Meet our newest fund manager, Gary. We thought it would be a fun experiment to see if Gary the chimp could beat the averages, thereby outperforming the majority of Wall Street fund managers.One of our most fundamental and important beliefs in "investing" (if you can call it that today), is that an object in motion stays in motion. You know the sayings, "The trend is your friend","Don't fight the tape", etc. In the spirit of these words, we trained Gary to distinguish between uptrending and downtrending charts. Believe us when we say that Gary knows nothing about fundamentals. We had him chose 5 uptrending charts and 5 downtrending charts.
For the uptrending stocks, he chose AFAM,ALGT,EBS,LPHI,THS
For the downtrending stocks, he chose BCSI,MMM,XOM,GOOG,ANW
The opening price of Monday, Nov. 3rd will be our starting price for each stock.
On the left side of our blog, we are going to track the performance of a fictional portfolio that goes long these 5 uptrending charts and simultaneously short the 5 downtrending charts. This fictional portfolio is being run by a chimp, remember, so it will not benefit from layering into and out of positions, nor from taking profits on any chart that makes an enormous move.
We will post the performance of each stock and the performance of the portfolio vs the market averages at the end of each week for several months.
It should be a very interesting experiment. Because we're not betting on overall market direction, this approach would work in any market environment. And the portfolio could easily be created in minutes by anyone with access to a garden variety chimp and a few bananas... quite a few bananas, actually.
Disclaimer: No animals were harmed during this experiment.
30 comments:
Good idea, but the choosen stocks for short are not the best stocks for short. They had already beaten down enough, additionaly I would never ever short a stock like XOM, because it's a big company, has history, etc.
And the same is true for the longs, they had a very long rally behind themselves, so the timing is not the best, but the test is good for an experience.
Gary doesn't understand any of that, he's just a chimp. What's worse than that is that he's not even able to wait for a pullback on the longs that just shot up, or for a better entry point on the shorts. It's a completely blind experiment, otherwise it wouldn't be fair. If Gary beats us, we're going to have to re-analyze our whole approach. He already beat the masterminds at Bear Stearns and Lehman, so he's off to a good start.
OK.
And what are the exit points? 200SMA?
Since we're being light-hearted, Snotwheel, how did you get your name?
No, Gary will exit all of his positions at the same time. We're going to tally his performance at the end of each week until his portfolio starts underperforming so badly that new stocks need to be chosen. We're hoping to let him go with these initial stock picks for several months. The amount of time that he can stay with (or beat) the averages is part of the experiment. Of course there will come a time when his stocks will reverse course and result in sub-par performance. Hopefully nowhere near as bad as Bear Stearns, Lehman, Merrill type performance, but terrible nonetheless. At this point, Gary will choose 10 new stocks if we think it's worthwhile keeping him on as an elite manager.
Very good Snot.. this should be interesting.. Of course logic says that all the downtrending stocks should be due a turnaround with the market as a whole and the uptrending ones are pump and dumps due to tank so it will be interesting to see if logic triumps over the lowly chimp.
Ill throw my opinion in the ring though and suggest that all the stocks could be a similar size. The shorts are all large caps and the longs are microcap pump and dump candidates.
Also, how about a genetically modfied gary who is capable of dumping a stock and picking a replacement as soon as it breaks its channel, no exceptions, no emotion? That would be interesting now...
Sniper
You may think it's lighthearted, but we really believe that no education nor suit is required to operate as efficiently in the market as the "professionals". Many studies support this, and we're out to prove it in real time right here on our blog. Hence the name Snotwheel, which assures we never make the mistake of taking ourselves too seriously. It's the Stratton Oakmont Whilshire's of the world that seem to keep going belly up, while the Snotwheel's of the world are keeping pace with the averages. If you work in finance and you're wearing a suit and tie, you're taking yourself way too seriously. At the very center of its being, Wall Street is a scam of such enormous proportion that people chose to believe it's legit because the alternative is a total rejection of their entire system of economics. There was a time when a share of stock represented a piece of a company, and its value was tied to the prosperity of the company. This is no longer how Wall Street works. Stock options are handed out like candy, with no concern of what the massive dilution does to shareholder value.
Sniper,
We had trouble finding uptrending charts, so we had to just choose the best we found. All in all, large cap/mid cap/small cap shouldn't matter if all of their trends continue. It would be interesting to modify Gary to replace each stock when it breaks its trend, but these stocks don't have clear channels, which would make it hard to do anyway. It would work with a moving average, though. That could be the next experiment if this Gary fails to beat the market. We'd like to use as little interference as possible at first, to see if the basic concept can beat the averages. And if so, for how long.
To address Sniper's concern about micro vs. large caps, how about picking some down-trending micro-caps to serve in the long group. Those should be easy to find.
The reason our longs were small caps is because we chose them from software that scans for uptrending stocks. They are hard to find right now. In a more bullish market, we would have some better known names to go with. For downtrending charts, we just went with names we knew because they're plentiful now.
In all honesty, though, it doesn't matter much because this isn't a contest between the long and the short group. It's a test of whether or not you can profit over time regardless of the broader market by going long strength, short weakness. Which group performs better is irrelevant. In fact, the way this is set up could be helpful because if one group performs better than the other, we'll refine the experiment next time by biasing the picks to the large or small cap, whichever shows more of an ability to stick with its trend thereby producing better gains.
This is a test of charting at its purest. We really have no fundamental bias towards any of these stocks, and because there are 10 of them from different sectors, it's just a test of whether or not betting on the continuation of chart trends can outperform the average or not, regardless of the market's direction. If this works, it would theoretically work equally well in bull, bear and sideways markets.
Hey Snot, seeing as we are on the subject of performance, heres a question that has been bugging me..
Why does your performance start at 32.25.
Is it just your account balance in june, missing a few Zero's?
Sniper, you got it right. It's easiest to use the real digits (less a zero or two), than to have tried to correlate it with some fictional round number.
Snot,
If you look at a 60 min chart of the Dow it just broke out of a cup and handle. If this doesn't hold up till Monday's close I would be looking to load up on FXP again as it doesn't seem to want to break it's uptrend line.
Thoughts?
Anon, we aren't big into intraday TA, although it has some validity.
Friday was a huge up day until the very end of the day. It was no suprise that daytraders closed their positions ahead of the weekend. If it were any other day, we could have closed substantially higher. We don't trade on where we think the market is heading short term, but rather where it has just been. If we had to guess, though, we'd guess on a continuation of this rally. Maybe some backtracking first, as we've come a long way in a short time. Overall, a higher market though.
But that's just our best guess.
The market overall is in neutral territory now, making any guess here that much more difficult.
If the market moves into overbought territory, we'll be joining you with FXP. If we didn't already own some of it, there's no doubt we'd be buying it right here in the high 80's. We're just trying to knock our break even price down substantially by seeing if we can get it at a lower price. Greed may not pay off in this case, but we choose to not be too heavily short while the Dow is in the middle of its range, as FXP's volatility can kill our profits on the long side even if we hold very little of it.
Bear in mind too that another global rate cut looks to be on the cards for next week with Asia leading the way. That could lead to a situation where US markets see a pullback and asian markets simultaneously soar due to a rate cut.. That would make FXP a risky indices to buy as a hedge...
European cut should come soon. I've already bought VEU last week and may buy VGK Monday. Nice ETFs to trade foreign stocks from one of the best in the business. Already layered into DBA twice and think it is time to start nibbling on MOO. Yeah, ag once again. Already have IYK and need to get some UGE. Have a little TAN. It is working. Daytrade and short-term trade DDM and QLD. Hedged (sort of) with bonds and cash. Staying off margin. How does that sound overall? Any serious weaknesses?
Hey Anon,
Those indices are all betting rather heavily on worldwide bottom being put in and a bull market from here on in. This is altogether possible as far as the US markets go but i cant see consumer goods being a good buy when millions of houses are being repossessed at the moment. It will be long after the markets recover that consumer goods buying will start to recover. Also, European economies are well behind the US in their entry into recession. They are at the stage where construction is just now shutting down and house prices are plummeting, but no repossessions or foreclosures have taken place yet. Therefore that fund would strike me as a cracking short rather than a buy if europe plays out the way the states has.
A mate told me today that his SUV is up for sale after he lost his job in construction. He bought it this year for E48,000 and he is looking for E27,000. He hasn't had a single call yet. Also, the BMW dealership in the richest town in Dublin went bust a few weeks ago due to lack of sales. This in a country where the 3 series is the most common car on the road!! It beggars belief how hard Ireland is falling and its only at the start of the process...
Anon, you're too diversified. All of those ETF's more or less trade in tandem. You could just hold DDM and do just as well (or bad).
ETF's are already diversified, so there's no reason to buy a basket of them. 2 is enough. The problem with owning so many of them is that you aren't as nimble if you want to get out.
Of course the bigger concern is that you're not hedged at all. Cash and bonds help, but they don't make up for losses should the market head South.
Over the very short term, these ETF's have done well. But there's no way of knowing yet if this is the early stages of an extended run or if we're closing in on the top of another bear market trap.
You're playing roulette with that portfolio, and you'll either win big or go bust. That's what Vegas is for. How about adding some real hedge? One that won't kill your portfolio if the market goes up, but will counterbalance your account if the bottom falls out of the market, like FXP or EEV?
Conorsh, very interesting commentary. Always thought it was funny that everyone in Ireland drove a BMW. We know people there, and wouldn't you know, they drive a 3 series!
Guess their wealth was as fake as America's.
Short term u can trade up some MOO and AG stock. Techical oversold but longer term I think all AG stocks will head to single digit... History will repeat. Look at DOTCOM boom...JAVA is case.
Wish Gary well on his opening day! If he outperforms Vanguard, et al, we may be able to get him on CNBC!
Thanks for the advice everyone. On Europe, at least short-term, they are up on rate cut hopes. They have more dry powder for it.
http://biz.yahoo.com/ap/081103/world_markets.html
I beg to disagree on one point. Consumer staples/goods should weather the recession as well as anything.
http://biz.yahoo.com/ap/081101/meltdown_survivors.html
Gary "purchased" all of his stocks at the open, as shown on the left side of the blog.
Too bad he doesn't benefit from channel trading, or layering into positions, as two of his longs, AFAM and ALGT look dangerously high. Still, in the true spirit of this experiment, it's only fair to let Gary choose his stocks based solely on uptrending vs downtrending charts and nothing else.
Anon, both Europe and Asia are expected to cut this week. But after the recent rally, maybe it'll be a sell on the news?
At least we have the election to help buoy the market this week, unless that, too, is used as a sell the news event.
We have a phrase in Ireland, Typically applied to people from a certin part of Dublin, but really, its applicable to the whole country.
BMW in the Driveway, no milk in the fridge.
Basically it reflects how overspent people were and how they were operatingon the financial limit. This phrase was applied during times when the property market was booming and everyone had money. Now that people are losing jobs it highlights just how precarious the situation is for all these people..
A good short would be CRH, Irelands largest construction company supplying Gravel to a now dead industry. Who else though, thats the question.
Good pick, Sniper. It's chart is a short, too. Wish we could short individual names, that would be one we'd choose.
You're lucky no solar stocks were on the short list, or that chimp would be looking like a chump.
My own slightly-better-than-a-chimp TA tells me that Gary should prepare to sell AFAM in about 6 weeks.
Same goes for ALGT. They might not fall below their moving averages, but these two are going to have a pullback.
If ALGT & AFAM do make it through christmas, they are going to sell off hard in January.
EBS looks safe to hold into the new year. I like this one alot.
LPHI looks like it has at least 3 months of legs too.
THS looks ok too.
Iconoclast,
You're right, AFAM and ALGT are not in positions where we would buy them. When we buy uptrending stocks, we wait for a pullback to the moving average and bottom of trend channel so if things go wrong, we only lose a small amount.
And other outcome is positive.
But in the true spirit of having a chimp pick a few charts, we let him just choose charts based solely on the direction of their trends with no help from common sense.
The idea here is to see if the approach to going long strength and simultaneously short weakness is effective enough in and of itself to overcome improper timing, market conditions, varying market caps, varying sectors, etc.
If this experiment works, there is no reason to believe it wouldn't work every time.
If it fails, we'll try to help Gary with his picks and timing next time to see if human intervention can improve upon his results.
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