I wrote a review about Zecco here about two years ago.  I liked what I saw and opened a small account with them for speculative trades.  I've been with Interactive Brokers since 2001, so it would take a long, long track record to get me to switch.  Plus, IB options commissions could not be beat.  No mind.  Free stock trades isn't something to let go by.  I was also interested to see if 'free' cost money in the way of poor execution.  Much to my surprise, the execution was pretty good, even on odd lots.  There was no shenanigans with the free trades either, they were free.  No account minimums, inactivity fees, etc.  Well, that changed in October 2007 when I wrote this article about Zecco bait and switch.  The fall out to me was pretty spectacular (they were verbally whipped and beaten for weeks after the announcement). To me, this was a sign that their business model of giving things away for free wasn't working (I guess they thought they would make money on volume?).  They raised the zero commission minimum balance to $2,500.  I had more than that in the account, so I actually wasn't affected, but I saw the writing on the wall.  I sold what I wanted to sell and moved all cash back to my IB account where the rules weren't changing so quickly.  I could no longer trust this company.

I don't know when it was enacted, but I signed into Zecco today to take a look at my few remaining open positions and noticed that the new account minimum for zero commission is $25,000.  Quite a leap and I'm certainly not keeping that kind of money with a company like this.  So what have the new commission schedules gotten us little guys? Nothing that I can tell.  It's still a subpar platform with no bells and whistles.  I think the little guys $4.50 funded the forex operations which is a profit machine for most brokers at this point.

So as I suspected, the zero commissions was nothing more than an elaborate marketing scheme.  Hope nobody closed their IB accounts.

In my June 1st posting I state:

And in trading system news, I believe I'm about 1 month away from testing another trading system.  I haven't figured out if I want to use options or just plain stock yet.  It's a quick "in and out" type trading system with a maximum hold time of about 10 sessions.  It may be tough to overcome the option spreads in so little time. This is what testing is for though.  I may test with both vehicles and see which one makes the most sense.  I'll share results here. 

Welp, I'm ready to go live and I've decided to go with options.  I've made some slight modifications to the system to support more liquid contracts which resulted in less symbols in the watchlist which increased the hold time and reduced the number of trades.  The selection of options over stock has also increased my hold time because part of the adaptation results in being short theta (i.e. drawing benefit from time decay).

So the testing will begin.  As I've mentioned before, backtesting results do not always translate well into the real world.  There are a number of reasons for it, curve fitting, data mining and emotions all come into play.  So I like to take it slow and enter in with single contract positions.  I'll share my entries and exits along with the options strategy.  I'll lag my actual entries because I don't want anyone to stupidly follow me.

This is the testing phase!  It will probably take several months (if I'm lucky) to put any real money from my speculative pot into this idea.  This is also a low frequency trading system.  Again, most of the benefit is drawn from letting short options expire.  When I enter the trade, I'll feel that there's a high probability that the current price will hold, increase or decrease slightly over the next month.  I expect the system to average one trade per month.  And I do mean average because we could go 5 months without a trade and then get 5 trades in a month.

Be warned, few of my trading system ideas make it to the testing phase and even fewer make it beyond testing. 

Someone made a good point yesterday regarding technical analysis and market timing among the asset allocators.  These are the buy and hold folks (like me on my long term holdings) who all of a sudden know and practice technical analysis.  They start with something simple like the 200 day simple moving average and then graduate to SMA crossovers and then when those two seem shaky, it's the EMA that's the REAL holy grail.  This new found love for TA just so happened to flourish when the market tanked.  Up until that point, most buy and hold guys despised technical analysis.

What doesn't help one bit is that the 200 day SMA did provide a great exit signal this time around. Imagine if you gave your kid $5,000 to invest.  The kid picked a bunch of bio techs that went to the moon and doubled the money to $10,000. You know how that kid would feel? He's a better stock picker than Cramer (well, he probably is, but that's not the point). So he continues to take wild risks thinking that he knows the next greatest thing. There's a high probability that he will lose in the end. Hopefully, the experience humbled him.

This has been the basis for my studies posted over the last couple of days.  I feel the need to debunk a lot of the crap floating around and get people to understand and test for themselves.  Don't shoot the messenger, but these extremely simple strategies have been known for decades and have been proven random by the system builders many times over. To think that all of a sudden they work is fooling yourself.

Back when the VIX was at 10 in 2006, long term holders began to pile into risk.  There was supporting evidence that emerging markets, small caps and even a diversified individual stock portfolio was the key to outperforming.  Now the crowd discussion has turned to commodities, gold, bonds and even currencies.  It will be interesting to see if this is also cyclical.  The VIX will some day hover in the low teens, risk will be forgotten, TA will be a way to "surely underperform", high risk asset classes will be all the rage.  We can only wait and see.

In the meantime, I sincerely hope those that are newly crowned technical analysis experts do take the time to study and understand how system building works and how to test trading systems for randomness.  This doesn't mean reading other people's studies! This means doing your own homework and understanding the risk you're taking.

I lost a lot of money in my early days of system building thinking that I knew what I was doing and found the grail. It's easy to get the comptuer to lie to you or fool you with data. Please exercise caution!

OK, it's that time again where the market hits a moving average point and everyone becomes a moving average expert.  It's easy, you can point to a chart during a cherry picked timeframe on a cherry picked index and make it look like it's a flawless entry point.  Sorry if this has a bit of a negative, smart assy tone, but to me the only thing that's flawlessly predictable about index SMA encounters.  There will be countless 'experts' coming out of the woodwork telling us about how wondering moving averages are for market timing.  The last time this happened, I did a little research of my own regarding whether or not the SMA alone was a good indicator for market timing.  The results can be found here.   I'm updating my SMA test results with a twist, I'm going to pit the simple moving average against the exponential moving average.

OK, enough of my jibber jabber.  This time we're going to run the same system, but instead of using the simple moving average, we'll substitute with an exponential moving average.

Just like last time, the data is from Yahoo. The system is done with RightEdge and I posted the trading system on the RightEdge web site for download here.

Here are the inputs:

IXIC = Nasdaq Composite. Data available was from 1972 to present

GSPC = S&P 500. Data available was from 1960 to present.

DJIA = Dow Jones Industrial Average. Data available was from 1960 to present.

I've also rerun the SMA strategy with the most up to date data and so that we can compare them side to side.  I've also included buy and hold results, so we can compare three ways.  The starting capital is $100,000.

The results are in:

There are some notable omissions.  There is time spent out of the market, so loss of dividends is not factored in.  Second, transaction costs.  I didn't put the # of trades per system for lack of room, but the trades per index averaged about 10 per year.  Third, taxable events.  Buying and selling like this could trigger multiple taxable events.  And for U.S. investors, the short term gain rate is higher than the long term rate.

The results for EMA seem a little bit better than SMA, except for the Nasdaq where they seem about the same.  We're talking about less than 1% APR on either side (whether EMA did better or worse than SMA).  I'm not sure this is something to shout from the rooftops.  To me, this seemingly slight edge is within the range of statistically insignificant.

But let's say a 1% additional return was significant enough and sustainable, on average, the EMA based trading systems had more trades than the SMA trading system.  So trading costs and taxation should be a large concern.

An interesting development here is that almost all of the moving average systems have now done better than buy and hold since I last ran the test.  It just so happens that the moving average was a great indicator to get out and saved you a ton of drawdown this go around.  It might be fun to run this again in another couple of years to see how whipsaws and potentially a new bull market play into the results.

By special request, someone asked to see the results of a moving average crossover system.  Specifically the 50 SMA over the 200 SMA.  I took the liberty of doing it against the 3 major averages as done in my last tests.

Rules:
The rule is to get in when the 50 day SMA crosses over the 200 day SMA and to exit the market when the 50 day SMA crosses under the 200 day SMA (signaling weakening demand).

Inputs:
IXIC = Nasdaq Composite. Data available was from 1972 to present
GSPC = S&P 500. Data available was from 1960 to present.
DJIA = Dow Jones Industrial Average. Data available was from 1960 to present.

Starting Capital: $100,000

Results:

I don't see anything statistically significant here.  The system seems fairly rotten, but I do have one excuse for it.  It did not enter the Nasdaq for over 6 years because the 50 day SMA was always above the 200 day SMA during that time.  If this system showed some signs of promise, I'd tweak it to enter the market on the first date of data knowing that being long the market is typically better than being out of the market for long stretches of time.  Of course, that's a bias and may not be true moving forward.

I only have a week and two days left until expiration.  At the risk of being assigned, I closed my calendar spread.  I've been waiting on a 1+% down day to hopefully spike volatility a bit and give me a few nickels back.  Today was the day.

I opened the spread for .70 debit and closed for .50 for a net loss of $20 per spread.  I may open another bearish spread on the JUL/AUG calls within the next few days.  To be quite honest, I'm impressed with the market's resilience.  I honestly expected to be defending my calendar spread, but to the downside.  My sweet spot was 840-860 on the SPX, and seeing sub 840 wasn't completely out of the question in my eyes.  Shows you what I know.  The punishment for being wrong wasn't much though.  The reward for being right could've been much better.

My next stop for jumping in front of the freight train that is the market is likely 950ish.  There have been gap ups in the morning that come close to this level.  If I can catch one some morning, I may hop on and see where it takes me.

What'll be extra funny is if the SPX is hovering between 840-860 by next Friday. I can only laugh because it's happened to me more than once. :)

The conventional wisdom is that closed ended funds, or CEFs provide a bit more volatile ride than open ended funds.  This is usually because they can trade significantly higher or lower than the net asset value.  The premium/discount of the CEF represents the value that it is above or below the net asset value or NAV. Typically, during bull markets, CEFs tend to run at a premium to NAV, during bears, a discount.  At the end of last year, CEF discounts were significant across the board.  I don't like to speculate on whether a discount represents value, which is one of the reasons why I don't do too much with CEFs.  However, the broad based discount was too much to ignore for a 'buy low' kinda guy like me.  In fact, I picked up some BEP in November and Decemeber when I felt asset prices were very depressed and add to that a decent discount to NAV on BEP which doesn't happen very often.

At the risk of monkeying around too much with long term holdings, my BEP holding has caught my eye for the same two reasons why I purchased it to begin with. Except for now I feel that equity prices are a bit rich short term and that BEP is at a high premium to NAV.

Things are very interesting for my bearish position.  As I mentioned, my new profit target is around 875 for the SPX, which seems like light years away.  After the employment numbers and the futures way up on the news, I was ready to close my bearish calendar at a loss, but before I could do so, the market ran right back down to breakeven on the day.  This feels very weak to me because on 'surprisingly' good numbers, the market could not muster a big rally day.  This feels weak on the short term and made me keep my position opened.  At this point, it is still open but the time is fading.  There is two weeks until expiration and I'm about 65 points away from my profit target.  I'll be looking for an exit in the next couple of weeks, naturally, but I'm highly skeptical that my profit target will be met.

This is one of the drawbacks of a calendar spread.  Sure, you get a low barrier to entry, but in exchange for that, timing is of the essence.  You get to sweat around expiration and what's more, your short option could be assigned.

My point here is to let anyone who is trading short term to understand the psychology.  It's easy to look at a chart or a position after the fact and justify the response, but if you're a bearish / overbought person, what do you do now?  It's not easy on the bull or bear side.  Hopefully I'll alleviate some the pain by telling you that I'm both long and short.  At least this helps me cope with a strange market.  The bearish position was put in place to hedge some of the gains I received on the long side. I'm happy to see the market move up, but not as sad as most to see the market move down.  This is probably the psychology that should be when in a bull situation with a small bearish hedge. 

The market is toppish at this point.  Anyway you slice it, 40% off the bottom in just a few months is a hell of a move.  It almost rivals the speed at which it raced for the bottom.  I've made a bearish move and I'm also looking to take a little profit on some items that have run hard.  Besides that, there isn't a whole lot to do and I'm quite nervous about putting fresh money into the markets.  There is still an option, pun sort of intended.  Short puts.  I've used this strategy in the past with some success and some pain, but I ended up owning indexes and stocks that I wanted at a discount.  The key for me is to find a stock or index that you'd like to own and determine your 'steal' price.  Sell a put or two below that price.  There are three possible outcomes.  The stock rises, the options expire worthless and you keep the premium.  The stock stalls in a range, above your strike, option expires worthless, you keep the premium (and write more next month).  And finally, the stock moves south, you're assigned and you get a holding you wanted at a discount.

There are some pitfalls, of course, but the worst case situation is that you own the stock.  So if you understand the risk of owning stock (i.e. it can go to 0), you have defined your risk.  There is a subtle pitfall in the way of leverage.  Let's say I sell 10 puts at a 10 strike with a premium of $10 apiece for a $100 credit.  I'm pretty well on the hook for 1,000 shares of stock.  If XYZ falls below $10 on expiration day, I'd better have $10,000 free in my account to accept the assignment.  It is important to understand the aspects of levrage here.

Practice makes perfect.  Don't like the idea of being a cash covered short, start off with a vertical spread.  Back to the $10 strike example, you sold your 10 puts for $100 credit.  What if for $5 per option you could limit your downside to $2,500 instead of $10,000?  You would buy 10 puts at the $7.50 strike.  Now your total risk is the distance between the strikes, minus the credit, for a total risk of $2,450.  That's a pretty expensive hedge, but just serves as an example.

I also prefer vertical spreads on items I don't want to necessarily own, but feel are in a very favorable place for a trade. 

My calendar spreads (discussed here) have received very little drawdown up to this point.  It seemed like I damn near picked a top at SPX 920 (lucky), until today. The SPX never hit my original profit target of 850 and expiration is coming up in the next couple of weeks.  Reviewing the technicals, a reasonable profit target appears to be right around SPX 875.  Now that time has passed, this should offer me a reasonable reward and it's a reasonable pull back point.  What if it doesn't pull back?  Then I lose.  But I had my risk clearly defined and well established going in, so it's not a huge deal.  I also have a lot more eggs in the bull basket than the bear, so I'm happy to see up moves.  I'm in this to make money, not be right.  

On the upside, VWO is really moving.  It is up 18% from my cost and is the strongest performer in the portfolio.  My only regret is that I didn't get filled on a 19.99 GTC order late last year.  I'll settle for up 18% though.

And in trading system news, I believe I'm about 1 month away from testing another trading system.  I haven't figured out if I want to use options or just plain stock yet.  It's a quick "in and out" type trading system with a maximum hold time of about 10 sessions.  It may be tough to overcome the option spreads in so little time. This is what testing is for though.  I may test with both vehicles and see which one makes the most sense.  I'll share results here.

The DoD strategy is a popular one.  I talk about it here from time to time but don't actively practice it.  It's one of those things that's simply on my radar.  It does have a knack for outperforming the broader Dow index most of the time, but as of late, it has not.  In a previous Dogs of the Dow post, I outlined that the small dogs are nothing more than volatile stocks in the Dow.  As the market has surged upward over the last couple of months, I wanted to see if the DoD responded in kind. Let's compare the DIA vs. DoD and see. 

(click to enlarge)

This chart slightly resembles leveraged funds where the dips are pretty deep and the recovery fairly swift, but when all is said and done, it's still underperfoming a bit.  The point here is that volatility is most likely the reason for the DoD's outperformance in some years.  You're taking on more risk to get more gain.  If that's all it is, maybe you're better off diversifying using small or mid cap indexes instead.  So let's not be fooled into thinking that there's some sort of magic going on with the Dogs of Dow.  It's simply a more volatile sampling of stocks within an index, not the work of superior stock picking. 

Covered call ETFs are a relatively new product.  I've disclosed that I'm heavily in PBP.  In fact, most of my broad based U.S. holdings are divided between PBP and BEP (which is a CEF).  I find that historically they seem to offer the same returns with less drawdown (i.e. risk).  I've demonstrated in previous posts that these covered call funds are acting like they're "supposed to".  They were down less during the crash and are currently outpacing their tracking indexes year to date.

Sounds perfect, don't it?   It's nearly perfect except for one thing.  CC ETFs are long stock and short out of the money calls.  At least they're out of the money whenever the ETF establishes a position.  What happens in a 'crash up' when the market socks away solid gains?  Now is a great time to cherry pick a timeframe. The last two months have been up 20%+ on the S&P 500.  How did PBP do?

Today's blast up is nearly uniform.  This was after the first down week in over a month.  As I like to speculate, small caps lead big ones into the next up cycle.  So I've been paying special attention to IWM.  IWM was one of my last purchases on the way down because the smaller guys usually crash further and longer than the defensive names.  But what goes down, must come up.  Everything played out according to plan with the exception of the last downturn.  I expected that with the mid term trend being up and the short term trend (i.e. last week) being down, that the IWM may outperform (lose less) than the bigger boys.  Not so.

Here's the perf of IWM vs. SPY month to date.

I'm reading a recent article on marketwatch.com questioning the stocks as a good investment.  It's true, the last decade has introduced something that we haven't seen recently, down 50% twice in a decade.  Meanwhile, during the last 50% down run, government bonds are up 20%.  The author is right, but what if you're an investor looking at entire the market today.  Over the very long term, stocks have outpaced bonds by a wide margin.  Does it mean that this trend will continue 5 years, 10 years, or 20 years into the future?  Who knows.  Based on historical information beyond this last crazy decade, it would seem that stocks have suffered an unusual setback and for 'buy low, sell high' folks, this might be a good time to get in low.

I'm not advocating any particular strategy (there I go, out on a limb again), but this may be a good time to be overweight stocks.  I say overweight because being in government bonds is never a bad thing, a balanced portfolio should have both.   This is where asset allocation might be a cue.  If you have a balanced portfoilio, your bonds are relatively high, your stocks are relatively low.  In this case, you should be putting more into stocks and less or nothing into bonds to get your predefined allocation back to your 'ideal' allocations.  With an allocation defined in advance, you can probably safely ignore what the front page news is and invest mechanically.  This is what I like about asset allocation.  You don't have to think too much about what the market is doing, you just need to continue to follow your plan.  Sometimes stocks are up, sometimes bonds are up.  Think about the late 90's where stocks were to the moon, hopefully your allocation strategy told you to put less into stocks and more into bonds.  It would've seemed counterintuitive at the time when your cab driver was recommending stocks, but you knew better. Not because you're smarter than your cab driver, but because you looked at the math.

What am I doing?  Following my allocation.  My current bond portfolio looks a bit rich.  While personally I'm looking to pay off my house with free cash, if the house were paid for, I'd be putting it into stock.  My allocation over the last few years has looked a bit toppish for both, which is why I took to paying off debt.  However, when stocks got really cheap in late 2008, I went for stocks because my portfolio was very imbalanced.  Then stocks and bonds went south.  Now bonds went north. I've placed a lot of 'pent up cash' into stocks and my asset allocation is looking a little lopsided.  Meanwhile, bonds have gone up, so that's not looking like a great place for the long term either.

The long winded point, as I do so often, is that your situation may vary.  I don't known what your tolerance is and I don't what allows your to sleep well at night, but if you're a risk taker and stock lover, it sure does seem like a great time to be long stock.  So if you're still with me and you want to invest some hard earned money into stocks, where do you go now?  Well, you have many options to consider.  My recommendation is NOT to invest soley in the United States.  Investing in foreign and emerging markets is a worthy consideration.  For emerging markets, I like VWO.  I own it.  Is it cheap now?  I don't know.  Is it cheap relative to the past, absolutely.  Are there other developed markets to consider?  Absolutely!  Latin America and Asia are two places I have my eye on.

So I'm stressing that we're in a fairly unique situation.  What you do in this situation is up to you and it should make sense for your risk tolerance and you're outlook on things bonds, stocks and foreign.  Please, please, please, as always consider risk before return!