Using overall market health to time stock screens

Parker from Texas sent me his ideas on selectively going long with AAII stock screens:

AAII stock screens are long-only. Which is great in uptrends. And spotty in downtrends. So, I fooled around and came up with a screen which tells me when to use the AAII screens. Here it is - one simple question:

On the monthly chart, did the S&P close above its 12 month simple moving average? If yes, use the AAII screens for the next month. If no, sit out or short the market. Here’s a chart:

Using this method, you would have gotten the signal to go long on 11/1/98 and get out 10/31/00. Here's how selected AAII screens fared over that 24 month period:

Zweig = +103.8% (~43% per year)
CANSLIM = +117.1%
Est Rev Up 5% = +243.9%
Tiny Titans = +133.3%

Note - the S&P went from ~1100 to ~1425 in this period, a 29.5% gain (~14% a year).

The next buy signal was on May 1, 2003 and lasted until 12/31/07. Here's the cumulative performance over 4 years, 8 months, re-balancing and reinvesting every month:

Zweig = +362.2% (~39% a year)
CANSLIM = +199.0%
Est Rev Up 5% = +350.5%
Tiny Titans = +381.2%

Note, the S&P went from ~910 to ~1460 during this time, a gain of 60.4% (~11% a year).

Had you shorted the S&P on 11/1/00 at ~1425, you would have covered at ~910 on April 30, 2003, picking up a nice profit while you wait to implement the screens again.

Under the same principles, you would have shorted on ~1460 on Jan 1, 2008 and be sitting pretty with the S&P at 860 right now.

So there you have it - a simple 12 month moving average screen on the screens. Unfortunately, it may be awhile before the S&P closes above its 12 month average.

Countdown to Trading for a Living

My wife and I have four days left of our careers. February 2nd is when I go "live" and make a go of trading for our only income.

The last several weeks have been very busy as we've been preparing for this change. We've slowly been moving stuff out of our old house to our new one. We've been working on figuring out insurance (that stuff is expensive when you don't work for someone), transferring our retirement accounts (what's left of them), and preparing for bills (we haven't had a grocery, gas, electricity, phone, or water bill in 11 years).

I've tried to trade here and there during breaks in the day, but I haven't made much progress. The real test will come when I can devote the entire trading day to finding good setups and exploiting the "edges" that I focus on.

I need to earn about $250 per day to pay the bills and live comfortably. That seems very possible. A good trend day can bring in $3,000 to $5,000. I've got to control myself all the other days that don't trend or have good setups. I find myself often taking trades out of emotion, fear, or boredom and it's those trades that I need to control. One or two good days a month is all I need. I just need to be really careful on the other day to avoid losing what I've gained.

Today is a good example. I was up $400 on 3 trades and decided to take an "knee-jerk" trade that had no real setup. In 10 minutes I was down to $70 for the day. That's just dumb.

I hope everybody enjoys coming along for the ride. It should be interesting.

The neat thing is, if a geek like me can do this--anybody can. So wish me luck, and look for posts to start flowing on February 2nd.

Saving money with an old car

I've mentioned my 10-year-old minivan a few times on the blog. By avoiding trading it in for something newer (can cooler), I've been able to save a lot of money that I use to trade. It seems to me that among average folks, transportation is one of the greatest financial drains. Endless car payments create continuous strain as the car quickly becomes worthless.

My car is worthless now, but I'm going to try and squeeze another 50,000 miles out of it. In the long run, I value financial independence over a sweet ride.

Get rich slowly has a good article about driving an old car.
Here's a great animated slide show from Dave Ramsey about the real cost of car payments.

Missed opportunity

Despite the market making the worst drop on inauguration-day in history, there were tons of opportunities on the short side. I took one opportunity in a banking stock and I got spooked out of it before it made its move. Patience, patience, patience.

I entered (selling short) the trade after price pulled back to the 20EMA (blue circle). It went well for an hour and then turned against me breaking the 20 and heading for the 50EMA. I had placed my stop above the 50 but moved it closer when I saw things reversing.

Had I held on without moving my stop I could have made a tidy 5R. Instead I broke even.

I'm learning the importance of placing my stops further away (and keeping them there) and shooting for smaller targets (through Corey Rosenbloom's mentoring). I wish I would have stuck to my guns on this one.

Girls and Star Wars

Despite years of half-hearted effort, I have not been able to convince my wife to watch any of the original first three Star Wars movies (I wouldn't put her through the torture of watching the more recently released trilogy of films).

I've been able to convince (force) my daughters to watch the series and they have at least pretended to like them, but I can't figure out why Star Wars just doesn't appeal to girls. Maybe that's why I didn't date one until I graduated from high school.

I ran across this video that explains Star Wars from a female (who hasn't really watched any of the films) perspective. It made me laugh.

Changes for 2009

I celebrated my 42nd year as a human being a couple of months ago. The reading glasses are for effect, but I do need them every once in awhile. How did I get so old so fast?

The last two months have really sucked for my trading (down 2.73R in November and up only .10R in December). Given those paltry returns, you would think that now would be a very inopportune time to leave a secure job situation and attempt to trade for a living. You would think.

In three weeks that's what I'm planning to do. My wife and I are leaving our jobs (we work together--more on that in three weeks) of over 11 years to pursue new challenges and dreams. I would like to trade full time and (hopefully generate an income from trading), and my wife, Tricia, is planning to focus on home-schooling our kids (Go Tim Tebow!--he was a homeschooler as well).

My goal is to bring in 5R to 6R a month, which seemed easy a few months ago. Lately I haven't been as adept at pulling money out of the market, so needless to say, I'm a bit panicky about this new adventure.

We're going to give it 6 months to a year to see if we can make it work. If not, I'll go back to work. We live in Nebraska, so the cost of living is pretty cheap. We drive a 10-year-old minivan (pictured along with my house, two kids, and new tree) and we live a pretty conservative lifestyle. We'll have to cut way back on our world travel (I had to get new pages in my passport because I had too many visas).

I look forward to the new-found freedom that this next step in our lives will provide. People have told me that trading for a hobby and trading for a living are completely different. I'm sure they are.

But I feel prepared to weather the ups and downs of the market as I try to squeak out a measly salary each month. This blog will be a sort of journal for me to document the good times and the bad during the next year.

I hope to be able to post every day during the next year. I haven't had much time lately with all the changes that have been going on. Moving has been a process. I'm not sure how we accumulated so much stuff when we live in a 600 square foot apartment--to be fair, the apartment is attached to a 6,000 square foot house. When we moved in 11 years ago we moved all our belongings in the back of a station wagon in one trip.

For the immediate future, my focus will still be on day-trading. I love the simplicity of stock screening, and I'm sure that I'll continue to track screens over the next few years, but I think that I can limit my risk and create much larger returns by trading intra-day.

I will no longer be tracking stock screens along the side of the blog. It takes way too much time and my focus has shifted to a different style of trading.

Let me know if you would like me to continue to post my "R" values on the side as well.

Prudent Speculator 2008 Performance

Even the best performing newsletter over the last 20 years (according to Hulbert Financial Digest) got hammered last year. Ouch.

Revisiting 2008's Goals

Boy, if I had any idea what 2008 was going to be like, I'm sure I would have made different goals. I went into the year pretty cocky after chalking up a +40% year using a mechanical stock screening trading model. I thought the S&P 500 would probably have another weak year, but I never imagined that it would drop 40%. These were my goals for 2008.

1. Beat the S&P 500--Shouldn't be too hard, but I'm already behind on that goal thanks to my irrational trading. I did beat the S&P 500 by 12.79%. Unfortunately, the S&P was down 38.5% so that means I was down by 25.71%. While I'm glad I didn't lose as much as the broader markets, I'm disappointed that I let myself get dragged down with it. As an individual trader, I have the opportunity to stay on the sidelines when things are not good, and I rarely did that. Most of my loss came while I was trading my stock screens (21%). I was able to stop the bleeding when I began day-trading, but in the last two months I made several "irrational" trades and ended up where I am today.
   
2. Beat Stock Superstars and Prudent Trader Newsletters Stock Superstars ended the year down 44.6%. The Prudent Speculator hasn't reported year-end numbers yet, but at the end of November the portfolio was down nearly 50%. Mission accomplished--but again, I can't make a living losing 25% in a year.
   
3. Make over 20% on my portfolio--My goal is to eventually trade for a living. If I can eek out 20% each year, I'll be able to meet my goal in the next 5 years. No deal on this one. I was never above +1% during the entire year. I'm planning on giving "trading for a living" a go this year, so I'm bumping up my plans despite a down year.
   
4. Beat last year's return--I'm not doing so hot so far this year. Last year at this time I was up 12%. I've got a ways to go. I only missed last years returns by 66%. Yikes.
   
5. Control my emotions--I'm a miserable failure so far this year. Hopefully, I'll get a grip and start doing better with this goal. I'd like to think that I made progress in this area, but emotionalism is still a struggle for me. I think going forward into 2009 it will be imperative that I learn to keep my emotional side under wraps.

The market provided plenty of humbling opportunities for me this year. It also forced me to change my game plan. My portfolio would have been down double what it was if I had continued following my stock screens without question. This just wasn't the year for mechanical investing (as the portfolios in newsletter screens clearly show).

In a way, I'm glad the year was so challenging. It forced me to re-think my strategies and to learn new things that were outside my comfort zone. I made my first "short" trade this year as well as my first day-trade. I made my first trade based on technical analysis (chart reading), used margin for the first time, and traded an index fund for the first time.

The things I've learned will hopefully give me more tools in 2009. It has been a crazy year. I'm glad it's over.

What am I thinking?!

After experiencing the worst year of my admittedly short trading career, I have decided to mark 2009 as the year I attempt to trade for a living. I've always had an ample income to support my trading hobby, but soon the money will dry up and I'll be fully responsible for creating an income out of the ups and downs of the stock market. I am scared out of my mind.

I have a wife and two kids to support as well, so the pressure will be on. However, I can't think of a better way of earning an income, and I look forward to the freedom that trading will provide. I love the market, and the opportunity it provides. I'll keep everybody informed on a daily basis. Wish me luck.

Best Posts of '08

I went back through all my old posts and was amazed at the journey that 2008 was. Things changed dramatically for me and for the rest of the world as we experienced the worst market since the Great Depression. I transitioned from a stock screener to a daytrader over the summer and was schooled many times by a volatile market. Here are a selection of posts that seemed to generate some interest over the past year.

• Stockpunk answers your questions
• One good trade can make your month
• It could always be worse
• Mistakes can teach the best lessons
• Too wimpy on an amazing up-day
• One day at a time