late last year run out of steam during summer months and turned into a nasty, but orderly correction. Most utility stocks are under 200ma and 10-20% off recent highs. Despite the carnage, this is all quite ordinary and historically able to produce a durable bottom somewhere here. For everything else - there are rules...

FMSUP trades and occasional commentary are published on my private Twitter feed 
(just send me a request - its FREE for now):  https://twitter.com/SWID_iBergamot

Friday, November 18, 2016

DART v2 note

At this time all notes, observations and orders of DART v2 Method pertain directly to my main account and being traded with real money. Still, I would like to caution an excited follower that this remains not a thoroughly tested strategy and money can be lost. You are responsible for your own decisions with your own money (tips hat).
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I used September and October dips to enter DART v2 positions, via a synchronization process, outlined in 'Dart Sync' article (post link). DART rule-set was sufficient to navigate softness due to Trump pre-election Slump, and portfolio took off from November low like a bat out of hell.

At time like this, when these six stocks are ripping tits to upside, it is important to remember that DART is not a trend following system, but a dynamic rotational method. Meaning: since there are no losers in portfolio - I must sell a big winner, add profit to cash reserves and re-allocate Standard Position Size into something that didn't rally yet. All according to rule b2 from from original article (post link)

MSM has been in Dart since end of summer. It gave me little trouble, although it was one of possible sell candidates after October low. Since then MSM rallied 20% and presently best performer. As a result of price appreciation, stock yields 2.1% - smallest in portfolio and kind of low by DARTv2 selection criteria. Ex-dividend date was about a week ago, so its a money in a bank, however small... still "one to-day better than two to-morrow" (as Poor Richard would say). Further red flag is short interest, standing at 12% of float (read about 'short qualifier' here (post link). While more like a recommendation rather than requirement, I don't like these expressions of doubt about Dart Picks.
Stop for MSM is 82.22 and will be aggressively trailed until caught.

(UPDATE: stop was trailed for almost a month until MSM was finally sold on 12/14/16 at $91.58 for about 25% gain in 3 months... unbelievable...)

This is Dart v2 Portfolio now:
http://stockcharts.com/freecharts/candleglance.html?ADP,ILG,MSM,CMI,DRH,VLO|B|P5,3,3|0

Portfolio can be viewed in MarketWatch for illustration purposes. as DART v2 Game (link):
http://www.marketwatch.com/game/dart-v2/portfolio/holdings?p=1741728&name=i%20Bergamot
(MarketWatch virtual game started 11/9/2016 and expected to end sometime in 2017)

DART v2 trades and occasional commentary are published on my private Twitter feed 
(just send me a request - its FREE for now):  https://twitter.com/SWID_iBergamot
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DART Pick
 MSC Industrial Direct (MSM) is a tool, parts and materials supplier for industrial clients. Think of it as Home Depot, but for real. Metalworkers, small factories, machine shops, transportation... you name it... when its serious business - people go to MSC Direct- 'Built To Make You Better'. Its not a retail shop, although they got offices all over the place, mostly everything is shipped from few major warehouses, that keep a cool million of in-stock items.

MSM debt is at manageable level, with small dividend, cash on a books and almost 3 Bil in sales - its a solid company and it almost pains me to sell such a beauty. Alas, rules are rules (that's what they are there for) and stock has to go.  I am looking forward to a possibility of re-purchasing MSM at lower levels, following obligatory 1 month lock-out period.
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 .to follow articles in this series - select 'DART' label on a right sidebar.
Read these key posts:
Original DART Article
Loaded Gun - results and observations
DART v2
Dart v2. System Start
Dart v2. Portfolio Check

Wednesday, November 16, 2016

System 12 Update. 11-2016

I am surprised to see how little changed Mega Dozen (MD) and Second Dozen (SD) have been over a past year or so.

This is MD:
http://stockcharts.com/freecharts/candleglance.html?AAPL,GOOGL,MSFT,BRK/B,XOM,AMZN,FB,JNJ,JPM,GE,WFC,T|B|P5,3,3|0

This is SD:
http://stockcharts.com/freecharts/candleglance.html?PG,WMT,BAC,CVX,VZ,PFE,V,KO,MRK,INTC,CSCO,ORCL|B|P5,3,3|0

FinViz link
Currently, only few stocks are Disqualified and really only one from MD ( T for sure and FB by a smidge), while half of MD+SD are Not Available... quite a predicament...

MD Control was recently re-balanced and updated. It remains remarkably correlated to S&P500 index. I continue to maintain it as a Motif for tracking and comparison:
https://trader.motifinvesting.com/motifs/mega-dozen-Ftnb1cNJ#/overview

This post will not update with recent activities (like I used to do). Instead, I set up a simulation at MarketWatch.  This whole 'virtual account' project turned out to be a major disappointment - I will write about all this in detail later. Meanwhile, this link will have all recent activities in (close to) market representation, but mostly for illustration purposes, rather than for record and comparison.
System 12 Game link
http://www.marketwatch.com/game/system-12/portfolio/holdings?p=1741728&name=i%20Bergamot
(MarketWatch virtual game started 11/9/2016 and expected to end on 12/30/2016)

This is System 12 AMD today:
http://stockcharts.com/freecharts/candleglance.html?GOOGL,MSFT,PG,JPM,CVX,MRK,BRK/B,WMT,WFC|B|P5,3,3|0
with pending sell orders for GOOGL and PG;
with pending buy orders for GE and XOM;

S12 hasn't been fully loaded for-awhile, and it doesn't look like it will happen tomorrow, but I will leave it up to market to sort out. Large cap 'growth' stocks had been laggards on this Trump Stump rally, while 'value' group leads and making decisive new highs.. The whole market split into stocks that rallied like crazy and stocks that dropped like dead. S12 positions managed to side step most of carnage and keep some top performers, with overall results slightly north of zero since summer top. Simultaneously, portfolio suffered only trivial draw-down of about 2% (about $800) at the depths of Trump Slump, which is nothing to worry about and has already been recovered and exceeded.

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System 12 Select - AO

This is one of the ideas I am actively working on right now.
Basic recipe is to take MD and upper portion of SD, rank it according to sales, then use Arnott Overlay (post link) to determine 12 stocks in an order of financial 'importance'.
http://stockcharts.com/freecharts/candleglance.html?XOM,AAPL,BRK/B,MSFT,T,JPM,GE,WMT,JNJ,PG,GOOGL,AMZN|C|J[SPY]|0

Naturally, this list serves as a blue-print on 'what to buy in panic', in case a big and sudden collapse happens and one needs a good selection of major stocks in an order of importance, although it is not apparent at present time.
This Select group can be treated as a limited universe of stocks, to serve as basis for further selection based on Relative Strength (RS). The goal is to be invested into stocks exhibiting better price performance relative to S&P500 tracking ETF - SPY, and to stay away from laggards. Concomitantly, RS can be used to pick a minor bottom, but only with general guidelines of cycle analysis (I'm working out some kinks there) and within the framework of System 12 Method.

Because selection process is inherently flawed and prone to misjudgement, inevitably S12S-AO will miss some big winners and catch catastrophic losers, if only by chance.
Equally, the opposite is entirely possible...

Test portfolio in simulated environment at MarketWatch:
http://www.marketwatch.com/game/system12-select
(MarketWatch virtual game started 11/9/2016 and expected to end on 12/30/2016)

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To understand what this article is about, make sure to READ these:
Part 1: System 12. American MegaDozen. Introduction.
Part 2: System 12. Portfolio Construction and Rules 
Part 3: System 12. Trade Management 
Part 4: System 12. Performance and Risk
Part 5: System 12. Portfolio Initiation
and remember that you are responsible for your own decisions with your own money (tips hat)
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Wednesday, September 28, 2016

See What I Do (SWID) Subscription

SWID is not a typical advisory service.
First of all, I am not an RIA (Registered Investment Advisor) - so anything I publish can not be considered as a legitimate investment recommendation, as far as CFTC RULE 4.41 is concerned. Traditional disclaimer, attached to all stock trading websites, clearly states that everything you pay for is a complete bul%$(t. Yet people sign-up for exorbitant fees, follow vague or pin-headed advise and ... lose money, while wondering "How come when everybody taking profits, I only cut losses? Must be something wrong with ME?"

Investing is very hard by itself, and especially considering proliferation of scam websites (link-lol) dedicated to endless pump-and-dump of overhyped stocks with intent to facilitate swift distribution of institutionally held shares. Illegal? What do I know? But those services always have the best writers, the most amazing personalities and fashionable web-page designs.

Fear-mongering blogs are designed to mislead and confuse active trading community. They have busy and very engaging comment sections, with variety of opinions and ravishing discussions. Come to think of it, many posters are so engaged that I wonder: "Do they even work at all? Some characters comment and tweet so often and in so many different places - I don't know if they have any time left for carrier, or study, or family... Or may be THAT IS their job?" I wouldn't pretend to know, but if I did I won't tell anyway. I'm not stupid.

Then, there are just plain crazy people, with some kind of wrong-footed mission. They are easy to recognize, but hard to avoid. Thankfully, this type usually self-distracts or switches to another fetish du-jour.

I am the fourth kind - The Real Deal!
I make money from speculating in financial markets. It's not a job. I don't work for anybody. I manage my own small account - family money, saved over a course of few years - without any specific expectations, but with goal to eventually withdraw more money than was originally put in.

While I don't make any claims about my past or expected performance, I publish my Strategies right here on this blog with reviews of gains and losses, for everyone to read and learn. After 15 years of being involved in Markets, these are the ONLY ways I found to make money in Stocks for a small individual investor. I believe I possess wealth of useful information, practical experience and sensible disposition, so my knowledge can be sold for a modest sum. The only way it can work is to give subscriber an ability to
See What I D
in real time, with real money.

SWID Subscription is an annual membership fee that gives an access to a private Twitter Account @SWID_iBergamot, where I announce all my trades, occasional commentary and some pertinent thoughts, concerning Systems and Methods published on my blog. At present time, Systems are being rolled out gradually and according to market conditions, so the subscription service is offered at a low introductory price of $100 per year. 
Think of it as a vote of confidence and support for your humble servant. 
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Enter your Twitter Handle

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UPDATE 5/16/2017.
It has been almost 8 months since I made this offer on the interwebs.
During this time I did not receive a single  subscription payment, had no requests for additional information and don't have any followers on Twitter. In the interim, I was offering a FREE access to above private Twitter account, yet to no avail. Not one request or question in comment section. Meanwhile, S&P went up 15%, but my account is better than 20% to the good. Keeping in mind that gold portfolio has been a dead-weight and reduced total gains by a bit over 10%. Gold and miners was never a part of the subscription offering because these are legacy positions taken years ago, based on now inactive System 8 (I will write about great promise, infallible premise and ultimate put-down of S8 sometime in the future. It's not a story of losses, but one of a struggle and bitter-sweet triumph).

Based on total lack of interest from general public, I therefore canceling all subscription offers, stop tweeting my trades, but will keep this blog open and free for the benefit of humanity.
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Friday, September 23, 2016

DART Sync

Coming on a heels of System 12 Portfolio Initiation article (post link), I want to explain a present stage in DART Strategy development. I published its principals and methods right here on this blog, over a course of more than a year, and finally DART reached an important milestone (I think).

Up until now, Dart v2 portfolio was running in simulation. I started this virtual account a month ago  with intention to illustrate how a system has to be started and managed (links on a bottom of this post). But that was only one reason. More pressing was my own need to test daily system management.  I needed to make Dart a part of my daily routine, to make sure I don't forget to check it, and also to see if I can go away for day or two without this thing blowing up. I had no time to waste, because as wrote here (post link): " ...it comes at time when my Main Account is 30%ish in cash, so I will have needed funds to allocate if/when good opportunity comes along...  I would do it with real money, had the market not be so high and time of the year not so treacherous".

Well, the market came down a bit and time is progressing, with September almost behind us. Meanwhile, Dart v2 went thru severe draw-down to the tune of almost 10%. I would never forgive myself, if I wouldn't use this drop to put it into production. Real world results will be the final arbiter for DART Strategy, and to be faithfully reported in this space.

Practically, there are only two ways to Start a System - you buy them all at once, or you don't. :)
Lucky for me, I don't have to bite this bullet, as system already started, suffered some losses, bought some new stocks and now ready to be synchronized. This is a unique characteristic of Dart method - it is 'Always ON'. The portfolio has to be fully invested into 6 stocks, selected from Best List - a scan of available database of fundamental information, looking for good business, priced at good value. Best List is constantly changing, offering ever expanding selection of sensibly priced stocks of best companies in USA, for immediate investment. Stocks in a portfolio (winners and losers) are being sold in efficient manner, providing endless rotation which can be used to seamlessly enter into DART Strategy. Just like a surfer who needs to get in sync with waves in an ocean to catch a thrill ride, a real world trading account can be synchronized with Dart Portfolio and (hopefully) surge to profits.

Use this logic for Sync:
-if  stock in simulated portfolio qualifies under Best List rules - then buy it as you would buy any new position
-if stock in simulated portfolio has a sell stop, or a likely candidate to be sold - then don't buy it
-wait for by-weekly rotation to enter remaining positions

This is Dart v2 Simulated Portfolio now:
http://stockcharts.com/freecharts/candleglance.html?ADP,IILG,MSM,CMI,SCS,GNTX|B|P5,3,3|0

SCS was bought in simulated account on Sept 9, dropped about 15%, but can not be sold due to minimum 1 month holding period. Since it's not in Best List now - don't buy it.
CMI has a stop-loss order in - don't buy it.
IILG was a worst performer, recovered somewhat and needs to be watched for a possible sell - so don't buy that either.
These commentary are published on my private Twitter feed (just send me a request - its FREE for now): https://twitter.com/SWID_iBergamot



I entered ADP, MSM, GNTX in Standard Position Size between 15th and 20th of September.
While all future trades of Dart v2 Strategy will be done with real money, I need to remind all two of my kind readers that this is still an experiment and I have no idea how this system will perform in crisis or bear market.

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.to follow articles in this series - select 'DART' label on a right sidebar.
Read these key posts:
Original DART Article
Loaded Gun - results and observations
DART v2
Dart v2. System Start
Dart v2. Portfolio Check
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Thursday, September 22, 2016

System 12. Portfolio Initiation


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Before attempting to follow the steps of this article, make sure to READ these:
Part 1: System 12. American MegaDozen. Introduction.
Part 2: System 12. Portfolio Construction and Rules 
Part 3: System 12. Trade Management 
Part 4: System 12. Performance and Risk
-reading part 5:  System 12. Portfolio Initiation-
and remember that you are responsible for your own decisions with your own money (tips hat)
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Whether System12 is started during some kind of market correction and shows high profit from the get go, or all the buying is finished just before bottom drops out and sharp losses occur - System Start is highly unpredictable. I found it very hard to forecast which one of scenarios is more likely to transpire, so it's always better to consider different outcomes and ... carry a cash reserve.

System 12 is not an "Always ON" kind of portfolio, it doesn't have to be fully invested all the time. In fact, there are periods when S12 is fully or partially in cash, as explained in 'Performance and Risk'. Naturally, these are the best conditions to start investing into Mega Dozen (MD) stocks, just as they emerge from a correction or a bear market. These periods do happen every so often, but being impossible to predict, they have to be observed in real time.

Practically, there are only two ways to Start a System - you buy them all at once, or you don't. :)
There is no other way - you just have to bite a bullet here. See, most of these stocks have been in MD and SD for years, they were good to buy before and will remain so indefinitely into the future. This system was designed to get money invested into them, so just do it! Don't worry if some look extended in their advance - they may go even higher. Don't fret about some that seems to be in correction - there is a 'stop' for that. Just do what system rules tell you to do, but first - put a buy order just above last high of a day or two ago. $3000 per position will do, in accordance with S12 Requirements (post link).

(-NOTE- I keep the following original text for illustration purposes. The 'Investopedia' simulator proved to be inaccurate and was abandoned. In November 2016 I started new simulation on MarketWatch that expected to run for about a year and then rolled forward for continuity:
System 12 LINK: www.marketwatch.com/game/system-12)

This is exactly what I did on August 23 of this year, by buying all Qualified and Available stocks from Mega Dozen (MD) and about half way into Second Dozen (SD) (see 'Portfolio Construction' article) into a simulated account at Investopedia, that will be accessible there for review and comparison. Note: they don't have an option to set-up a 40K account, so I took next one up ($50,000). Remember to always adjust it by 10K. I will keep my own records to make sure of that.
http://www.investopedia.com/simulator/portfolio/?gameid=357150  
WMT was never triggered, instead V was bought on Sept 2.
GE and PFE were stopped out on Sep 9, MRK was bought on Sep 15.
As of this writing, S12 Portfolio has 11 positions on, with buy stop order set for WMT and sell stop set for CVX. Notice that account value stands a bit over 50K, and realize that recent market rout (when SPX corrected by about 3%) left System 12 completely unimpressed. Portfolio was down about $500 at the lows, which is nothing.
http://stockcharts.com/freecharts/candleglance.html?AAPL,GOOGL,MSFT,BRK/B,AMZN,FB,PG,JPM,V,CVX,MRK|B|P5,3,3|0
While there are some differences between this simulated account and real world, I want to make an important suggestion: don't go betting tens of thousand of your hard-earned money on some guy's say-so. Study this series of articles carefully, set-up a virtual account and start keeping your own records and notes. Follow my updates and ask questions. Don't rush. You have to give yourself enough time to get familiar with the system, establish a routine for its management, as well as to see what kind of mistakes you are making and what needs to be done about it. While all this going on, you should be waiting for a draw-down in portfolio or some panic in a market - the perfect time for System Start. Then you go about it just as practiced in virtual account, with experience gained from simulation and calm disposition learned from practicing portfolio management.

I put all orders, by-pass elections and explanations on this private Twitter feed (just send me a request - its FREE for now): https://twitter.com/SWID_iBergamot

.Programming note:
.all articles and updates about this strategy are accessible by selecting label 'System12' on right sidebar.

Tuesday, September 20, 2016

VIDEO: Study in the Price Movement and NYAD


In this video I discuss support and resistance in S&P500 index, SPY and NYA.
I present a traditional way to look at NYSE Advance-Decline issues and my alternative use of this indicator.
MADI- My Advance-Decline Indicator - is a multifaceted tool offering a simpler way to analyze market breadth and (sometimes) pick a bottom.

S&P500 Index and Sectors Analysis based on Composite Score Indicator (CSI). I discuss buy signal on $XLU Utilities sector, and stop placement on $XLK Technology.


Friday, September 16, 2016

Dart-Fin Experiment

"A great trader is like a great athlete. 
You have to have natural skills, but you have to train yourself how to use them."
- Martin "Buzzy" Schwartz, aka Pit Bull

Sometime during a smoldering summer of 2016 I noticed an abnormal number of financial stocks in Best List.

I remember seeing a group of technology stocks back during winter of 2015, when DART method was in testing. There were only 10-15 of them, which is not a lot, but that was more than half of Best List - a definitive watch list derived from scan of available database of fundamental information, looking for good business, priced at good value. I made a note in this post (link) and saved a group-chart. Go see what happened since the beginning of this year. I don't think its by chance...

When a new version of Dart strategy was published a month ago in this post (link), I pointed out an overwhelming number of financial stocks in a scan. It may be an anomaly, some industry-wide fluke that makes these stocks so attractive on paper. Or may be its the next fad. I don't pretend to know, but want to test this theory. This is exactly how I developed most of my methods - by trying and testing on paper.

This is a test! 
No real money is traded, but I will keep a virtual trading account with (near) real records. 

A scan of database with Dart-v2 settings returned 10 results in Financial sector: life and property insurance with some regional banks.
 FinViz link.
By relaxing and massaging some settings of this scan I enlarged ;-) this list to over 24 stocks, covering some obscure sectors of financial industry. Regional banks and insurance companies still dominate the list, but with healthy addition of REITs, broker, asset managers and more. I added Mid-Atlantic banks, although they don't qualify. These selections will change overtime, but if my hunch is correct, most will stick and go to new highs.

Current Dart-Fin List FinViz link.

http://stockcharts.com/freecharts/candleglance.html?FAF,TRV,AFSI,CINF,PFG,LNC,PRU,CUZ,HST,LHO,PEB,AMTD|B|P5,3,3|0
http://stockcharts.com/freecharts/candleglance.html?BKU,UBSI,ONB,MBFI,CHFC,WBS,PACW,HBHC,CFR,PBCT,BLK,EVR|B|P5,3,3|0

I think there is a way to construct a diversified financial portfolio of about 10 stocks and have plenty of candidates for replacement.  I will use modified portfolio management strategy, based on Original Dart (post link). Minimum account size required is $35,000 for ten equal size Standard Positions (read 'How to Bet' post link), with cash reserve of about 5K. Position size is expected to change in a couple of months, according to performance.

Dart for Financial Stocks : Dart-Fin Portfolio
a. 10 financial stocks to be selected from expanded version of Dart-v2 scan.
b. One time per week, the worst loser will be sold and replaced with new candidate from the scan.
     b1. If there is no stock with loss from purchase price - sell biggest weekly loser.
     b2. If there are no weekly losers - sell biggest winner
     b3. If everything moving higher - wait and trail stops.
c. New positions can not be sold for 1 month, to avoid over-trading (except for initial allocation).
d. If stock is sold - it can not be repurchased for 1 month, to avoid wash-sales.
e. Sell and purchase don't have to be on a same day, but every effort has to be made to keep portfolio fully invested.

Dart-Fin Portfolio should to be as much diversified as possible within financial industry. Considering that majority of scan results at this time are regional banks and insurance, I will start with this allocation: 3 banks, 3 insurance, 2 reit's, 1 savings/loan, 1 broker/asset manager. This mix may shift in a future.
http://stockcharts.com/freecharts/candleglance.html?ONB,WBS,HBHC,AFSI,FAF,PFG,PBCT,CUZ,LHO,BLK|B|P5,3,3|0

I set up a simulated account at Investopedia and bought all these shortly after open on September 15, 2016. 'Dart Fin' game will be accessible there for review and comparison. Note: they don't have an option to set-up a 35K account, so I took next one up ($50,000). Remember to always adjust it by 15K. I will keep my own records to make sure of that.
http://www.investopedia.com/simulator/portfolio/?gameid=359586


Dart-Fin experiment is designed to exploit a temporary attractiveness of certain financial stocks. A meaningful amount of money is to be invested in simulated environment in order to realize above-average return. If premise of this test is correct, Dart-Fin will run for a period of 6 months, or possibly for as long as 2 years. It is unclear (at this time) how to recognize a completion of the experiment.

I will return to this in a few months to show what develops, but it should not stop an adventurous investor from running independent simulation and hopefully share the experience in a comment section... No?

-----------------------------------------------------------------------------
update: November 10, 2016. New simulator at MarketWatch:
http://www.marketwatch.com/game/dart-fin/portfolio/holdings
almost same portfolio:
http://stockcharts.com/freecharts/candleglance.html?CHFC,PACW,HBHC,AFSI,FAF,PFG,PBCT,CUZ,LHO,BLK|B|P5,3,3|0

UPDATE 1/5/2017
FAF was sold on 12/22/16 on-stop, due to under-performance.  Replaced with CINF.
Position size raised to $3500.
Dart-FIN Portfolio is up about 10% since this simulation begun on Nov 10, 2016.
Original Investopedia simulator from September 2016 indicates possibility of 40% annualized profit, but can not be relied upon for record and comparison and has been abandoned since November.
http://stockcharts.com/freecharts/candleglance.html?CHFC,PACW,HBHC,AFSI,cinf,PFG,PBCT,CUZ,LHO,BLK|B|P5,3,3|0
----------------------------------------------------------------------------end of update

Thursday, September 15, 2016

System 12. Performance and Risk


If you REALLY looked inside System 12 Portfolio I proposed in Portfolio Construction article of this series (post link), you will notice that all stocks in it are members of S&P500 Large Cap Index SPX. Moreover, they are the biggest components and affect index price action a great deal. To make sure of that I calculated an Index of Mega Dozen - MD Control - equal weighted portfolio of all 12 Mega Dozen stocks, regardless of any rules. MD Control uses fractional share count and doesn't account for commissions - so it is not an investable instrument, but a tracking tool. At times, there is a stock or two in MD that are not in SPX index. I found it to make no difference on MD Control relative performance in comparison to S&P. Originally I calculated it manually in Excel. On June 1, 2015 I set up MD Control as Motif here:
https://www.motifinvesting.com/motifs/mega-dozen-Ftnb1cNJ#/overview
Below you will find a graph of Mega Dozen return since creation, where MD Control is blue line and S&P500 is green line. They track each other pretty closely, proving my original theory, that Mega Dozen actually Controls price movement of SPX. Really.
Based on back-test, simulation and real results, I still keep general projection of 20% profit annually, with average draw-down of 12%, but with much wider dispersion of results in a first year. Whether System is started during some kind of market correction and shows high profit from the get go, or all the buying is finished just before bottom drops out and sharp losses occur - system start is highly unpredictable. I found it very hard to forecast which one of scenarios is more likely to transpire, so it's always better to consider different outcomes and ... carry a cash reserve.

One of the biggest risks to the system is an abandonment during a period of under-performance. There will be stretches of few months when S12 shows nothing but losses. Every next trade is a stop-out, trading ledger is all red, with only open positions showing some gains (if any at-all). It is crucially important to stay the course, may-be reduce position size, wait a day or two, but maintain a system nevertheless. The other big risk is breaking the rules. There is no remedy for that.

System 12 focuses on absolute returns (meaning: I just want to make money), but it will act similar to S&P500 index most of the time, especially during bull rally. In fact, it often outperforms SPX, considering reinvested dividends, but this difference really felt only after the system is 'ON' for a year or more. Where System 12 really shines - is in avoiding big market-wide drops, that come out seemingly out of the blue, every year and sometimes more often. The S12 portfolio will not be able to completely eliminate the losses, but risk control measures will reduce portfolio somewhat prior to initial drop and liquidate most positions during bear market.

I was running System12 in 2014, and published "Mid-Year check" in this post (link). Red line on a chart is an actual portfolio balance - S12 real data, including commissions and dividends. Blue line is MD Control. Note, how red line dipped much less than blue in a beginning of the year, as positions were either stopped out or not initiated during market correction.
Shortly thereafter some positions were stopped out and I wrote here (link) on July 29: "Open positions of System 12 are light" (meaning there are less than 12 stocks in the portfolio), and how not having much to buy made me "a bit worried". Resolution came just a few days later with a drop on August 5: "I wasn't worried for nothing...he-he. System 12 is protecting itself, as it should..." Then in September 17 update post (link), I repeated that S12 was STILL not fully loaded, just before "whole market crap out" by about 10% in few short weeks.

In a spring of 2015 post (link) I found Mega Dozen "in a difficult condition, with half stocks either outright disqualified or unavailable", but by that time I already learned my lesson. From same post: "I remain very pleased with System12 performance. Risk control filters (designed for keeping me from buying Mega Dozen (MD) stocks during correction or in downturn) did just that - kept me away from bad risk. MD stocks are the biggest and the best, but its not written anywhere that they must remain to be so. Some will fall and never come back. I don't know which ones and when. I don't know the future. Really. I just know that System12 hasn't been fully loaded for months. I'm not arguing. I'm glad."
This condition persisted for remainder of the summer, and WAS a 2015 top! Pretty impressive...

System12 Rule #7 (post link) states that "portfolio can be partially or fully in cash for unspecified period of time" and is the basis for S12 Risk Management. This cash serves as a buffer during period of heighten volatility and gives an ability to 'buy the dip' when the time is right.

-------------------------------------------------------
.this is a forth article in 'System 12' series.
Read Part 1: System 12. American MegaDozen. Introduction.
Read Part 2: System 12. Portfolio Construction and Rules 
Read Part 3: System 12. Trade Management 
-reading part 4-
Read Part 5: System 12. Portfolio Initiation
------------------------------------------------------- 

Wednesday, September 14, 2016

VIDEO: S&P500 Price Movement, Sectors and MADI

In this video I recap last CSI Trend in S&P500 ETF - $SPY.  The SPY trend started on a week of Brexit  June 27 and completed with an 'OFF" sell signal on a week of August 29. All S&P sectors are either in correction or 'OFF'. A timely sell signal in Industrial sector $XLI from my video a couple of weeks ago revisited.

I realize  that some of CSI (Composite Score Indicator) terminology may sound a bit bizarre, but I try to explain it in these videos the best I can, with actionable points along the way. I never published any info about CSI and don't think I should just put it out in the open. Including CSI overview and rules into a paid subscription service seems to best option at this time. Any questions or suggestions are welcome - use comment section or Twitter: https://twitter.com/i_Bergamot

I also discuss My Advance-Decline Indicator (MADI) - a slightly different approach to $NYAD analysis. Instead of plotting a Cumulative chart of NYSE advance-decline line (which will change depending on starting point), I look at them as an average. Basically, MADI is similar to McClellan Oscillator, but more adjustable. I will explain more in next video.
This video was published a couple days ago, but i forgot to link it to this blog. The plan is to put these videos out every week on Monday, or maybe during a weekend. I find them pretty useful as summary of recent past and different scenarios for immediate future. I hope my dear readers are as well...

Thursday, September 8, 2016

System 12. Trade Management

System 12 is set up in such way that any working individual can easily manage a portfolio, with no need to monitor quotes during market hours. It would be beneficial to take a look just after the open, to see if some kind of unexpected development affected prices too much, but not spending more than few moments on it. To dwell too much on this will lead to over-trading. Daily check after the close should be all that's needed in order to set or move stops. This may take 15-30 minutes. Make sure your family is on board - you will need this quiet and uninterrupted time to manage your wealth. Investing for the future is not a short term stint - specifically, System 12 can run continuously for years, so one should plan for a long haul. Even when it's in cash, you should keep an eye on Mega Dozen to make sure not to miss a good opportunity.

With rare exceptions, all orders are entered on-stop, with buy stop being above current price and sell stop below. This allows to calculate precisely how many shares to buy, at what price to sell, and lets an investor to go about a day as usual, while Market keeps working. All positions are equal Standard size of about $3000 for minimum required $40,000 portfolio, or scale up accordingly for larger account. Do not do it with less money!

Positioning Period (PP)
All trades are done during Positioning Period (PP) of 5 trading days after and including day when trade signal is generated. Trade trigger is a Simple 50 day moving average. For a 'BUY Signal', price has to close a day above 50dma, buy stop order will have to be placed few ticks above the high of that signal day and adjusted as necessary until caught or cancelled. At the end of day 5, stock has to be purchased no matter what, since Positioning Period (PP) has elapsed. This allows certain flexibility to consider market conditions, account for gaps, and use common sense in general. OTOH, if you missed a day here or there portfolio will not suffer any major damage anyway. In fact, sometimes it's better to wait a day or two. Once bought, stock can not be sold for 5 trading days (1PP).

For a 'SELL Signal', price has to close a day below 50dma, sell stop order to be placed few ticks below the low of signal day, with the same PP stipulations as above. If, during PP, stock rallies and touches 50dma then PP gets restarted and stop needs to be adjusted accordingly. When stock is sold, it becomes UN-Available for next 5 days (1 Positioning Period). If, after 1PP has elapsed, stock is back above 50dma - then it becomes Available for purchase again and has to be bought within 1PP, following 'BUY Signal' management. This constitutes an effective Re-Entry procedure, designed to keep money invested into best stocks continuously, notwithstanding an occasional whip-saw.

The whole reason for Positioning Period is a dubious nature of the Moving Average. I am not claiming that 50dma is some magic unbreakable line, nor saying that 50 period average is somehow superior to 45 or 55, or whatever number. It's just an imaginary line that means completely nothing, except for one characteristic - price has to rally in order to stay above it. Mathematically, it can not be any other way. 50 period is something that I found universally fitting and readily available from multiple chart vendors (including my favorite), but certain discretion needs to be applied to its usage. I don't take 50dma as a specific price, but rather as an area, also considering nearby support and resistance. Since 50dma trigger line is more like a 1% ribbon around it, more time is needed to make a rational decision. By trial and error I devised that 5 day period is more than enough, giving the market a whole week to sort itself out. This approach provides a narrow band of time and space for a careful trader to exploit, with hope that some little blip on a chart wont throw a trade off.

By-Pass
Most trades of System12 are set on day 1, but sometimes a normal price action can bring stock to an area where sell order has to be executed, if rules are followed mechanically. In this case normal sell rules can be 'By-Passed' for up to 1PP, giving a trader whole 10 days to observe price action. Another instance where I found 'By-Pass' beneficial is when stock gaps below 50dma, but doesn't follow down. A sell stop order can be trailed up, while price recovers, and as long as stock advances or consolidates PP can be extended in 'By-Pass' conditions.

In a situation when whole market gets affected by some extraordinary development and stocks collapse thru the floorboards, 'By-Pass' can offer some respite, but generally will only prolong the pain and deepen the losses. With this in mind, portfolio is allowed 1 'By-Pass' per 6 positions, or maximum 2 for a fully loaded System12 at any time. Indeed, I rarely use 'by-pass' as I personally prefer not to use my own opinion, and just follow the rules - that's what they are there for.

Emergency Exit
If stock gaps down below 50dma and under any meaningful nearby horizontal support, and causes position to lose 10% or more - sell this stock at the market and not think twice about it. If there is any doubt, then it is not a true 'Emergency Exit' (EE). This condition is rare and very painful, but can not be helped... hence the name. In a previous run of System 12 (that lasted over a year) EE happened only once.

To illustrate these Trade Management issues I offer some recent examples:
XOM closed below 50dma on July 27. Set stop just under days low at 89.80. Stop filled next day on the open, successfully exiting a trade from February 4, for 16% profit in less than half a year.
GE is consolidating sideways in vicinity of 50dma. Even if stock price doesn't touch the moving average for 5 days, it's still isn't falling - so a 'by-pass' condition can be used, as long as GE stays above 30.80 or so. This situation needs to be re-evaluated daily!
KO in this example doesn't really qualify for 'Emergency Exit', but this is what EE roughly looks like.


In order to assist any inquiring minds, I will have real time updates on positions and trades of System12 at private Twitter handle @SWID_iBergamot, as soon as all supporting materials are published in this space. I want to touch on risk and performance next week, followed by unveiling of System 12 running in simulation, with my notes on how to start trading a working system. The whole process is very simple to manage, especially looking over my shoulder, I believe that in a short period of time a trader can get a handle on it ;-)
-------------------------------------------------------
.this is a third article in 'System 12' series.
Read Part 1: System 12. American MegaDozen. Introduction.
Read Part 2: System 12. Portfolio Construction and Rules
-reading part 3-
Read Part 4:  System 12. Performance and Risk
Read Part 5:  System 12. Portfolio Initiation
-------------------------------------------------------

Saturday, September 3, 2016

READ: 'How to Trade in Stocks' by Jesse Livermore

The story of Jesse Livermore, a legendary speculator of 100 years ago, is widely known in a narrow trading circles. Any list of trading books I ever saw included 'Reminiscences of Stock Operator' - a fictional account of Boy Plunger, loosely based on his life and endeavors. Surprisingly, I never saw a mention of his own book. Jesse Livermore himself wrote a small book in 1940, shortly before he taken his own life. Aptly named 'How to Trade in Stocks', this short text is an instruction manual for an intelligent stock market operator, with major concepts and techniques just as valid today, as they were 100 years ago.

Have a taste:

"...let me warn you that the fruits of your success will be in direct ratio to the honesty and sincerity of your own efforts in keeping your own records, doing your own thinking, and reaching your own conclusions."

"To be consistently successful, an investor or speculator must have rules to guide him. Certain guides that I utilize may be of no value to anyone else... No guide can be 100% right."

"Confine your studies of movements to the prominent stocks of the day. If you cannot make money out of the leading active issues, you are not going to make money out of stock market as a whole.... Keep mentally flexible. Remember, the leaders of today may not be the leaders two years from now."

"It would be simple to run down the list of hundreds of stocks which, in my time, have been considered gilt-edge investments, and which today are worth little or nothing. Thus, great investments tumble, and with them the fortunes of so-called conservative investors in the continuous distribution of wealth."

"There are times when money can be made investing and speculating in stocks, but money cannot consistently be made trading every day or every week during the year. Only the foolhardy will try it. It just is not in the cards and cannot be done."

"... you must entirely ignore personal opinion and apply strict attention to the action of market itself. "Markets are never wrong - opinions often are.""

"As long as stock is acting right, and the market is right, do not be in a hurry to take profit. You know you are right, because if you were not, you would have no profit at all. ... Profits always take care of themselves but loses never do."

"It is foolhardy to make a second trade, if your first trade shows you a loss. Never average losses. Let that thought be written indelibly upon your mind.'

"What i am trying to make clear to that part of the public which desires to regard speculation as a serious business, and I wish deliberately to reiterate it, is that wishful thinking must be banished; that one cannot be successful by speculating every day or every week; that there are only a few times a year, possibly four or five, when one should allow yourself to make any commitments at all. In the interim's you are letting the market shape itself for the next big movement. If you have timed the movement correctly, you first commitment will show you a profit at the start. From then on, all that is required of you is to be alert, watching for the appearance of the danger signal to tell you to step aside and convert paper profits into real money."

The second part of the book (Livermore Market Key) is a detailed description of his trading system, with rules, explanations and examples of JL's own trading sheets. You must see it for yourself. It's a gem!


I don't know what happened with the original book - I couldn't find it on Amazon. The only option is this publication, including some guy's 'commentary' which can be completely disregarded.
http://amzn.to/2bY2MjW
 Clicking on this link will take you to Amazon.com. If you buy this book or something else I will receive small commission that helps to support this free website.

Friday, September 2, 2016

DART v2. Portfolio check

DART v2 was started only a week ago (post link), and immediately was hit with 12% loss on BRCD. Stuff like this happens. There is nothing to do about it - that is why they call it stop-loss. The only objective is to stop the loss, find new stock for portfolio and move on. I found exactly this to be a superior quality of multi-position dynamic portfolio vs other so-called systematic approaches.

The System (in my understanding) has a certain set of requirements, parameters and guidelines, which when followed as designed, produces more money than what initially was put in. It doesn't mean that every single trade is a winner (mathematical impossibility), or even that money grow slow-n-steady with no set backs (nice when it happens, but it doesn't last). Still, Pain of a Loss is more profound than Joy of Gain, if speculation in markets viewed as some kind of gaming activity. BUT, if investing in stocks is approached as an operation or a side-gig for profit, then this loss is nothing but a cost of doing business. Just like store owner doesn't keep all the money made, having to spend some on supplies, utilities and labor. He will gripe about electric bill, but pay it nevertheless. Same here.

BRCD was sold on 8/31 at original stop-loss. Proceeds are to be replenished back to Standard Position Size and invested into SCS. This is what DART v2 has now, in equal size:
My only concern right now is new figures for short interest on MSM. I would like to stay away from stocks with more than 10% of float short, but it's not enough reason by itself to sell a position. As always, I'll let market sort this out, besides DART is allowed no more than 1 trade per week and this ammo already spent...

This is DARTv2 (top 6 slots are open positions, the rest are possible replacements):
http://stockcharts.com/freecharts/candleglance.html?ADP,IILG,MSM,GPC,CMI,SCS,tif,GNTX,BEN,SWKS,FAST|B|P5,3,3|0

Portfolio can be viewed in Investopedia for record and comparison:
http://www.investopedia.com/simulator/portfolio/?gameid=357126

November 10, 2016. New simulator for fully synchronized DART v2:
http://www.marketwatch.com/game/dart-v2/portfolio/holdings

------------------------------------------------------------------------------
DART Pick

Steelcase SCS, a new position in the portfolio, is an office furniture and design company. Although classified as a small-cap, this 100 years old thing is actually not-so-small 1.75Bil with impressive 3 Billion of sales, 11000 employees and 3% dividend yield.  Stock fell some 40% at the end of last year and now seems to be making a base between 13 and 16 dollars.

I have never heard of them anywhere, but apparently Steelcase is THE maker of my dream - Electric Height-Adjustable Desk - a $2000 monstrosity I must own some day.
Now, this is a stock I can get behind :-)   (my puns are always intended... Always!)
-------------------------------------------------------------------------------

.to follow articles in this series - select 'DART' label on a right sidebar.
or read these key posts:
Original DART Article
Loaded Gun - results and observations
DART v2
------------------------------------------------------------------------------

Wednesday, August 31, 2016

System 12. Portfolio Construction and Rules


The logic behind System 12 strategy is deceptively simple:
a. By using best available stocks scanner, select 12 biggest by market capitalization US companies.
b. Invest into these stocks continuously, while they are in uptrend.
c. Don't invest if they fall in downtrend.
d. Use rules only - to differentiate between b and c above.
e. Don't break the rules.

American MegaDozen.
According to FinViz, these are 12 largest American enterprises:
Since these stocks commonly referred to as 'mega-caps', I call this list Mega Dozen (MD).
This is MD:
http://stockcharts.com/freecharts/candleglance.html?AAPL,GOOGL,MSFT,XOM,AMZN,FB,BRK/B,JNJ,GE,WFC,T,JPM|B|P5,3,3|0
This is SD - Second Dozen - next 12 stocks by market cap:
http://stockcharts.com/freecharts/candleglance.html?PG,WMT,VZ,PFE,CVX,V,MRK,ORCL,HD,INTC,BAC,KO|B|P5,3,3|0
These two lists need to be re-evaluated monthly for any changes and positions need to be revised accordingly. MD stocks are the biggest and the best, but its not written anywhere that they will remain to be so. Some will fall and never come back, but they are always replaced by new 'winners' in stock market, as in life.

S12 Requirements:
Minimum account size to run a System12 portfolio is $40,000, considering initial allocation of 12 equal positions of about $3000 each, with more than Standard Position Size cash reserve for replenishment. Read about 'How to Bet' here (link)
-note- I attempted to do it will less money and found results unsatisfactory. Don't repeat my mistakes - learn from them!
At larger sizes, System 12 becomes increasingly more efficient, as dividends accumulate and costs decrease. All my systems are designed to be run at 10 times of minimum allocation with almost no changes to execution (for my own future use), but S12 really stands apart. This thing can be traded with virtually unlimited amount of money, as MD stocks are some of the most liquid traded securities. A million dollars?  10 million? Just look at a volume figures for these stocks - you can do it on an opening tick and the Market will not even know you are there.

System 12 requires daily monitoring. I found it unnecessary and even counterproductive to watch these stocks intraday. We are not day-trading here, but portfolio needs to be reviewed nightly on closing basis and stops placed or adjusted. This should not take more than 15 minutes.

Personally, I think S12 should be traded in tax-efficient account, like an IRA. First of all, MD is a heavy object and moves slowly. Beneficial effects of this strategy will not be apparent in a period of few months, but over a year or two. It would be nice not to pay any taxes in the interim. Secondly, S12 has extremely efficient re-entry procedure (see 'Trade management'), unfortunately disregarding wash-sales (if investment bought and sold for a loss within 30 days, a loss can't be applied to offset gains for tax purposes). Since typical IRA does not observe wash-sales rules, our lives are made a little easier.

S12 Rules:
1. Take positions only in stocks trading above 200 day simple moving average. Any stock with daily close under 200dma is DISQUALIFIED from System12 and must be sold.
2. Any remaining stocks are AVAILABLE for purchase above 50 day simple moving average.
3. BUY all stocks that are Qualified and Available from MegaDozen (MD) first. If not all MD stocks  can be purchased, then go to Second Dozen (SD) and continue to buy until 12 positions are filled.
-note- an edge of System12 is in largest of mega-caps. The lower you go into SD, the more this edge dissipates. You must consider this very carefully.
4. Sell any position if daily closing price is below 50dma.
5. Use Positioning Period (PP) of 1 week (up to 5 trading days) to enter and exit positions. There will be more about this in a next article on 'Trade Management' (post link).
6. S12 portfolio can not have more than 12 positions. No margin. No leverage.
7. S12 portfolio can be partially or fully in cash for unspecified period of time. No trades beyond MD and SD are permitted.

Accordingly, as of today, S12Portfolio should look like this:
http://stockcharts.com/freecharts/candleglance.html?AAPL,GOOGL,MSFT,AMZN,FB,BRK/B,GE,WFC,JPM,PG,V,MRK|B|0

You can poke around fundamentals of these stocks via FinViz (link), but I tell 'ya - this is one helluva portfolio. Conservative and diversified, but definitely skewed towards technology and financials - market leaders of the past few years. Good. Even better, considering that it was picked not by some biased analyst, but by Mr. Market himself. I don't need to have an opinion (AMZN has crazy P/E) or make predictions (I would never have picked FB). A "bloodless verdict of the marketplace" is already reflected in these 12 stocks. Just follow the rules...

...until next week, when I will expand on a topic of "Trade Management", including Positioning Period (PP), 'by-pass' conditions and usage, and rare (but dreadful) Emergency Exit (EE).

-------------------------------------------------------
.this is a second article in 'System 12' series.
Read Part 1: System 12. American MegaDozen. Introduction.
-reading part 2-
Read Part 3: System 12. Trade Management 
Read Part 4: System 12. Performance and Risk
Read Part 5: System 12. Portfolio Initiation  
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