Plan, do, check, act: the simple, four step management process popularized by Edward Deming. After a year of “doing”, it’s time to check the outcomes and see just how well (or poorly) the weekly “Stock Market Outlook” performed in 2015.
My expectations are mixed. With a relatively flat market, attempts to get into and out of the market often leave investors and traders with a whole lot of nothing…and brokers with a lot of profit from commissions.
That said, the weekly market outlook has a longer timeframe, so the volatility (in terms of number of buy and sell signals) should be low.
Results = Success!
The results are pretty good. I talk about safe investing as a path to wealth, which includes aggressively protecting your capital from losses. And that is exactly what the methods managed to accomplish last year.
As a refresher, I used 3 different trading methodologies and subjectively combine them into a weekly market outlook.
Every Sunday, I review the previous week’s market action and decide whether the outlook (uptrend, mixed, or downtrend) has changed, based on the signals from the 3 trading methodologies.
By cross-referencing three different methods and only changing outlooks when they all align, I reduce the number of false signals.
- 20, 50, and 200 day moving averages
- Price/volume, distribution days, follow-through days
- Objective Elliott Wave (via Tony Caldero)
Trading Criteria – Investment Type
Since we can’t directly buy shares of an index, we need to go with the next best thing; funds. I chose two S&P funds (SPDR SPY and Fidelity FXSIX) based on their common availability in individual and retirement trading accounts, as well as a fund based on the NASDAQ (Powershares QQQ) and Russell 2000 (iShares IWM), to see how well the signals translate across the various market average types and providers.
Trading Criteria – Buy and Sell Prices
The forward looking outlook (uptrend, downtrend, mixed) is posted on Sunday, based on stock market price action from the prior week. Since that week is already in the books, there is no way for you to “trade” at the same prices that shaped the outlook.
That means, if you decided to take action, you’d make your moves between the market’s opening price on Monday (the next day) and the closing price on Friday afternoon. For better or worse, I’m using Friday’s weekly closing price as my buy/sell price for any trade. You will rarely, if ever, get the opening price, funny things happen when price “gaps” at the open, and catching the high or low during the week isn’t feasible for 95% of the people reading this blog.
Trading Criteria – Transaction Prices
I’m assuming that trades are placed in an account with Fidelity, so transactions cost $7.95 per trade. Everyone should be using a low cost broker, and there are several with lower costs than Fidelity…just FYI.
Trading Criteria – Position Sizing
For this study, I used a position size of 100 shares to keep the math simple. If I were buy shares of an index ETF (SPY for example), position size would be customized based on the size of my total portfolio and my risk tolerance (how much I’m willing to lose before selling the position).
Trading Criteria – Buy and Sell Signals
Shares are purchased if the market outlook changes to an uptrend.
If the outlook is mixed, sit on your hands and watch.
If the outlook changes to a downtrend, the entire position is sold.
Issues and Objections
Stock markets can fluctuate quite a bit during the trading week, which makes the weekly review lag the market. Also, trend changes aren’t nice enough to change at the same time every week. Thinking that a change in trend will happen at the end of every week is like expecting fellow drivers to use their turn signals. Not gonna happen. So using Friday’s closing price as the buy or sell price will not always match the price level that triggered the change in trend.
Are you always going to buy in an uptrend, sit on your hands when the market is “mixed”, or sell before a downtrend takes hold? No. General trends are great for giving you a sense of the overall investing environment. But each of your positions needs to be evaluated on its own merits.
For the analysis, I used historical data from Yahoo Finance. Here’s an example for the SPY calculations: