One Hour per Month Trader - Continued... What do I trade!

I want to spend as little time as possible on picking what to trade. This automatically eliminates stocks of any individual companies. Picking stocks is hard work. It requires research, and frankly is very close to gambling, regardless who's doing research. Accounting scandals, CEOs getting fired, litigations, you name it... Don't have time, not a gambler, so, those are out of question. This leads me to picking only in the universe of ETFs.

Next, I want to be able to make money both in good times, and in not so good times.

First in good times, I want to pick the best ETF in the world ( :)) (equivalent to the best company in the world - what a task, eh). It has to follow an index - and the broadest index possible - and about the best candidate is S and P 500. Good candidates are all triple leveraged ETFs. I like the best MWJ. It follows Mid Cap universe of companies, fairly consistently follows the index and is less volatile then e.g. TNA that follows small caps. Not that I care too much, but MWJ also offers fairly high dividend (last time I checked it was 12% yearly).

In not so good times for stocks there are two options (oversimplification, but this is what I like): either go with inverse ETFs, or go with bond ETFs. Back testing proved that inverse ETFs are fairly dangerous play... They are very volatile, and not always exact mirror corresponding long positions. Bond ETFs are way less volatile. There are different categories, but I want to cover as much as I can from time horizon and types of bonds. Hence, short, medium, long term bonds, aggregate bonds, company bonds. I choose the following, but there are lots of them that can be substituted with similar ones: TLH, BIV, LQD, AGG. Also, I want to make as much as possible when market really goes down. Chosen bond ETF is UST that is double leveraged long-term bond.

There are times when all should be in cash. If you prefer you can use ultra short term bonds that give a bit of dividend - SHY.

Finally, there are times when market does go up, but not very convincingly so... I use index following ETF - SPY.

So, the list is: MWJ, SPY, SHY, UST, TLH, BIV, AGG, LQD... for all except for the MWJ there are Canadian equivalents if you prefer to trade in Canadian dollars only, and you can contact me for the list.

In the next blog: What and Why I Absolutely Don't Trade...

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Comment by Skot Kortje on September 12, 2011 at 11:28am: Thanks for the postings, Miodrag. How important is leverage in the long portion of the strategy? Can unleveraged ETFs provide above market performance, too?

Comment by Miodrag Kilibarda on September 12, 2011 at 11:58am: Thank you for the comment Skot! Leverage is very important in the long position. The method is very conservative, and have lots of safety features incorporated, and only when there's very high probabilty that market is going up the long position is taken. At those times you want to play aggressive. If only non-leveraged instruments are taken, same conservative approach lead to the following: On medium term results are inferior compared to buy and hold strategy SPY (e.g. 2-5 years). On longer term (e.g. during 2007, 8 and 9) results are way superior. So, you can sleep well, capital is protected, but results are not spectacular if non-leveraged instruments are used. Instead of leveraged ETF option might be (not my favorite) would be to choose a particular set of companies that you believe would perform better compared to overall market. So, you would use the model, and when MWJ shows up, you'd buy your favorites. Hope this answers the question.

Comment by Skot Kortje on September 26, 2011 at 8:55am: How do you manage a stop on these leveraged instruments? They are quite volatile and would challenge hard stops easily in many cases. How much room for volatility do you give?

Comment by Miodrag Kilibarda on September 27, 2011 at 11:18am: HI Skot, thank you for a good question! I've never put a stop loss on leveraged instruments exactly for the reason you mentioned. Let me explain a bit. First, as you could see from historical data, MWJ and UST are chosen relatively sparingly and only in times when trend is well established and volatility is not excessive (compared to other chosen stocks that I follow - see historical data table). Secondly, those two have to be above 50 day simple moving average when chosen. Thirdly, if at any day during that month at close (3:45 EST to be more precise) chosen etf is below 50 day simple moving average (by the way - in last two years never happened!), the stock would be sold and converted either to cash or to SHY. That is great question again! Thank you Skot.

Comment by Miodrag Kilibarda on September 27, 2011 at 11:33am: Sorry, just checked, it did happen once! Dec 2009 - TLH. Just for the sake of simple calculation i didn't actually take that into consideration, and considered it as if there wasn't a stop loss rule! If I did, actual results would have been even better. Thank you again Skot.

One Hour per Month Trader - Continued... What do I trade!

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