05-11-2020: The Data Support Waiting another Day... or so

As you know, I am very 'quant' driven. I study data all the time, looking for ways to increase return while keeping risk as low as possible. The problem with being a trend-based quant, is we need trends to last long enough to capture a profit and we need the volatility to be low enough to keep from getting stopped out before a profit can be captured.

This is one of the reasons why I am testing our "Delta-Neutral" trading strategy (more on this, below). The Delta-Neutral trading strategy is designed to pick up daily trends and ignore, completely, longer-term trends. We want this strategy to pick up 0.5% in profit a week, on average. We are not there yet, but we are getting very close to achieving that goal. This is an evolving process.

But, the Delta-Neutral trading strategy is NOT what I want to talk to you about this evening. We have also been heavily (very heavily) at work (over the past several months) developing our "TIP" algorithms, where we have our computer programs alert us when the 200-day moving average of an index or market or stock or ETF changes its slope. A change in slope from bull-to-bear or bear-to-bull is a very important change and significantly impacts the timing of when to be in or out or short. We have found a huge correlation of the success of a trade and the number of TIPs over the past 3 years. The fewer the number of TIPs, the higher the likelihood of generating a profit.

As of this week, we are incorporating this TIP scoring algorithm to our normal stock-picking and portfolio management process. You might not see, initially, a big change. But, you should start seeing us holding onto positions for longer periods of time and, consequently, holding those positions with much larger stop loss settings. This process gives us the ability to avoid a lot of the whipsaws that we have seen in the past. The last thing we want is a whipsaw to take us out of a position just before it jumps back up. The TIP strategy has shown a propensity of reducing whipsaws by widening the stops to a more realistic level, but only for those equities that have a historical trend of few, if any, TIPs in the past 3-5 years.

Ok... now to my plans for tomorrow...

If the market opens up tomorrow, I will be looking to put 10% to 20% to work in all the portfolio strategies. While the market is in a bearish-to-neutral condition, it behooves me to err on the side of caution. So, I am reticent to put a lot of capital to work right now, but I do have several equities that have extremely good TIP data and are trending solidly higher. And, of course, I still have my Delta-Neutral strategy in play every day, in testing with real money.

Inquiring minds have proferred a question...

"Why does the Delta-Neutral strategy have to hold both sides of the trade overnight? After all, you gain nothing for holding overnight as the gain on one side cancels out by the other side the next morning."

Wow... there are some really smart inquiring minds out there...

This is absolutely true and were it not for the day-trading rules, we would simply wait for the market to open and pick the winning trend. But, when we make a complete round-trip (meaning buy and then sell the same equity) in the same day, more than 4 days in a row, the account will be tagged as a "pattern day-trader"; not that there is anything wrong or improper with day-trading. The problem is, day-trading accounts must be margined. I have many clients who trade inside IRAs and an IRA cannot hold margin. Holding the trades overnight, therefore, completely eliminates the day-trading issue.

But, to hold overnight, we do not know which way the market is going to move the next trading day. This is why we have to buy both sides of the trade; the bull-side and the bear-side via an inverse ETF. Based on the stop we have in place for both sides, the next day the losing ETF stops out (generally) and then we move into managing the winning ETF. The only downside to this process is that half the capital is kept in cash since we are always selling the losing side of the total trade. This is not a big, big deal, as it has an upside to it, too. It takes half the risk off the table each day because half the capital is always in cash.

The real key to the success of this trade is how the winning trade is managed. The goal is to pick up small, incremental gains every day or, at the worst, only lose a small amount if the trade reverses before we can exit the trade.

As I said earlier in this blog, the goal is to pick up 0.5% per week. If we can make that happen, that's an annual gain of 26% on 50% of the capital put at risk... or about 13% overall. We are still testing the exit strategy to capitalize on this incremental, but consistent return strategy. More to come on this as we hone the processes for you.

And, now for an off-the-wall request...

If you are not an existing client and live in MA, MI, NC, NY or IL, I would like to hear from you. I have a proposal that might be of interest to you. Send me an email to mike.turner@turnercapital.com and I'll fill you in on the details. This is for folks who are NOT an existing client... Thanks!

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