Snake Oil Strategies.
I have been getting a lot of queries about alternative strategies and backtesting – which is good, and keeps me on my toes. I try to check out all the strategies that are suggested. The main complaint is:
Why Not Get Out Sooner?
Most suggestions involve getting out sooner in a downturn so that we preserve more profits. The 10/50 SMA cross has been suggested several times and at first glance it seems like a good idea. Yes, it would have got us out in August when SPY was $445. But what then?
For a strategy you need 3 things:
> A GET IN signal
> A GET OUT signal
> A GET BACK IN signal
So, if we use the 10/200 golden cross to get in, the 10/50 death cross to get out – what do we do then? We can’t use the GET IN signal because that is still in force – we have our GET IN and GET OUT signals happening at the same time. We could use the 10/50 golden cross to get back in – but then we are trading ITM with different parameters. I have run both backtests and here are the results (no leverage):
You can see that the 10/200 has a higher success rate and larger average gains than the 10/50. This not saying that there isn’t a better way, just that this isn’t it. I am actively looking and testing strategies.
A Shocker of a Strategy
I don’t like criticizing people who set themselves up as experts. From experience I know that criticism always stings and it takes about 20 nice comments to be able to get some perspective on one nasty one. But when people have set themselves up as experts by disparaging others then I think they are fair game. This one got up my nose.
But here’s the shocker … all the dummies that put out these books never computer-tested a strategy in their life.
My 100% computer-tested trading strategies use exact and repeatable rules to beat the stock market
Well, this ‘dummy’ decided to check out your ‘100% computer tested strategies’ that are supposed to have beaten the market.
Last week I wasted time on your ‘Reverse MACD’. Then I tried your ‘Swing Trader Strategy’. Here’s your claimed results:
82% profitable trades – that’s some record! Better than any other trader results I have ever seen. This guy must be good. Let’s get down to the details of how he does this. This is his strategy:
Seems reasonable at first sight, doesn’t it?
So, I set up an Excel spreadsheet and programmed it in. The results were nothing like his. Two frustrating hours later I did what I should have done in the first place: analyse his strategy.
And just by eyeballing his flow chart with an open mind it became clear what was wrong. Have you worked it out yet?
The Strategy Signals
What is the IN signal? Quite clear, trading above the 66 day SMA and the lowest close in 3 days. Seems reasonable. Trying to buy small dips in an upward trending market. No problem.
What is the OUT signal? Sell when you have the highest close in 19 days. Again, sounds quite reasonable. He is obviously trying to take profits along the way then buy back in again when it dips.
BUT – what if you are in a trade and SPY doesn’t make a new high before the prices retreat?
If you are following the above strategy, you are going to have to ride the bear all the way to the bottom.
How would this work in practice?
Let’s check out what would have happened in the GFC. IN the following graphs the blue down arrows are the buy signals and the green up arrows the sell.
You can see that the strategy would have kept us in for the duration of the GFC, riding the from the top of around 160 to getting out at 90. Not good.
Why doesn’t it work?
At first glance, the strategy sounds reasonable, even sensible, but you have to always look at the ‘universe of possibilities’ and see if the strategy covers them. All of them. This strategy clearly doesn’t.
How he can claim to get the results that he is claiming I don’t know. (Have deleted the next sentence, it was very uncharitable.)
OK back to the market.
The Last Gulf War
Last week was horrible on the markets, and much, much worse for the people caught up in this terrible situation. Everyone is on edge in case things escalate into all-out war in the Middle East.
Let’s look at what happened on the market the last time, in the second gulf war which was declared on March 20, 2003.
The market was in a downturn when 9/11 happened, and then it continued down for the next 18 months, all the while the world was on edge knowing that things were escalating in Iraq. Then almost to the day, as soon as war was declared the market started to climb and climbed for the next 4 years, almost doubling in that time.
Lessons from this? Just that sometimes markets don’t react the way you think they will.
Wednesday, Thursday and Friday were terrible. Just when it looked like SPY was going to break through resistance, it tanked 3%. Not nice. We’re not yet at correction level ($412) and well away from a bear ($366) but the 10SMA is pointing down again and it is possible we will have a death cross this week.
On the other hand, there is support at $420 which hasn’t been broken so maybe this will turn out to be a consolidation phase. As with all things in the stock market, we won’t know for sure until afterwards.
Similar to SPY, it is just sitting on support. It has been in consolidation since early June, oscillating between $59 and $63. The SMA has been holding up better than SPY, but has now turned down again and could be heading for a death cross.
What about the MACD?
For all of them (SPY, SPYG and QQQ) the MACD histogram has turned negative. Which is traditionally a bad sign. However, I have been backtesting the MACD, and the results are quite terrible.
Over the last 30 years, if you had started with $10K and traded the 12/26/9 MACD you would now have $31,296. Nice. It has tripled. BUT – if you had just left is in the market it would be worth $97,199. So much for the MACD being a great way to trade!
The VIX has ticked up, and is now at 20.73 so we are now out of the low volatility period.
The week ahead . .
The futures look slightly positive right now but there is still around 10 hours to go before market open. Like you, I am sure, I am completely fed up with the market right now, but it is there, and we have to deal with what is there not what we would like to be there. Although that would be much nicer!
Questions and Comments
As always, happy to answer questions and receive comments (just be kind!)