Sunday, May 3, 2009

Weekend Update: Portfolio updates + comments

Dr. Kris has been under the weather for the past quarter-moon which is why I'm not at the birthday party of an acquaintance at a Moroccan restaurant replete with full bar and belly dancers. Feeling a bit better than yesterday at least, Dr. Kris (aka moi) has updated the Channeling Stocks Portfolio. As mentioned in Wednesday's blog, I covered all of my short positions at their closing prices. The chart below reflects that.

As I also said, I don't have time until my talk at the LA Traders Expo on June 4th at the Pasadena Convention Center to contribute more to this portfolio. The only two positions open are the two longs—HNP and OSIP.

But, as I mentioned at the start, this was a strategy that I've never traded before as an entire portfolio and it would be a learning experience for both of us. I've traded a few channeling stocks and index tracking stocks on occasion and made an overall profit on them. At the time, there weren't nearly the amount of fundamental nor technical tools available as today (for better or for worse!), nor was the market so ambiguous. Running this experiment today has been an eye-opener for me

What I've learned from paper-trading Channeling Stocks
Here are some of the more notable things that I've learned from this experiment:

1. In markets that have been trending in one direction for a long time, trying to fade (go against) the market in the majority of picks was not optimum, even though the entry (short) signals were triggered.

Although it might be tough to discern market direction, when the market headed south at the beginning of March and the VIX didn't follow was a signal that something was up, either good or bad. But once the market began rising and the VIX concurrently falling was a time to limit taking on short positions.

2. There's always been a debate between those who think you should put all of your eggs in one basket (e.g. shorting stocks like I did at market down-turns) and balancing your total amount between long and short positions.

3. Unknown factors can be detrimental in any portfolio, such as short-holding Pepsi-America (PAS) which was covered right after the take-over announcement by Pepsi-Co. Unless you have insider info, there's virtually no way you can spot this action. You might expect it if other companies in the sector are cash-flush and hurting for cash flow, e.g., new product.

4. Holding over an earnings release can be detrimental, especially if the release is in sync with current market direction that is opposite to your holding. Take Fiserv (FISV) who reported good earnings after the bell on April 30th. Good thing I chose to cash out of my short positions on April 29th based on other criteria, because my position would have suffered a bit: the stock opened on May 1 (after the good earnings announcement) at $37.58. Had I covered my short at that time, my loss would be -6.3% instead of -4.8%.

Even the most experienced traders in the business can be unprofitable if they're novices in regards to a new strategy. That's why I'm going to shout the following: PLEASE PAPER-TRADE ANY STRATEGY BEFORE EXECUTING IT! That's how you learn the intracacies that you may never have thought of due to changing market conditions. Your failure does not make the strategy invalid; you just need to learn it.

Many people will tell you that trading the market is easy; if you're new to trading and have good luck, you might agree with them, but after a while your luck can (and probably will) run out. That's when you might consider giving up, but that's exactly the time when you should examine your trades and learn more about why you succeeded and also why you didn't.

Which leads me to the second point: KEEP A JOURNAL!

You're only a failure if you keep repeating your losses.

End of lesson.

Channeling Stocks Portfolio:

[Click to enlarge.]

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