05-01-2020: Playing Russian Roulette for Fun and Profit!

I got a great email from a client today. Here is the gist of his thoughts:


This stock market is insane. Two days up, then one day down, sideways one day, followed by a down day. Crazy! Playing in this market takes a professional like Turner Capital, and not for the faint of heart novice investor. This market is a version of Russian Roulette where you never know which chamber is loaded.


For most investors, I could not agree more with my client. We, on the other hand, see whipsaws as just another problem to solve. Engineers (of which I am one) have a perverse delight in solving problems that are, seemingly, unsolvable.


The unending whipsaws are non-trivial and, as so well stated by my client... "Crazy!" But... in reality, it is just another problem... a big problem, mind you, but still... just another well-defined problem. All we need is a formula (strategy) that can solve the problem and I think we have that formula.


We are in the final testing phase of, what I call, a whipsaw reduction formula that is showing a lot of merit. It is not a home-run methodology and is not without some significant effort needed to put the formula in play, but it may prove quite useful. It is NOT a methodology that replaces any of our current rules and methodologies; rather it is merely an additional set of rules to be used when the market is not in a well-defined trend.


Here are the components of the "Whipsaw Reduction Formula":


  1. The investment mindset is to not have a bull or bear bias; rather, the investment mindset is to NOT care which way the market moves in tomorrow's market.

  2. Each day, just a few minutes before the closing bell, we enter a bullish trade (index ETF) and a bearish trade (inverse index ETF). We invest the same amount of capital into each trade.

  3. The next trading morning, we look to see how the market is opening via the pre-market, just a few minutes before the opening bell. At this point we are "flat"; meaning we have not lost or made any money, even if the market is surging higher or surging lower. One of the ETFs will be positive and one will be negative. They, basically, cancel each other out; no profit or loss.

  4. We sell the losing ETF at the open and we put on a tight trailing stop on the winning ETF. At some point during the day, the winning ETF will likely get stopped out and if the trailing stop gets above the basis in the ETF, we generate a profit.

The devil, as they say, is in the details... There are issues (significant issues) to deal with in the implementation of this formulaic process. There will be days where the market opens up (or down) strong and then suddenly reverse direction. This sudden intra-day whipsaw can result in a loss if the reversal occurs before the stop loss moves above its basis. Setting the trail on the stop loss is also formulaic and depends on the volatility of the ETFs. There will be days where the market is basically flat or trading in a very narrow range where no winner or loser can be selected before the opening bell. Then, there are issues regarding handling the times when the trade stays in play for the entire day without triggering its stop.


We have worked all of those nuances out and are now trading this strategy with real money (my money) to see if other nuances occur that we have not anticipated. We may find this strategy not worth the effort. On the other hand, it does look very promising and it might be a great way to weather this age of whipsaws.


Wouldn't it be great to absolutely not care if the market booms up today and crashes lower the next? This formula looks very promising in that regard.


As soon as I am comfortable with this strategy, we will begin rolling it out first in ULTRA-MAX and then ULTRA, followed by Total Market. I haven't decided whether to use it in Tactical Growth or not. I will not be using it in the Diversified Income Strategy.


Please do not try to run this formula on your own. I am not ready to say it is a viable strategy; plus, you may not have all the rules in place for the nuances that can occur (not all of which I have delineated above) in the process.


Lastly, we are completely in cash this weekend in all but one position in Tactical Growth and one position in Diversified Income. With the sell-off today, one has to wonder whether the market is finally waking up to the realities of this economy or is this just another, rather typical, on-again-off-again bull/bear one-day cycle in the market, where Monday is just as likely to boom higher as it is lower.


In closing, I just saw a bulletin flash across the screen that says the COVID-19 pandemic could last another two years with spikes in infections like those we have already seen. Oh boy... with that awful perspective, the market will probably skyrocket higher on Monday (tongue-in-cheek comment).

Turner Capital

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