Notes for December 30, 2011

[grems8544]

Long-only traders (especially if trading on a longer timeframe than a single day) as well as investors tend to do particularly well in Dec for obvious reasons (outlined by you). Long/short traders may be at a disadvantage, however. For instance, if a long/short strategy does not adequately take into account market seasonality and market volume levels in its approach, then abnormally large and/or abnormally frequent losses in the strategy developing during a holiday period, especially on the short side, would not be surprising. Short trades that would be avoided by a more sophisticated (but not necessarily ultimately better) strategy can end up being taken by a less sophisticated (but not necessarily ultimately worse) strategy, during a holiday period.

So you got me thinking about the long/short plays available. We've been in a range-bound market, with the 200d resistance lines looming over our heads, so this points me to mean-reversion strategies over trending strategies.

EdgeRater is a good program to evaluate Connor's TPS strategies, and they've been doing well on the short side for the month of December. I provided a copy of the strategies in my sticky thread here some time ago. Scroll down to the PDF section and you should be able to download the file, and more importantly, review the criteria for long/shorts on the TPS strategy.

When I present Connor's work in seminars I frequently get beat up by people who think the gain / trade is not worth the effort. Whether you subscribe to this view is individualistic -- profit is profit, and I know a few people who trade Connor's works exclusively and have beaten me this year.

In a perfect world, taking the signal at the end of the day on each side, the trades would look like this:



If you had a $100K to play with using this strategy you'd have $6250/position (hindsight), and when the dust settled, you would have netted about 1.5%. *I* didn't net 1.5% in December, so I should have been paying better attention to this strategy. Kicking myself right now because I play Connor's strategies all the time.

For those of you interested in the stats for the trades above, here are they are:



The long side has been poor:



This simply means that we've been in an up trend for December, contrary to being flat or range-bound, and given the high number of short candidates, we've been more overbought than oversold.

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2010 Wasn't nearly as exciting as 2011 from Connor's point of view. Mean reversion doesn't usually work across the board when there is a strong trend, and if you recall, last year saw a sneaker trend rise starting just after Thanksgiving 2010 and continuing through the month of December.

There are no Connor's TPS short candidates that fired last year (in hindsight, of course), but there were 11 trades on the long side:



The low profit / trade tells me that there was not a great deal of exuberance in the market -- prices were not overly volatile and hence were not overbought/oversold. We don't have the luxury of choosing our trades so take what is given ...

December 2008 was an interesting year, specifically in that it also generated NO Connors TPS Long positions, but fired a number of buys on the Short side:



Whether January 2012 will look like January 2009 based on this is anybody's guess. The key here is that there are strategies to play, and for the most part, they appear to be lower-risk / higher probability plays.

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If there is interest I'll continue to dive into these, especially from the leveraged point of view, because leverage can give us movement where some of the underlying does not.

Happy New Year everybody!

Regards,

pgd