GLD is Trending Up

The market rose sharply this week.  Since I am completely out of stocks, I was not helped or harmed by  this turn around.  To reiterate, I am out of stocks because the short-term trend turned down.  However, I am not short stocks either because the long-term trend remains up.  

Below is a chart of the S&P 500 going back to the mid 1990's and shows the long-term trend of the market using a 100 and 150 moving average cross over.

The areas highlighted indicate times where the long-term trend was down and shorting would have been acceptable.  In my view, shorting stocks at this time is still premature.

While stocks are neutral, other areas are, in my view, more positive.   One such area is gold, which I bought through the exchange traded fund GLD this week.

Unlike the S&P 500, GLD remains in an uptrend and is looking strong to me.

As I continue to wait to see whether the stock market tells me to buy stocks again or to short stocks, I enjoy exploring new trend following related resources.  Below are a list of resources that I found useful this month:

1) Michael Covel's Peter Brandt Interview  
2) An article by Automated System Blog 
3) An eBook by Trend Following trader, Nick Radge
4) An article by Stock Market Trends Blog
5) Nassim Taleb's newest book

Market Breaks 200 Day Moving Average

The market declined again this week resulting in the S&P 500 breaking its 200 day simple moving average.  Although I use a a 150 day moving average in all of my charts, the 200 day is more popular among technical analysts.   The chart below shows that the market has now broken both moving averages:

What does this event mean for the market?  Keeping in mind that anything is possible with the market going forward, a break below the 200 day moving average is a bearish development and I will present some evidence in support of this.

The blog All Time High Stocks breaks down a study which, among other things, backtests the performance of a buy and hold strategy versus a very simple strategy of buying the market when it is above its 200dma and selling when the market crosses below.

The study backtests the S&P 500 from the year 1928 to 2010.   Interestingly, the average annual rate of return for the market for buy and holders was only 4.86% during this 82 year period.   But what if you were only invested during the times when the market was above its 200dma?   Your average rate of return more than doubles to 10.29% annually.

The study also performs the same backtest to several other global markets, and I have summarized the findings in the table below:

On average, just being invested in up-trending markets, simply defined by the 200dma, doubles the rate of return relative to buying and holding.

While there are other simple systems that perform even better, learning to get out of a market, stock, commodity, mutual fund etc... when it crosses below its 200dma is a good start.

Market Trend Changes, Bonds Breakout

Selling pressure intensified this week, which finally pulled the S&P 500 into a short term down trend.  The chart below shows the buy and sell signal generated by my system:

The signal generated in the summer started off quite well, but ended being only marginally profitable as the trend quickly reversed.  The stocks I selected I think did good (but not great) and I calculate that I am up 15.22% YTD.

Now that the short term trend is down, I cannot own any stocks in my account.  Bonds, however, often do well in this environment:

Immediately after unloading all of my positions on Friday, I bought the long term bond ETF, TLT:

Notice how this chart is breaking out just as the general market is breaking down.   Meanwhile, Canadian bonds are also looking strong, making a new record high on Friday:

Presidential Election Futures

I don't really have anything to add to last week's post.   To reiterate, I am focusing on the short term trend of the S&P 500 to tell me what to do next:  if the short term trend remains up, I will continue holding my stocks; if the short term trend turns down, I will move into cash or bonds.

Meanwhile, with the election right around the corner, I naturally began thinking if there was any connection between that and the world of trend following.  As a matter of fact, there is.  The University of Iowa runs what is called The Iowa Electronic Market.  Here is their description posted on the official website:

The Iowa Electronic Markets are operated by faculty at the University of Iowa as part of our research and teaching mission. These markets are small-scale, real-money futures markets where contract payoffs depend on economic and political events such as elections.

So, basically, you could open an account and bet, with real money, who you think will win the forthcoming election.   Here is how the graph of this futures market looks like now:

The chart above shows that the traders of this market are pricing Romney at about 28 cents and Obama at about 72 cents.  In other words, this translates to Obama having about a 72% chance of winning on Tuesday.

Interestingly, these futures market have an uncanny ability to be more accurate than any expert and most polls, as was the case during the previous election:

It is my view that the price of any market is king.  Through the wisdom of crowds, markets are able to allocate scarce resources better than any one expert, guru or bureaucrat.  This, in turn, is why price (or a moving average of price) is the only indicator I use in my trading.