Introduction:  August 2008 - December 2008

Artistes perform during Cirque du Soleil's "Delirium" show in Hamburg September 18, 2007. The show of music, multimedia, dance, theater and acrobatics by 36 performers from 13 countries will tour 25 different cities all over Europe. REUTERS

Members of the Australian circus 'Circus Oz' pose for photographers during a promotion event in Hong Kong Tuesday, Sept. 18, 2007. The circus will start to perform in Hong Kong from Sept. 20. Circus Oz, is credited with being the first contemporary circus in a now significant international industry. (AP Photo/Vincent Yu)

Circus Acrobats - Do you need this much skill to do well in the market?

I have decided to start up my Journal again.  Take a look at the introduction of my old Journal to see how I operate.  I started writing this in August, as I developed trading systems, but I have no results to report because I am currently in cash.

This has been a very volatile market.  The major domestic and foreign averages are down significantly, and it will be very difficult to make money trading stocks.  Those wonderful people at the banks and brokerages have gotten us into a real mess, with a little help form housing speculators and realtors.  Ironic, isn't it, that these people who line up to give us advice and manage our money have brought the system down, and their companies to the edge of bankruptcy.  I would love to see Merrill Lynch go belly up.  Couldn't happen to a more deserving bunch.

August, 2008:  Considerations in developing FastBreak Mechanical Systems

FastBreak mechanical systems are unlike some other mechanical systems.  Other systems generally start with a list of recommended stocks from some vendor, such as Value Line or Zacks.  A further winnowing is performed, resulting in a relatively small number of stocks, 10 or so, These stocks are held for a fixed period of time.  Then the process is repeated, and trades are made to the new list.  The time period may be measured in weeks or months.  

My criticism of these methods is that they are calendar-based rather than event-based.  

FastBreak mechanical systems are event based, in as much as they trade based on a ranking which can change every day.  There are also stops and pre-conditions for buying.  Hence holding times vary from a few days to as long as several months. The disadvantage of FastBreak systems for stocks is that they work from a fixed list of stocks, and this list cannot, from a practical standpoint, be much larger than around 1500 stocks. So there needs to be a way of developing the list and changing it on a regular basis.  This amounts to developing a new system, and transitioning from the old system to the new one.  It also means that one needs a good source of candidate stocks.

Now FastBreak systems are great for ETFs, since the list of ETFs does not change much, and recently it seems that many of the newer ETFs are just different versions of other ETFs.  But stocks are a different matter.

The system I am using takes lists of stocks from Coolcat (Kevin Kennedy, an early poster on the Motley Fool's CANSLIM board), The Kirk Report (Charles Kirk), TradeGuru (a mechanical system from the same organization that has brought us TimingCube), and from various lists of "overlaps", that is, stocks that are common to the various mechanical systems a the Motley Fool. In addition, I picked leading stocks from each of the various sectors. There are many stocks common to all of these individual lists.  The current list consists of 954 stocks. Most are in the Fasttrack database, but some are not, and I have used GotData to provide these additions to the Fasttrack database.  The Fasttrack database is continually growing, and the organization is very cooperative about adding additional stocks.

I have systems which trade 10, 20, 30, and 40 stocks, where the stock systems that trade fewer stocks are simply intended to be used for a smaller account.  The method of ranking is Short EMA/Long EMA.  This has worked out much better for stocks than any other method of ranking I have found.  I used to think that Most Anchored Momentum was the best, but a lot of tinkering has convinced me that the EMA ratio is the best approach, at least for stocks.  The system was determined by the genetic method of optimization, and contains both flow control conditions and stops.  Note that the FastBreak Pro has no official limit on the number of stocks that can be held, whereas the "non-Pro" version limits you to 10 stocks at most.

Right now, I am just running the systems and waiting for a good buy signal.  That is not terribly likely to happen until the financial system is on a better foundation.  I expect to change the list of stocks and re-optimize the system about every 1-3 months.  In the meanwhile, I intend to keep a list of new stocks, and there is nothing to prevent me from buying from that list if I see something that looks good.

There are two significant problems with trading such a system:

(1)  There may be an error in the data.  If this error is corrected, this may change the stocks bought by the system.  For example, let's suppose that the price of a stock two weeks ago was lower in the database than it should have been.  This might mean that the stock was not bought by the system; hence you do not own it and instead you own something else.  Now if the data is fixed, it may turn out that the system bought the stock, but you do not own it.  Instead you may own something else.  What is worse, since the database is corrected (potentially at least) every time you do an on-line integrity check (which should be every day), and since the old database cannot be preserved, you cannot even know what happened.  

(2)  If one of your stocks is being bought out by somebody else, it will most likely move up significantly.  No problem if you already own the stock, but if you do not it may be bought by the system.  Yet at this point, you most likely really do not want to buy the stock.  It will most likely have appreciated to the buy-out price or near it by the time you have the opportunity to trade.  But if you take the stock out of the database, it may have already indirectly affected what the system bought, and so your holdings may not match the system.

There is nothing to be done about either of these problems.  They cannot be prevented, and all you can do is use common sense when they occur.  Fasttrack data is generally excellent - certainly better than anything Yahoo puts out and Yahoo Finance.  I have been having some problems with Yahoo data, but I do not yet understand what is happening.

Burning Man Time Again

September 1, 2008

After some time, I have managed to analyze the problems with Yahoo data downloads.  If you go to the historical chart page for a stock, you should see a table of prices that ends at the current day's close.  Sometimes it does not.  It may end 2-3 days ago, or it may end several weeks ago.  What is worse, sometimes if you refresh the page you may get the correct data.  Then if you refresh it again, you get back to what you started with.  Or not.  In any case, this in unacceptable to me, and irresponsible for Yahoo.  After the trouble I have had with this, all I can say is that it would please me if the company were bought out and all the executives fired.  

At any rate, the bottom line is that I have no reliable data for many of the stocks whose historical data I have gotten from Yahoo.  In addition, I know how to download the data, test it, and correct it every night.  That is, however, not at all practical.  Maybe I can get Fasttrack to include the stocks in their database.  Otherwise, I will just have to delete those stocks from the family.

Whatever I do, at this point the Fasttrack people in Baton Rouge are more concerned with surviving Gustav than adding stuff to the database.  So I will wait for a while to ask.  Things seem to be doing well, and oil prices are down at this point (Noon, Sept 1).

October 11, 2008

Well, when I started to write this in August, I knew that things were a bit bad, but I had no idea how bad they were going to get.  I am happily in cash - actually Treasury bills due 2/26/2009.  That should be safer than a money market fund, no matter what the money market fund holds.  Not much point in keeping a Journal at this time.  There is not much to say, and in fact there are too many people saying it.  It would have been good to go short, but I just do not have the stomach for it.

October 29, 2008

Fed lowered interest rates, and the market is still very volatile.  Up and down all day.

November 8, 2008

We now have a new President, and I am very pleased.  While I voted for George Bush twice, it is clear that his conduct of the wars in Iraq and Afghanistan has been miserable.  The "surge" came way too late, and after a huge cost.  The lax regulation of the investment banks - primarily in the use of leverage, unregulated credit default swaps, and totally insane mortgage standards - has been a disaster.  Four years ago, John Kerry had nothing to offer of any substance.  This election was different.  Clinching things was the selection of Sarah Palin as the Republican candidate for Vice President.  That McCain could pick such a complete airhead indicated to me that his judgment was, to put it politely, age-impaired.  In addition, Sarah Palin was a travesty when it came to women's rights - in particular the right to have an abortion.  Then, of course, there was the bigotry of the religious right with respect to gays, of which she was a part.  I do not want an administration that is beholden to those ignorant, hate-filled bigots, and I do not want anybody in office that thinks that ex-gay therapy either works or would be desirable. In addition, nobody who believes in creationism is really capable of the kind of independent thought necessary to make good choices in government.

There is so much stuff on the part of the Republicans, like the affirmation of creationisn, that is either religious stupidity or pandering to the stupid religious right.  These people do not deserve to govern.  

McCain still got a majority of the white vote, and it makes me aware that there is still a lot of racism around.  Look at the states he carried - are those places known for diversity, racial tolerance and harmony?  

The aftermath of the election, however, did provide me with some occasions for amusement.  Some hysterical idiot over at the Motley Fool declared that there was no money to be made in the market now that Obama had been elected.

It will take a very long time for us to work ourselves out of this economic mess.  I have no idea when the next buy signal will occur, or whether or not it will be profitable.  Still, I do have an excellent combination signal for trading this system, and the market as a whole.  It is rather conservative, but its record in timing this system backtests at 100% profitable trades since 2003.  The combination is formed by taking the Trade And of DS36a and SOB1.  In addition, this timing signal is improved by requiring positive readings on the equity curve of the strategy for the 21-day EMA, the moving average crossover (8,34), and the MACD histogram (55, 144, 13).  

Note the way the Trade And works:  As soon as both signals go on a buy, you get a buy on the combination.  The signal will remain on a buy until both go on a sell.  That is, both do not have to be on a buy for the signal to stay on a buy after both have gone on a buy.

November 23, 2008

Almost Thanksgiving.  We are nowhere near a buy, and I have a feeling that GM will file for bankruptcy.  No telling about the other 2 American automobile manufacturers.  We have bad unions and bad management, and it may be that the only way to become efficient is for the companies to break the unions through bankruptcy.  But they will still have bad management, so the prognosis is grim.  Another problem is that people are buying cars less frequently, so fewer cars need to be built.

Currently, I have a list of over 1200 stocks, but nothing to do with them except to wait.

I don't know whether or not to post this.  Not much point is posting until I get a buy signal.

December 12, 2008

WowWee, Deppity Dawg!  The unions have refused to take pay cuts to the level of Toyota and other foreign automakers in this country.  The deal may have collapsed anyway, but they were the deciding factor.  The market looks terrible.  Bankruptcy may give the GM and Chrysler a way of restructuring things so that they can again become profitable, but I have no confidence that they will have success.  I am very glad not to be holding any of their bonds.  Also very glad to be driving a Prius.

December 13, 2008

Now it looks like the President will give some of the TARP money to GM and Chrysler.  I do not see how that is even legal.  This mess looks worse and worse.  Just let the guys go into bankruptcy.  They have made so many mistakes that there is no point in going on.  If any of them had gone to hybrids when Toyota did, and had implemented it right, they would own the market now.  Instead, they spend money lobbying (and paying off) Congress not to increase mileage standards.  Die in a ditch, managers and unions all, with your lobbyists on top of you.

December 15, 2008 - How to Avoid a Scam

Huge Ponzi scheme perpetuated by a well-known and trusted manager, Bernie Madoff.  This one is about $50 billion.  See the 2-page article (1, 2).  Then there is also a cool list of clients. Lots of important people and institutions trusted this person, and gave other people's money to him without much due diligence.  Consider the list of clients, many of whom are banks and other financial institutions who gave Madoff their client's money.  Would you want ever to take advice from any of those jerks?  They would be happy to give it, take your money, and charge you a fee.

Then there was a well-known and highly respected lawyer, Marc Dreier.  But this piece of scum was a piker compared to Madoff.  Only $380 million.  But he took down his entire law firm, so there are a lot of lawyers without jobs currently.  I am tempted to say that is probably a good thing, but maybe some small number of them were honest.  Another 2-page article (1, 2).

Rules for having a managed account: Rule 1: It should be held by a third party - e. g. Schwab. Rule 2: You can access that account at any time to see what is there.  Rule 3: You can liquidate at any time without any penalty.  If your manager will not agree to those conditions, RUN AWAY.  And if anything happens to cause you to lose money because of fraud, sue Schwab for not protecting your account.  If Schwab reports that you have 100 shares of MMM (for example), any you really do not because somebody like Madoff was doing phony trades, Schwab is on the hook. Schwab cannot keep him from making bad trades, but they are obligated to report the trades correctly, and actually have the shares in your account.

RUN AWAY

And your Girlfriend Should be Required to Wear Running Shoes.

The Doctor knows How to Get Out of a Bad Situation

Current System Results, Timed and Untimed

Note that the timing does not improve the final results, but it does lessen the drawdowns.  

December 15, 2008

OK - I finally decided to publish this beginning of a new Journal.  I wish I could tell you that I had been following the above system, which trades 10 stocks, for several years, but in fact I just constructed in while we were in this downtrend.  Whenever the time comes, this, with perhaps some additional stocks in the list, will be what I will trade.

I also wish I could tell you when next it will be a good time to buy.  Hunkering down in cash, or well-timed shorts, seems the only good policy at this time.  Watch those acrobats.

We got into this mess through idiocy and greed.  People thought that housing prices would just go up indefinitely.  People thought that housing was a safe investment, Investment banks thought that they could be leveraged 30-1 or more and because of their complicated mathematical models and credit default swaps would be safe.  They never believed anything by Taleb or Mandelbrot, both of whom they denounced. Not only did they not believe those 2 guys, they applauded a couple of Nobel Prize winners, Myron Scholes and Robert Merton, and when that LTCM scheme ended in disaster in 1998, they continued doing the same sort of things, based on the same sort of mathematical models.  Isn't that the definition of insanity?  Doing the same thing over and over but expecting a different result.

The mathematical models were not only all wrong, they were entirely stupid because their assumptions about the real world violated common sense.

BTW, the Taleb and Mandelbrot books are not hard to read, even for those not particularly mathematically inclined. 

Also, some mortgages were falsified, and/or based on sexual favors.  But the people at the banks did not care.  Many people need to go to jail, but most will probably get away free.

The whole thing makes me furious, and very eager for much more regulation at the banks.  There are a number of simple rules, which if followed, would have prevented this mess.

December 17, 2008

Just in case you thought that the SEC was a useful organization, dedicated to finding and punishing fraud in the investment area, think again.  The SEC was tipped off about Bernie Madoff's scam, but did nothing (1) (2).  What a useless organization!  

December 22, 2008

Almost Christmas.  While I have some good signals on a buy, these are not confirmed by the action of the mechanical system.  So I am still on the sidelines.

December 23, 2008

Just thought of Rule 4 for having a managed account.  If you have to beg the manager to take your money, that is a dead give-away that the manager is not honest, so forget about it.  He should beg you for your money.  People were begging Madoff to take their money.  That is a wonderful clue that he was a fraud.

But the bottom line is that if you follow these 4 rules, you simply will not invest in a hedge fund.  So does this mean that I think that the whole industry is illegitimate?  Yes it does.  If you cannot see what the manager is doing, and cannot check up on him on a daily basis, then you need to stay away.  Sure, there are some honest hedge fund managers out there. Nevertheless, it is impossible to tell which ones are honest and which are not.  The government is no help.  Fellow hedge fund managers are no help - many of them in their "fund of funds" channeled money to Madoff.  So do you think that you can tell the honest ones yourself?  Lots of luck.  Of course, the hedge funds say that they do not publish their activities because they do not want their competitors to know what they are doing, and use it to the competitors' advantage.  Well, that's the breaks.  The whole enterprise is simply untenable.

January, 2009:  New Administration, More Fraud, and a Market Head Fake

February, 2009:  Pretty Dismal

March, 2009:  Lots of Fun Stuff

April, 2009:  Making a Little Money

May, 2009:  Out and In

June, 2009:  Back Where I Started

July, 2009:  Back In, But Not Soon Enough

August, 2009:  A decent month

September, 2009:  Volatility makes things difficult

October, 2009:  Not a good month

November, 2009:  Much better

Month Accounts Accounts SPY SPY QQQQ QQQQ IWM IWM EFA EFA EEM EEM

Monthly % Overall % Monthly % Overall % Monthly % Overall % Monthly % Overall % Monthly % Overall % Monthly % Overall %













Nov 2009 6.19 6.19 6.16 6.16 6.35 6.35 3.12 3.12 3.92 3.92 7.85 7.85

December, 2009:  New System.

Month Accounts Accounts SPY SPY QQQQ QQQQ IWM IWM EFA EFA EEM EEM

Monthly % Overall % Monthly % Overall % Monthly % Overall % Monthly % Overall % Monthly % Overall % Monthly % Overall %













Nov 2009 6.19 6.19 6.16 6.16 6.35 6.35 3.12 3.12 3.92 3.92 7.85 7.85
Dec 2009 4.77 11.26 1.91 8.19 5.21 11.89 7.88 11.25 0.70 4.65 3.27 11.38

 January, 2010:  Out to cash

Month Accounts Accounts SPY SPY QQQQ QQQQ IWM IWM EFA EFA EEM EEM

Monthly % Overall % Monthly % Overall % Monthly % Overall % Monthly % Overall % Monthly % Overall % Monthly % Overall %













Nov 2009 6.19 6.19 6.16 6.16 6.35 6.35 3.12 3.12 3.92 3.92 7.85 7.85
Dec 2009 4.77 11.26 1.91 8.19 5.21 11.89 7.88 11.25 0.70 4.65 3.27 11.38
Jan 2010 -1.72 9.35 -3.63 4.26 -6.47 4.65 -2.77 8.16 -5.07 -0.66 -7.76 2.73

 February, 2010: Back in, but not doing well.

Month Accounts Accounts SPY SPY QQQQ QQQQ IWM IWM EFA EFA EEM EEM

Monthly % Overall % Monthly % Overall % Monthly % Overall % Monthly % Overall % Monthly % Overall % Monthly % Overall %













Nov 2009 6.19 6.19 6.16 6.16 6.35 6.35 3.12 3.12 3.92 3.92 7.85 7.85
Dec 2009 4.77 11.26 1.91 8.19 5.21 11.89 7.88 11.25 0.70 4.65 3.27 11.38
Jan 2010 -1.72 9.35 -3.63 4.26 -6.47 4.65 -2.77 8.16 -5.07 -0.66 -7.76 2.73
Feb 2010 -0.76 8.52 3.12 7.51 4.60 9.47 4.48 13.01 0.27 -0.39 1.78 4.56

March, 2010: Underperforming again.

Month Accounts Accounts SPY SPY QQQQ QQQQ IWM IWM EFA EFA EEM EEM

Monthly % Overall % Monthly % Overall % Monthly % Overall % Monthly % Overall % Monthly % Overall % Monthly % Overall %













Nov 2009 6.19 6.19 6.16 6.16 6.35 6.35 3.12 3.12 3.92 3.92 7.85 7.85
Dec 2009 4.77 11.26 1.91 8.19 5.21 11.89 7.88 11.25 0.70 4.65 3.27 11.38
Jan 2010 -1.72 9.35 -3.63 4.26 -6.47 4.65 -2.77 8.16 -5.07 -0.66 -7.76 2.73
Feb 2010 -0.76 8.52 3.12 7.51 4.60 9.47 4.48 13.01 0.27 -0.39 1.78 4.56
March 2010 2.81 11.56 6.09 14.06 7.71 17.91 8.23 22.31 6.39 5.98 8.11 13.04

April, 2010: Doing well, under the circumstances.

Month Accounts Accounts SPY SPY QQQQ QQQQ IWM IWM EFA EFA EEM EEM

Monthly % Overall % Monthly % Overall % Monthly % Overall % Monthly % Overall % Monthly % Overall % Monthly % Overall %













Nov 2009 6.19 6.19 6.16 6.16 6.35 6.35 3.12 3.12 3.92 3.92 7.85 7.85
Dec 2009 4.77 11.26 1.91 8.19 5.21 11.89 7.88 11.25 0.70 4.65 3.27 11.38
Jan 2010 -1.72 9.35 -3.63 4.26 -6.47 4.65 -2.77 8.16 -5.07 -0.66 -7.76 2.73
Feb 2010 -0.76 8.52 3.12 7.51 4.60 9.47 4.48 13.01 0.27 -0.39 1.78 4.56
March 2010 2.81 11.56 6.09 14.06 7.71 17.91 8.23 22.31 6.39 5.98 8.11 13.04
April 2010 2.63 14.50 1.55 15.83 2.24 20.55 5.68 29.26 -2.80 3.01 -1.70 11.12