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Is it Possible to Invest Profitably without Stops?
I am associated with a large investment club. The majority of the members have been struggling to maintain their hard earned retirement funds. Almost all have moaned and groaned whenever the topic includes stop losses. Everyone is concerned with past threats to their portfolios: Desert Storm, Bosnia, 9/11, Too Big to Fail.
Fabulous Stocks?
Many have invested in great stocks only to witness their value decline: Enron, Citibank, General Motors, General Electric, Cisco, AIG, Lehman Brothers, Filenes Basement, SGI, Bennigans Restaurants, Six Flags. The list is almost without limit.
Why The Fall?
The reasons why an equity drops in value are equally endless: The CEO just sold 100,000 shares; A reasonable forecast was met yet, the stock price crashed; The SEC has subpoenaed the CEO; Consumer confidence is down; Paid a pretty dividend, but the price fell even more; Record earnings and the stock still fell.
Just about every member appears to hate stop losses and with good reason: I was the only trade at that price; I had a 10% stop-loss, but I was closed out with a 20% loss; If I had a 10% Trailing Stop, I would get stopped out too soon, if the stop was at 20% I would sacrifice too much profit.
On May 6, 2010 the DJ Industrials lost 1000 points in less than 1 hour. Any Stops you had set that day would have been triggered. The price you would have received would have been far beneath your Stop price. Subsequently the same day, the market rebounded. You would have done better without Stops.
No wonder why the members whine!
There is a vast difference between trading stocks and broad based indexes. Without a doubt, it is possible to realize a higher profit with stocks; but, you can also lose more. How many of you have lost money after listening to Cramer or following the tips in a newsletter? How many of you have lost money after buying a stock you believed could not drop any further?
When it comes to investing, singles are easier than home runs -- and they can end up being more profitable. I am referring to broad based indexes. The S&P 500 is an index, obviously of 500 stocks; the Russell 2000 follows 2000. If the CFO of one of their stocks was indited, it would hardly create a ripple in the price of the index. I am not suggesting the price of an index will not fall if there is disastrous news. But, trading these indexes is the first step toward minimizing risk.
Recognizing Market Direction
The next step requires recognizing market direction. You do not want to go long when prices are falling. Conversely, you do not want to go short in a Bull market. This applies to both stocks and indexes. There are other times when the direction is obscure. During these events, you do not want to bet on a direction; you should be on the sidelines.
Unbiased View
This is why a market timer is important. It provides an unbiased view of the market direction rather than the hype offered on many news stations and newsletters.
Most market timers are based solely on the chart of the index they are following. They must be optimized periodically to accommodate market changes. These timers generally forecast either Bull or Bear markets.
The SPXTimer, in contrast, combines market sentiment with the chart and produces one of three forecasts, Bull, Bear or Neutral. From September 2007 through January 2010, the SPXTimer reported Neutral for over 25% of the trading days.
Stress Test of SPXTimer
I decided to stress test the SPXTimer by trading the Proshares Ultra ETFs for the S&P 500, SSO in Bull markets and SDS in Bear markets. By the way, the SDS is an inverse fund; it goes up in value when the S&P 500 declines. Inverse funds allow investors with IRA accounts to trade during Bear markets. There is no shorting allowed in an IRA account, but you can use the SDS to earn returns while the market falls without shorting.
No Need for Stops
Both SSO and SDS are leveraged 2:1. If there were a need for stops, this test would be the proof. The test ran from September 2007 through January 2010, starting during the time period when SSO and SDS first became available. There were almost 79% winning trades with an Average Annual Rate of Return [ARR] over 34%. Next, I ran similar tests of the Nasdaq 100, Mid Cap 400, and Russell 2000, still using the SPXTimer. The largest losing trade for any of them was 21.64%. Each had over 70% winning trades and even higher ARRs. Surprisingly, each of these tests did better than the test of the S&P 500. No optimizing was done to the SPXTimer.
I decided to push the stress test even further by using the more highly leveraged Direxion 3:1 ETFs on the Russell 2000. TNA was traded during Bull markets and TZA in Bear markets. Because these were newly introduced ETFs, the testing could only be run from 2/20/2009 to 2/11/2010. There were 87.50% winning trades with an ARR over 60%. The largest losing trade was under 16%.
Summary
By using a market timer, you can eliminate your need to use stop-loss orders on your trades. The SPXTimer is unique because it not only shows Bull and Bear directions, but it indicates when it is appropriate to be in cash protected on the sidelines.
You can see details of these trades at SPXTimer.com. Most investors would be excited with the gains afforded by using the SPXTimer. The gains top most mutual funds and investment advisors. In addition, you can safely leave the stop-loss orders alone. If you want to watch several videos about the SPXTimer and its multiple investment strategies that use this timer go to SPXTimer Videos
About the Author
For the past few years I have served as an analyst to a hedge fund. I'm also a popular speaker at a local investment club. Generally, my presentations relate to money management. As an analyst I have developed market timers and evaluated various money management ideas. In addition, I have created multiple trading strategies.