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MARKET TIMING with DECISION MOOSE

Moosignal
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The Week's Signal

 Weekly Close
                  This Week's Signal
 End Date
08/15/2014         HOLD Latin American Equities (ILF)
 08/24/2014

The model switches from Long Zero Treasury Bonds (EDV) to Latin American Equities (ILF) @ $38.60 on 07/03/2014. Always familiarize yourself with any investment program and the assets involved before committing to it. Read the FAQs and The Art of the Switch, below, and get a prospectus online from the fund provider.)



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The Art of the Switch

 
Look before you leap. While the Moose may sound simple and automatic, there is an art to maximizing your performance.

 
There are two types of signal at the Moose: HOLD and SWITCH. They mean what they sound like they mean. Holding for more than a week or two after a "switch" signal is not recommended. Similarly, switching into a position in the middle of its 'hold" signal is not recommended-- particularly if there has been an appreciable price increase in the designated asset since the signal was first given. (See FAQs for more.) Switching out of an old position late, however, and going to cash between signals, may stem further losses.

THEORY vs. REALITY

Although the Moose is nominally invested in a particular asset ALL week, anybody who knows the way this site works (having read the FAQs), and who has followed it with real money, realizes that's never exactly what happens during a SWITCH week.

A weekly theoretical model, the Moose works exclusively off Friday COB ("close of business") data. The site is usually updated by Sunday evening. In switch weeks, it "pretends" to have made the switch on the preceding Friday, when in fact the first opportunity to switch will be Monday. Now sometimes you can get Friday's price (or better) the following week, and sometimes you can't.

As mentioned in the FAQs, the Moose is not a short-term construct. It may spoon-feed you a great intermediate term switch signal, but you do have to do a little of your own chewing before you swallow it. You have to apply your own short-term methods, timing each switch week as best you can. A switch is never automatic. It doesn't have to be at the Monday open (in fact, I generally advise against that), or even by the Monday close. (I've waited up to nine trading days to complete a switch.)

The switch decision is, in reality, an open-ended one. Which is why we use Friday COB data. If not that number, which one? Why collect, store, and tabulate a second, third, or fourth time series, that is no more valid a benchmark than Friday COB? Keep it simple, stupid.

THE PERFECT SWITCH

On the surface, the perfect switch would seem to entail selling an undesirable holding on Monday (or after) at a higher price than the previous Friday's. After that, you have to buy something new and theoretically better on Monday (or later) at a lower price than last Friday's. Sounds tough. But does "perfect" mean that? Actually, no, it's far less rigorous.

Sure, you'd like the asset you're selling to go up next week, right as the new asset you intend to buy dips for a moment. However, if you sell higher than last Friday's price, you can now afford to buy in (the same percentage) higher, and still break even. The same holds true if both assets head lower next week. If the asset you're buying falls in price, you can afford to sell at a lower price too.

The only problem occurs when the old asset tanks, as the new one spikes higher, which isn't often. That's because the top two assets in the model at any given moment are usually (more or less) positively correlated. In other words, their prices are generally headed in the same, not an opposite, direction-- albeit with different momentum and different degrees of volatility.

Although I've never done a data analysis, personal experience suggests that my chance of getting a better aggregate price the following week, combining both the sell and the buy, is about 50-50. It really depends on how well I handle it, but also on conditions at the time of the switch.

MARKET CONDITIONS CAN HELP YOUR SWITCH-- OR NOT

Sometimes, life is wonderful, complacency is nigh, everything is bullish, and one asset simply overtakes another in the model. That is the toughest switch to time, believe it or not, because you're simultaneously trying to sell on a bounce, something that's supposedly losing steam, and after that, buy the purported the new barn-burner on a dip. Although your probability of pulling off that ideal two-fer seems low, ironically, you end up not caring that much-- unless you're really anal. (Once you realize both assets are going up, you know you're getting richer no matter how stupid you were about the switch.)

The November 2006 switch from Europe to Latin America exemplified this. I failed to pull off the perfect short-term switch, but I did have the opportunity. Europe, my sell, did open higher the following Monday, and Latin America, my buy, was lower intraday. Had I put in stops and limits right around the Friday close, I would have been even or in the black. As I recall, I danced around for a few days, sold IEV high, but bought ILF a little higher percentage-wise. (Hey-- sometimes you get the bear, and sometimes the bear gets you.)

So much for hunky dory. Occasionally, the Moose signal hits when life sux, volatility is through the roof, everything is in the tank, and YOUR portfolio is LEADING the herd down into the Fourth Circle of Hell.

(If that situation sounds vaguely familiar to Moose veterans, congratulations! You do NOT suffer from short-term memory loss.) On February 27, 2007, it seemed "Lasciate ogne speranza, voi ch'intrate" was running across my CNBC ticker instead of "ILF". (For the classically curious, that's Dante's account of the inscription above the Gates of Hell- "Abandon all hope, you who enter here.")

Black humor aside, such extremes do lend themselves to an easier short-term switch. When a weekly close in virtually every asset class is really oversold, as we knew and reported that week to be, a one-day bounce the following week is all but assured. And the longer it's delayed, the bigger it gets!

Hence, we enjoyed the spectacle of a bunch of Greedo's bouncing around the next week with their shorts on fire. What is never certain is whether a one-day short-covering rally will carry through to a positive week, although the odds seem to be better than 50-50 when invested in a top-tier asset.

If you followed my switch advice in that week's commentary-- didn't panic on a very scary Monday, and waited for the predicted bounce to sell mid-week, you made out as handily as I did on the week’s pop in ILF. (As that signal ended in cash, the second task of the ideal switch- to buy a stronger asset at a lower price- was moot.)

Again there was irony. This was a near perfect switch that yielded an additional 1-5% over the model. But how to break out the champagne, when I still have the tread marks on my forehead from being run over the week before?

HOW AM I DOIN'?

There will almost always be a difference between the theoretical performance calculated herein using Friday COB data and the actual performance you achieve during a switch. Whether that difference is positive or negative (and whether it's significant or minor) will depend on your short-term trading skills, on the volatility of the assets involved, and on market conditions at the time of each switch.

So don't try to judge your success by looking at one switch. Consider each in the context of the entire program. If you miss on a switch this time, you may make it up next time, especially if you've gotten better at switching, or if conditions are more favorable.

Remember, it's a percentage game. It's not about being right every time. If you hit big on a switch and make, say, 2-5% over benchmark, it can erase (in one swell foop) four or five previous small misses you may have had.

DAY TO DAY, WE'RE ALL ON OUR OWN-- SOUNDS LIKE A PLAN


The Moose gives no short-term switch guidance. I may write something in Moosecalls about my intended approach to an upcoming switch, if I do indeed have a clue-- or I may not, particularly if I intend to wing it.

My switch strategy will depend on whether I'm trading a taxable account or an IRA. Taxable accounts usually allow borrowing on the margin to buy, while tax-deferred accounts do not. Margin allows me flexibility to buy the new asset before I sell the old one. Without margin, in tax-deferred accounts, I must sell first (or simultaneously) to buy. My strategy will also depend on whether the switch involves cash at one end, or is a switch between two non-cash assets.

Either way, I try to get the lay of the land the following Monday before acting. I monitor short-term technical indicators, but usually fall back on common sense.

The decision is much easier when the switch is either to or from cash. Since cash is a constant, only the price of the non-cash asset is important. The following table outlines my basic strategy for completing a switch to or from cash. I put it right up there with the best laid plans of men and mice. Market conditions and the target non-cash asset always play a major role. A fast market and a volatile target can throw the entire strategy to the wind. Nevertheless, it's good to have a plan.


When switching from CASH into a non-cash BUY ASSET, if in the following week BUY ASSET Action
SELL ASSET Action
 BUY ASSET price < its Friday closing price  buy  cash out
 BUY ASSET price > its Friday closing price  wait  wait
 When switching from a non-cash SELL ASSET into CASH, if in the following week 
BUY ASSET Action
 SELL ASSET Action
 SELL ASSET price > its Friday closing price  cash in   sell
 SELL ASSET price < its Friday closing price   wait   wait

When the switch entails two non-cash assets, the decision is more complicated, but the logic is the same. I guage the percent change from the Friday close in both my sell and my buy asset. Generally, if my sell asset is having a much worse day than my buy asset, I'll wait. (Even though I'm selling it, it's still a top-tier asset, and will usually bounce.) Similarly, if my buy asset is through the roof right out of the gate, I'll wait for a retracement. But there is more to it than that.

 
When switching from a non-cash SELL ASSET into a non-cash BUY ASSET, if in the following week  SELL ASSET Action BUY ASSET Action
 SELL ASSET price > its Friday close and
 BUY ASSET price is < its Friday close
sell
 buy
 SELL ASSET price = its Friday close and
 BUY ASSET price is = its Friday close
sell  buy
 SELL ASSET price < its Friday close and
 BUY ASSET price is > its Friday close
sell  wait
 SELL ASSET price percent increase from Friday close >
 BUY ASSET price percent increase from Friday close
sell  buy
 SELL ASSET price percent increase from Friday close =
 BUY ASSET price percent increase from Friday close
sell  buy
 SELL ASSET price percent increase from Friday close <
 BUY ASSET price percent increase from Friday close
sell  wait
 SELL ASSET price percent decrease from Friday close <
 BUY ASSET price percent decrease from Friday close
sell  buy
 SELL ASSET price percent decrease from Friday close =
 BUY ASSET price percent decrease from Friday close
sell  buy
 SELL ASSET price percent decrease from Friday close >
 BUY ASSET price percent decrease from Friday close
wait  buy margin


HOW LONG DO I "WAIT"?


So market conditions and the target non-cash assets always play a major role. A fast market and volatile targets can throw the entire strategy to the wind. And then there is always the question, "So when it says 'wait', how long do I wait?" My answer to that is essentially, "...until I can't stand it anymore".

Very funny. So how long is that?

All I can tell you is that you'll know it when you see it. Since the average signal lasts three months and returns 8%, I usually start getting antsy after a week or two if the switch in question gets 3%-4% more expensive than the signal prices. It does depend on the assets' beta, however. Some ETFs (ILF, EPP, IWM) are more volatile than others (cash, BTTRX). ILF, for example, can have 3-4% intraday swings. The more volatile, then, the more patient I can be. If the asset seems to be making higher highs and higher lows on decent volume, however, the train is leaving the station. I have to forget patience and chase it.

How far down the tracks do I chase? My "drop dead" limits for a switch (which I have never used) are 8% more expensive than the signal price and/or six weeks into the switch. (For those of you tempted to buy in mid-signal, these limits represent averages over the life of the model, which if exceeded, would lead to a loss in that position. There are however, wide disparities in individual signal length and profitability.)

Personally, I never put in "blind" buy or sell orders over the weekend to catch the Monday open. My backtesting confirmed early on that trading the Monday open is a poor choice more often than not. A little patience appears to yield a better result 60-70% of the time. Readers' backtests have subsequently confirmed that.

I don’t use overnight stops or limits either, although that would seem to be a good bet to get a particular price. Gaps up or down on the open can be painful when locked into the wrong price. Intraday stops and limits are more work, but a better choice. As a general rule, however, I sell at the market. If I do set a price, it's only on the buy side.

In the end, for me at least, short-term timing is often a crap-shoot. But the hardest part of it invariably proves to be the most profitable, and that is to stay cool. Keep the greed and the fear in check long enough to make a rational switch.

Still Thinking About it? Please Remember:

The switch signal on this site is presented free of charge. It is no substitute for the services of a professional investment adviser. Investments recommended may not be appropriate for all investors. Recommendations are made without consideration of your financial sophistication, financial situation, investing time horizon, or risk tolerance. Readers are urged to consult with their own independent financial advisers with respect to any investment.

Past performance is no guarantee of future results. Model signals and related analysis are for informational purposes only and should not be construed as an offer to sell or the solicitation of an offer to buy securities. Most financial instruments (stocks, bonds, funds) carry risk to principal and are not insured by the government. Anyone using this site for investment purposes does so at his or her own risk.

Data accuracy cannot be guaranteed. Opinions and analyses included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. We are not liable for any errors or inaccuracies, regardless of cause, or for the lack of timeliness of, or for any delay or interruptions in, the transmission thereof to the users.

As a matter of policy, we do not act upon the investment information that this site provides prior to making it available to the public. We do not accept compensation of any kind from any companies mentioned herein.

This is a private Web site providing a private service. No part of its content may be copied or forwarded to anyone else; the sole exception is a one-time forwarding to inform others of this service.





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