Artificial Intelligence and Trading.

April 12, 2021 by

In the last few weeks, I have investigated a few AI(Artificial Intelligence) platforms in the hope that one or more vendors of this new technology could enhance my trading results.

The quick answer is maybe, but the research has found a troubling example of what could go wrong.

A new  ETF that is based on AI is was offered on October 17, 2017: AEIQ.

To quote from its informational site:

“The fund applies proprietary algorithms to artificial intelligence (AI) technology which can process over one million pieces of information per day to build predictive financial models on approximately 6,000 U.S. companies. The technology continually analysis data and models in its active stock selection process, and derives an optimal risk adjusted portfolio consisting of companies with high opportunities for capital appreciation. The fund is actively-managed and discloses all portfolio holdings daily.”

The informational information About AEIQ also states that “The system mimics a team of 1,000 research analysts working around the clock analyzing millions of data points each day.”

“Harnesses the power  of IBM Watson.”

The performance of this ETF should answer the basic question that I have had in my investigation; Does AI work?

The answer as it relates to the AEIQ ETF is sometimes yes, sometimes no.

The following graph of the relative performance of AEIQ and the SPY ETF, which represents the S&P 500 index starting in August 2020.

The AEIQ ETF started life on 10/17/2017 at an offering price of $25. On Friday, April 9, 2012, it closed at 39.48, an increase of 57.92%

The S&P 500 on 10/17/2017  was 256.25. It closed on Friday, April 9, 2021, at 411.49, an increase of 60.58%

The above chart, like all the other charts on this bog, has green, blue, and red vertical lines.  Green vertical lines are the place where AEIQ is performing, on a relative strength basis, better than the SPY ETF and AEIQ has positive momentum. Red vertical lines show the times that AEIQ is performing worse than the SPY on a relative strength basis and has negative momentum. Blue lines are the indication to close the current position.

The better way to use the AIEQ ETF would be to invest in  AEIQ  when, on a relative strength basis, it is stronger than the SPY ETF and AEIQ has positive momentum. The basic swing trading method I have been talking about in this blog since day one.

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“Echo Trades”

March 29, 2021 by

Unless you are in a cloister or on a desert island, most of us have recently been contacted in one way or another by the recent Rob Booker promotion. The latest is about a discovery by an East Tennesee farmer named Jeffrey Turnmile who has generated, in the latest 12 month period, a return in excess of 4000 percent. I have nothing but respect for Rob Booker, who in the past has promoted many such “discovered” traders with outstanding results. Mr. Turnmile has found what they call; Echo Trades.

The reverse engineering of this amazing ‘discovery’ looks very similar to what I have been talking about for the last 10 plus years been discussing in this blog. Identify the trend, then jump in.

The main difference is that Mr. Turnmile, after discovering the trend, waits for a pullback.

He proposes buying trend continuations in an uptrend, wait for a pullback, and at the continuation of the basic trend, trade the continuation.

The continuation becomes the ‘echo trade’.

That’s all folks. Easy Peasy.

An example of what can be accomplished with this basic Echo Trade strategy is the following chart of EPD, Enterprise Products Partners.

One of the scanning services generated this security. Strong buy with analysts price target greater than 20% with a dividend yield greater than 2.5 %.

The weekly chart of EPD shows an uptrend beginning at the end of November 2020.

 

The above, daily chart of EPD. The  Green vertical lines showing BUY. The blue vertical lines showing a CLOSE long position.

Continuing this practice in this security should result in nice continuing profits.

A portfolio of similar securities could possibly replicate Mr. Turnmile’s results.

Please contact me at 516-902-7402 with any questions.

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Gates Foundation Shuffles Portfolio

February 23, 2021 by

Dow Jones reported that The Bill & Melinda Gates Trust, which manages the funds of the foundation, exited positions in  Alibaba Group and Uber Technologies, halved its stake in Apple, and increased investment in Schrodinger in the fourth quarter.

The following shows the relative performance between APPL and SDGR from June 2020 until the close yesterday, February 22, 2021.

As per all my previous charts, Green vertical lines represent that the top security, in this case, Schrodinger, is, on a relative strength basis, outperforming AAPL. A red vertical line, the Second security (AAPL) is doing better.

Bravo to the trust, so far.

 

 

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Houston, We Have A Problem : GameStop

January 31, 2021 by

The recent movement in GME (GameStop) has been headline news in almost every financial newspaper and as the lead story on almost every network and cable news channel in the last week.

Whether by individual investors acting through chat rooms or multi-strategy hedge funds acting individually or in concert, or investor trading platforms or clearing and pay for order flow firms, they ALL should have realized that tracking momentum would have prevented the large losses, if short, and given hope to the long side traders.

The four pictures below show the story. The linear scale has been changed to Semi-log for better illustration.

The last sale is as of the close of Friday, January 29, 2021.

Green is GO LONG, Blue is the close position, Red goes short.

Weekly:

Daily:

720 Minutes:

130 Minutes:

It is pretty obvious that only LONG positions should have been established starting the week after September 18, 2020, based on the weekly close. LONG-only once again after December 22, 2020. And so on with the 720 minutes after January 12, 2021, and LONG only after January 13, 2021. with the 130 minute picture.

It makes no sense looking at the above pictures of the trading history of GME over the last few weeks to understand how anyone with a plan would make try to profit from the short side of GME in the last few weeks.

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Market Timing, another look

January 27, 2021 by

In one of my former posts, December 7, 2020, I discussed looking at the relative relationship between the bond market and the equity market to gauge investor sentiment. In that post I stated:

“In the past, which is certainly no predictor of future behavior, the movement of the U.S. Treasury note and bond market, has behaved in an almost opposite manner to the equity market. The avoidance of equity risk has shifted the money flow into the safe haven of U.S. Treasuries and vice versa. In the past then, the equity market has been negatively correlated to the Treasury market. So, when equities are getting strong, Treasuries should be getting weaker, etc.”

The following is a chart of SPY and EDV as of the close yesterday, January 27, 2021, and it appears from the attached that the equity market is still in a nice uptrend.

I have added a 200-day exponential moving average to the present illustration.

Some have noted, historically, that when the SPY is considerably above the 200-day moving average, that a correction may occur. Yesterday’s close meets those criteria. In February 2018, prior to a correction, the 200-day moving average was approximately 12% above the index. Yesterday’s close was approximately the same.

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Basic Swing Trading Strategy

January 18, 2021 by

I have been asked by many viewers of this blog for more information on the basic swing trading strategy.

As is true in day trading, a multiple time frame analysis will lead to better success than just looking at an individual time frame.

The longer-term, in this case, weekly, is the signal that determines which way the security is going, i.e. the long term direction.

The shorter time frame, in this case daily, is the signal to follow in the same direction as the longer time frame, weekly.

I am using FedEx (FDX) for this example. The up arrows indicate long, down arrows indicate short. Blue vertical lines indicate neutrality.

We can see by the above chart, that FDX was in an uptrend starting on July 10, 2020.

Swing trading decisions from that date until January 1, 2021, should only be on the buy-side.

 

The chart below is the daily chart of FedEx, the shorter time frame that should be used to make the actual decision.

On July 11, 2020, the opening price of FedEx was $160.00 and a buy decision could have been made based on the weekly signal.

The initial long position could have been closed, October 28, the day after the neutral signal, at a price of $262.73, the opening price.

As in any trading decision, proper trade management should be used, such as stops.

This is only an example of what could have been done, not any kind of recommendation on FedEx or any security mentioned in any of this blog. Illustrations ONLY.

 

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Relative Strength

January 12, 2021 by

In the many past posts, I have recommended that to be successful in swing trading, one has to be aware of the individual securities relative strength as it compares to some index of its peers.

The following chart is an example of  OIH which is the oil VanEck oil services ETF. I have compared this ETF to SPY, which represents the Standard & Poors 500 index.

 

The prices are as of the close yesterday, January 12, 2021.

The rules are very simple, and the action indicated by the up and down arrows reflects the result of following the rules.

  1. Buy when the target security is stronger, on a relative strength basis than the index.
  2. Buy ONLY when the target is stronger, has positive momentum, and the index is also going up.
  3. Close the position when any condition is violated. Shown by blue vertical lines.
  4. The rules apply to shorting when the actions are the opposite of the buy rules.
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Market Timing and Other Examples at Year end 2020

January 3, 2021 by

In many past posts, I have tried to illustrate the relative strength of market sectors. The example below is as of year-end 2020.

In my previous post on Market Timing in early December, the illustration below shows that the market trend as portrayed by the ETF “SPY” is still intact. Prices as of the close on December 31, 2020

I am also showing below, another example of relative strength with positive momentum is APPL versus QQQ.

 

The rules in this example are pretty straightforward. Only buy APPL when it is outperforming QQQ AND QQQ is also in an uptrend.

The green arrows show these events. There are many different strategies that can be developed based on these events occurring.

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Market Timing Signal

December 7, 2020 by

Most investors find that timing the market, which is trying to determine whether to be invested or not, is not something that is within reach.

My experience tells me that not only is it possible, but it is also very important in these volatile times.

The ‘market’ can be illustrated by looking at the performance of the S& P 500 index, which comprises a good section of the United States economy.

The above graph shows the S&P 500 index, ETF: SPY, as of the close on Friday, December 4, 2020. It shows that there was a significant decline beginning at the end of February 2020 with a nice recovery starting in April 2020. It would have been ideal to find some way of getting out of the way of the decline and getting on the right path in April.

There is that kind of early, or at least not so late way, of doing just that!

In the past, which is certainly no predictor of future behavior, the movement of the U.S. Treasury note and bond market, has behaved in an almost opposite manner to the equity market. The avoidance of equity risk has shifted the money flow into the safe haven of U.S. Treasuries and vice versa. In the past then, the equity market has been negatively correlated to the Treasury market. So, when equities are getting strong, Treasuries should be getting weaker, etc.

I have chosen an ETF which is a good indicator of the U.S Treasury market: EDV, the Vanguard Extended Duration Treasury ETF.

Prices reflect the close of December 4, 2020.

 

The following chart shows the relationship between the price movement of SPY and EDV during the period of February 2020t to the close of Friday, December 4, 2020.

SPY is represented by the green line and EDV is represented by the red line in section three of the graph.

The next line shows the relative strength of SPY versus EDV. Green shows that SPY is stronger, Red shows that it is weaker.

The same is true on the bottom part of the illustration. The cross indicator on the individual ETFs show positive or negative momentum of the individual ETF.

 

The answer then is that one could make a market timing decision by watching the relative strength between equities (SPY) and Treasuries (EDV) and act accordingly. Purchase the equity market when it is in a positive relative strength to the Treasury market, which is represented by the Green vertical lines. Stay on the sidelines when it appears that the Treasury market is stronger than the equity market, the Red lines.

 

 

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High Volatility versus Low Volatility

October 5, 2020 by

There is a fascinating article in today’s Wall Street Journal in its quarterly “Investing In Funds & ETFs on page R3.: The Time to High-Beta?

Once a Quarter.

The thesis is that new research conducted says that: “high -beta stocks tend to outperform in just one week per quarter. Only in that week, therefore, does it make sense that traders bet on high-beta stocks. That week occurs in the quarterly earnings season.

The article goes on to that to test the theory, one would invest, during the first week of earnings season in a high-beta stock ETF while shorting an equal dollar amount of a low ETF.

Their example in the article regarding a high-beta fund is the Invesco High Beta ETF. (SPHV) That ETF  contains the 100 highest beta stocks of the S&P 500 index. The 100 selected have the “highest sensitivity to market movements, or beta, over the past 12 months. The fund and the index are rebalanced and reconstituted quarterly in February, May, August, and November.”

The example of low beta is the Invesco S&P Low Volatility ETF(SPLV) which contains 100 S&P 500 stocks with the lowest realized volatility over the past 12 months. It then weighs each stock based on its volatility(well, lack thereof).

I assume it is rebalanced every month, but was unable to speak to anyone at Invesco to give me that information.

The article begs the question of whether a strategy of ALWAYS having a position in being long/short SPHV versus the reverse in SPLV would be successful?

The following illustration says YES!

The green vertical lines indicate long SPHB and short SPLV. The red vertical lines indicate long SPLV and short SPHB.

 

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