Are The Bulls Back?
I’m back from my trip, and it seems that the bulls are back also. There’s a peculiar sort of pain in sitting on the sidelines watching the market go up, and we have had that pain in spades over the last 8 days. When I sent out the special update, the bulls seemed to be running out of steam, with 4 doji candles (candles with a small body, signaling indecision among traders), on successive days and then Friday’s big red candle on higher volume seemed to confirm that the bull run had ended. But – the market makes fools of us all.
Friday saw a large green candle signaling that the bulls hadn’t run out of steam, or not just yet anyway. Such is life.
The only way to execute perfect trades that get in at the bottom and out at the top is in hindsight. We mere mortals who can’t see into the future have to depend on probabilities based on what has happened in the past. But we’ll look at the charts later in the blog.
Backtesting Software
I have had a lot of very helpful readers sending me strategies that work for them or that they have read, and I am working my way through them. I have looked at many backtesting systems and as yet haven’t found one that suits. They don’t have the functionality I need, and I would have to conform to their way of doing things, just being able to mess around with the parameters.
I think I have ‘NDH Syndrome’ (Not Developed Here) – which means that you tend to view systems that you haven’t developed with a very jaundiced eye. The systems I have looked at seem to me complicated and clunky, and they don’t do what I need. Hence, I am falling back on Excel – but I have to say that Excel really doesn’t like working on spreadsheets with 24,000+ rows, 40+ columns and lots of complicated formulae!
Three Moving Averages Strategy
This is one of the strategies that has been suggested. There are books about it and some brokers and websites are promoting it, so I thought it was worth checking out.
Basically, the strategy uses 3 moving averages, one short, one medium term and one long term. When they are in the order short > medium > long then you go long. When they are long > medium > short you go short.
They show some lovely charts. Here’s one showing a bull trade:
And one showing a bear trade:
They look pretty convincing, don’t they? No wonder people jump right in.
BUT – DOES IT WORK? None of the sites or brokers that I have visited did anything other than point to a few charts where it did work, and none gave any indication of how it performed on backtesting. The number of days they use for the MAs seemed very arbitrary. No reasons were given for choosing those particular parameters, you chose them depending on your:
‘trading objectives, style and preferences’
Helpful? Not really. And as for which ones worked the best, we are advised:
‘ There is no definitive answer to the best moving average crossover combination, as different mixes may work better for different traders, styles, markets and timeframes. ‘
Not good enough! We want to know.
We are going to backtest, starting in 1927 (before the big crash) and continue to the present day. Will it beat the market? Let’s check.
Here are the most used parameters for the moving averages. So which one is best? Let’s backtest.
(n.b.– the % of gains / losses is not accurate where the parameters are close (e.g. 5/10/20 because they are frequently the same figure and it is not counted. But the trades were ‘executed’.)
5 / 10 / 20
5 / 21 / 63
8 / 13 / 21
9/ 21 / 55
10/ 21 / 50
20/ 50 / 200
So, what can we deduce from the above results? Two things:
- Leveraged accounts ALL performed worse than unleveraged accounts, with several reducing to zero
- Using a shorter term MA1 produced better results than using a long one (unleveraged)
BUT – DID IT BEAT THE MARKET??
A resounding NO!
If we had just bought $100 worth of S&P 500 shares (yes, I know we can’t buy indexes, but work with me here) and sat on them, not adding or withdrawing, it would now be worth $24,000 (Open 30 Dec 1927: $17.66, Close 24 Oct 2023: $4247.68)
So – I’m not a fan of the Triple Moving Average Strategy. It seems like a lot of work to end up losing money!
I do get frustrated when websites and brokers push these strategies without any validation, it’s just a cool idea that someone thought up, and a few cherry-picked charts. Sounds good, looks good, but we’ve no idea whether it works or not!
To the markets . . .
It has been an annoying 2 weeks, with those of us in ITM SPY trades getting out on a death cross. SPYG was not affected so if you are following ITMS then you are still in the market and have recovered. Let’s check the charts.
SPY CHART
The SPY chart has the death cross and the golden cross marked on it The golden cross is confirmed so we have an ITM ‘Get In’ signal. But let’s look to see what else we can deduce.
The downtrend line is still intact, but being challenged. If SPY breaks through it then that will be a very positive sign. If it bounces off, then not so good. We have a higher high than was reached in mid-October (good) but are yet to break through resistance around 445 (not so good).
We are currently trading at the levels last reached in mid September. The 200 SMA continues on the slope it has been on since early August. If the uptrend had continued, then SPY would be around 485 by now, which would have been nice.
So – what to do? We have a clear signal so getting back into the market is what the ITM strategy tells us. But you are the trader, and don’t have to do what anyone or anything tells you!
ITM got in in January at $400, and out last week at $418, so a rather meagre profit of 9 % at 100% leverage (strike $200, 50 % of current price). You can’t help but look at where we would be if we had stayed in the trade: a 20% profit. Annoying? You bet! But rule no 1: don’t lose money. We didn’t. But we have missed out on profits which is irritating.
SPYG CHART
The ITMS strategy did not have a death cross so you should still be in the trade. The golden cross was back in March when SPYG was trading at slightly less than $55, so you should be sitting on a profit of around 24% (36% annualised) at 100% leverage (strike of $28, 50% of current price), which is not earth-shattering but (as we say in Australia) ‘better than a poke in the eye with a burnt stick’.
SPYG seems to have just broken through resistance at $61, and is now in the 61 / 63 trading channel. A break through the $63 level would be very bullish.
QQQ CHART
We look at QQQ as it is an important index, but I have not back tested the ITM strategy on it, mainly because it only started in 1999 so there is not a lot of history. However, I trade it using the ITM strategy and it works well – BUT, I am not recommending it as I haven’t checked on a formal backtest, just observations. Thought: maybe I should do a backtest for next week?
Like SPYG, QQQ has not given an OUT signal so if you had gotten in on the golden cross in February when it was $311, you would now be sitting on a profit of around 44% at 100% leverage (strike $155, 50% of current price). Not earth-shattering, but works out at an annualized 59%. Not bad!
VIX CHART
The VIX has dropped dramatically, and is now well below 20.
DOW Comparison Chart
You can see that QQQ has been outperforming both the S&P 500 and the DOW since September (which is why SPYG has also performed better) The Dow has been flat now for 12 months. It is not a good indicator of market conditions, having only 30 stocks in it, but it is always quoted, and people take a lot of notice of it so I have decided to include the comparison from time to time.
ITMeter
Gadding about . . .
Hard to believe that we go for months with no signals, but the 10 days I am away we have 2 signals!
I was in Melboune, staying in a ‘private gentlemen’s club’ which had the most fantastic building, so unlike anything else in Australia. Here’s the staircase:
The Melbourne cup is the richest race in the world, with a total prize money of $8 million (AUD). That’s it on my right.
The week ahead . . . .
Well, back into the market – the futures don’t look promising:
We can look at this in 2 ways: if you are twitchy you may want to stay out and see what happens – alternatively you can look on it as a good time to get in and buy.
Fingers crossed for a good week.
Heather
Questions & Comments
As always, happy to answer questions and receive comments (just be kind!)
17 Responses
Hi, Heather. If you haven’t already, two quick tips for large Excel files are to save as .xlsb (binary) and turn off auto calculation. At least those help reduce the annoyances a bit. Also – if you were to want to potentially spend several months learning a new tool and spend a few hundred dollars, then check out MATLAB with it’s Financial Toolbox. Being a high-level programming language, it’s very flexible and powerful for formulating strategies. (From what I can tell anyway, as I haven’t learned enough of MATLAB yet to do much that’s useful.) MATLAB’s home version is USD 149 and the 3 required addons are 45 each, and those are perpetual licenses. Here’s a short video demonstrating testing a backtest strategy in 8 lines of code. (https://www.youtube.com/watch?v=zHnvYdsVH7I) The line starting with “signal =” is the simple rule set. As a bonus you could add a for loop around that line to have it run many hundreds of combinations of RSI buy and sell levels. And with another line of code have it graph the results on a 3D surface with buy level on the x-axis, sell on y, and final profit/loss on z. Seems like it would be a great tool, after getting over the learning curve. Thanks for another great blog post!
Hey Rodney – thank you for this! I am going to copy it into the latest blog post so that everyone can see it.
Hopefully someone will do it and share all the results with us. I will have a look – I think I’ve checked it out before, but I will do it again.
And thank you for the excel tip! Never saved anything as XLSB before, must check it out.
Thank you
h
I missed your call to get back into the market earlier this week since I was out of town. What do you generally suggest in such cases? Is it okay to get in now and follow the ITM signals going forward?
Heather – Thank you for your great updates. I am eager to get started with your “ITMS” program. If I trade a Call Option on SPYG am I buying it naked unless I also buy 1 stock? Appreciating your time for us newbies! Sheryl M
Hi Sheryl
no, you are not buying naked. Naked means selling without having the underlying stock.
If you buy a call the most you can lose is the premium that you paid. If you sell a call then you have to come up with the goods if it expires in the money.
For example, if you BOUGHT a Jun2024 SPYG option with a strike of $60 then you would pay $470. Even if SPYG went to zero the most you can lose is that $470.
If you SOLD the same option you would get the $470 right away as a premium – but there would come a day of reckoning. If on expiry SPYG had risen to $100 then you would have to buy 100 SPYG shares at $100 and sell them for $60, so you would lose $4,000 (100 * $40). Not nice.
Your broker probably wouldn’t allow you to do it anyway, without having the cash in your account to cover that situation.
So, in short – buying a call is not naked, and the worst case scenario is that you lose the money you paid for it, but you are not up for anything else.
Hope this helps.
h
Hi Heather,
I have been following Scott and getting his emails for several years now. He is one of the few people that I have found to be pretty genuine and he sends out his emails for free. While not my thing, his thing is trading forex pairs with robot strategies that he has developed and sells and he does a lot of back testing. I thought this might be of interest to you because he is going to Melbourne in December for a trading conference.
Best,
Dale
https://scottwelshstrategies.com/
Hi Dale thank you for the info – had a quick look at his website, his products and his results.
I am hesitant about messing around with forex again – I played with it a few years ago and got burned, but the scariest thing was that I found it addictive! But I am curious about what he does.
The one thing that always makes me sceptical is the selling of ‘automated systems’. If they are so great why don’t you just use them yourself, and not bother about making money from other people? It wold be good if they displayd their sources of income – e.g. Trading 20% Product 80%. But, naturally, that isn’t going to happen!
But I will keep reviewing what he is doing – thank you!
h
Hi Heather,
Thank you for your weekly blog. As I am looking over your back testing of the ITM method from 1993 to 2023 for the SPY, I find out that there are some years that it is losing money. For example, from 1993 to 1995, the original $10k went down to $8.7k before it went back up again in 1996. The important lesson here is we need to be patient and stay the course and we will be rewarded. Once again, thank you for keeping us updated weekly.
Sincerely,
George Halongton in Los Angeles
HI George, thank you!
Yes, there are years when the ITM strategy does lose money – but in the long run it wins very well.
However, I know people are spooked if it loses money, so I am working on trying to improve ITM so that we still get all the upseide but limit our downside even more – which would add greatly to our profits in the long run.
I’m sure there is a way – I just have to find it!
h
Thanks for the recent update. I’m new to this kind of trading. It looks like my choices for calls are the Sept. 30, 2024 calls or the December 20, 2024 calls. Neither is around one year to expiration, but I assume either would work with the Dec. call being somewhat better because it is closer to one year in the future. The Sept. options don’t offer strikes less than 300 which doesn’t seem to work. In the December calls I looked at the 220 and 180 strikes which are about 50 % and 40% of the current value of the SPY. Option prices, however, are too high and not within the current price of the SPY plus 1%. So, what is the best trade, if any. I don’t know how to choose.
Hi Bill,
We’ve had a lot of discussion recently about option pricing as currently options are expensive (due mostly to interest rates). However, we can still get options that fit the strategy by moving in our expiry date. The only hassle is that we have to roll more frequently, around 30 days prior to expiration. I have posted a table at the bottom of these comments showing the ones that meet the strategy of 1% or less above the current price, which is the shaded ones.
Hope this helps.
You said it best Girl when you said in your Commentary in regards to looking at suggested Systems, “…they don’t do what I need.” That is why it is my position that you need to find a System that suits you or develop your own. I like what you do but I apparently can follow a System but I cannot do what it does. I think this is a result of Trading for years without a System or following one that does not work for me. There was a 4% weekly System published by Martin Zweig, using the Value Line Index that worked for years brilliantly and suddenly quit working. Moving Averages always lag and Hull averages don’t work for me. There is a book, few people seem to have read that was written by Leslie N. Masonson called All About Market Timing, that helped me immensely, focusing a great deal on, but not exclusively, on using Moving Averages to time the Market, all back tested. He even wrote a subsequent book using a System he developed from All About Market Timing that did not perform well in fact and in my estimation. I used his info. and borrowed ideas from many many others but moved on and added and tried Bollinger Bands, tried Keltner Channels, my own Moving Averages, Price Channels and all other kinds of things. Simpler is better. I could trade with just two daily moving averages and my experience but I have added a Bollinger Band and I use it on a weekly and daily Chart and have moved it down to even an hourly Chart. I have also added a Slow Stochastic indicator. It is not a hard set System I must follow but I sure do pay attention to it and it is subjective in the sense that One must decide to take the signal or not or do something else, always with a Stop. But you know what, it works for me. v Good Luck.
Hey Tommy, sounds like you should be writing a book!
Thank you for the info – I am currently trying all sorts of thngs to see if I can get an improvement on ITM, and haven’t been using a stochastic. I must look at that. I’ll put it on the list (it is getting to be a very long list! So many ideas!)
h
With all due respect, I’m a little surprised and disappointed in your most recent blog post.
Reason being, either ITM is a mechanical system or it’s not. In your post you say that we are the trader and
we basically decide whether or not to take a trade. Waiting to execute a trade after a signal has been confirmed rather than taking the trade will, in the end, cause someone to underperform the back tested results of the system in the long run. That’s the whole point of back testing….and throwing your emotion or “trading savvy” into the mix when you are trading defeats the whole purpose of having a mechanical system. More importantly, it causes undue stress and can potentially lead to catastrophic decision making and huge mistakes. I have traded mechanical systems for years and have made all the mistakes in the book with regards to thinking that I don’t have to take all the signals or that somehow I am smarter than the market and certain signals don’t look right to me so I’ll wait a day or before executing them. It’s a fools and gamblers game if you end up doing that. Yes, there may be certain black swan events that occur from time to time and cause one to back off trading a system. But, they are rare, and I don’t believe we have that scenario currently. Trading is a mind game and sometimes the market makes trading easy, and sometimes it doesn’t. Your mind can play tricks on you and in my humble opinion, one has to be like a machine and just take every trade signal independently as if they are all equal; when the trading signal flashes you follow the system. It’s that simple and you never get mad or happy when the trade works out or doesn’t. It’s just another trade on your long term journey. Having an opinion and getting emotional about market behavior is not what professional traders do. It’s that sort of mind set that will serve you well when dealing with the ups and the downs over time. Maybe, at the end of the year, you look at your results and either allow yourself to be disappointed, or raise a glass of champagne depending on your system’s performance. Why should we make it more complicated or dramatic than that? Keep it simple…simple does work best in the end.
Oh well…just my two cents.
Jeff
Hi Jeff
I understand what you are saying – we either follow the ITM system, or we don’t. You are right. It is clear what the system says, and if you follow it then you know what the backtested results are.
I guess I am just trying to put the responsibility for decisions back onto the person who is making them. I think that it is important that you own your decisions. The choice is:
– Follow the ITM system to the letter – but that is YOUR choice. The advantage is that you know what the outcome will likely be.
– Make your own decision – again YOUR choice – being clear that you are not following the ITM system.
I understand that last Friday I recommended waiting a day to make sure of the confirmation – that is something that I recommend in the books. If it is not clear, wait a day or two. Now we are sure of the confirmation, it is clear what the ITM strategy says.
BUT – the decision is the individual trader’s – they have to decide whether to follow the system or not, I am not telling anyone what to do. I am not a financial adviser, and have to be very careful that I don’t recommend trades as under Australian regulations the penalties are severe. I always try to make it clear that I am explaining what following the ITM system entails, but not recommending trades to people (which I can’t legally do).
Hope this explains it – if not please get back to me.
I have so far read 95% of the ITM bull market book and have learned a lot particularly regarding analyzing the market activity in terms of what other traders are looking for. Still I have a question why the ITM strategy works best with the SPY options but not necessarily other index options. For example, what is your opinion about the TQQQ, Pro Shares Ultra Pro QQQ? A look at the charts for SPY and TQQQ shows higher possible profit from an ITM strategy as compared to the chart for SPY. But the TQQQ chart does show a much more erratic price movement than SPY. I would love to hear your opinion of the ITM strategy for TQQQ or any Nasdaq ETF for that matter. Thanks! Paul
Hi Paul
its not that ITM works for SPY and not others – just that SPY is the best indicator of what the overall market is doing, and has a history going back 100 years (well, SPX has and SPY is a proxy for that) It does work on other index options – like QQQ and SPYG, but these started much more recently, in 1999 and 2000 so the backtesting can’t go back that far.
Re the 3X and 2X options – they are day trading vehicles, not for longer term investment, as they are reset daily. The have quite different results to ITM. There is a section in the Bear book, Chapter 3 Beating the Market, subheading Leverage and Leveraged ETFs that explains this, with examples. Have a look at that and then get back to me with any question, will be glad to help.
h