The conventional wisdom in bond investing is that, as interest-rates rise, you shorten maturities. As rates fall, you lengthen them. But what to do about holding-periods for equities? Might not the same thinking apply as markets rotate between their bull and bear phases? When faced with intermediate to longer term trends whose directions are flat to downwards, might it not be a good idea to tighten trailing stops and/or be prepared to get in/out quickly when technicals are overwhelming fundamentals, maybe even to the extent that technicals become fundamentals, as Soros argued in one of his books when he was still a shrewd trader rather than yet another political meddler?
To that end, I’m going to set up a campaign to trade the stocks in the SP1500 and the same number of ETFs, using some scanning software I have that can slam though 100 stocks/ETFs per second looking for breakouts that might be worth buying or breakdowns that might be worth shorting. I have no idea what the outcome of the campaign will be. But it’s the project that interests me right now, and to keep myself honest, I’m going to document the project here.
The SP1500 index includes the stocks in the (large-cap) SP500 index, the (mid-cap) SP400 index, and the (small-cap) SP600 index. There isn’t a similar index for ETFs, though Seeking Alpha has put together some pretty good lists that cover the major asset classes and that I’ll be borrowing from and augmenting. So, my “trading universe” will be 3,000 items.
The investing thesis is this. “Over-sold should be bought. Over-bought should be sold.” In other words, this will be a ‘mean-reversion’ gig rather than a ‘momentum’ gig. Scanning for breakouts/breakdowns will be done with a legacy charting program called Candle Power Ultra. Any buy or sell signals for stocks generated by CP Ultra will be vetted technically at BarChart and fundamentally at Simply Wall Street. The signals CP Ultra generates for ETFs will just get technical vetting, again at BarChart.
So, here’s an example with the signals based on yesterday’s close for the SP500. There’s a single ‘buy’ (BAX) and 20 or so ‘sells’. Here’s yesterday’s chart for BAX.
Pretty obvious what’s going on, right? CP Ultra is saying that BAX is very over-sold to the point of becoming a ‘buy’. But the chart for BAX contradicts that. Price (again) closed below the MAs, and TSI is still negative. In other words, there isn’t yet any evidence that BAX is going to turn itself around. Here’s what Simply Wall Street says:
Yeah, BAX is trading at a discount to intrinsic value (IV), and the earnings forecast is strong. So the stock might seem like a value play. But the company’s financial health sucks pretty majorly, especially when compared to a peer in the industy like HAL.
My takeaway? Rather than screw around with individual stocks in the sector, the smarter play might be just to trade an index for the sector, such as XLE, or better, one of the long/short ETFs pairs for crude or nat gas, which adds a third screen that would need to be run, namely, building a correlation matrix that benchmarks all stocks in the sector against the broad market plus an index or two that tracks the sector. What you’re looking to find is which securities are redundant to each other and --hence-- don’t need to be tracked, as well as finding which ones lend themselves most easily to being charted/traded, i.e., aren’t likely to whipsaw you, not hat all whipsaws can be avoided, though they all must be managed.
