Stock Exchange: Is your trading skillful or just lucky?

Would you like to know whether your trading is lucky or good? Today’s Stock Exchange will help. As a bonus, we have some interesting ideas to explore.

[Important Update – Market Open 02/10/17]  Holmes gave a “sell” alert on CASY this morning.  Obviously I did not expect this, or I would have used a different example.  While we are not going to update every trade, this is an unusual situation.  These are supposed to be illustrative examples, not trade recommendations.  Holmes has 16 positions at any given time, so you cannot get the true effect by trading one or two.  But just in case someone chose to play along with Holmes on this one, I wanted to make this update.

Review

Our last Stock Exchange discussed how to find a trading sweet spot in a political minefield. The group found some ideas that continue to work well. Our timely discussion of the T-WOP, HT @corporatecommie was accurate, but had a short shelf-Iife. This week we saw the first evidence of waning tweet power, a crucial matter for short-term traders. What will work now?

Today’s Theme

If you start as a trader with a few lucky wins, you are on a course to lose everything you have. Is there any way to separate luck from skill? Capitalogix has a nice discussion of this topic, including examples that anyone can understand. Unlike critics who do not use quantitative methods, Howard Getson’s credibility is enhanced because of his experience with the important tools. Michael Mauboussin’s excellent book, The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing, is a leading source on this topic. I will return to his complex underlying question. For now, let us consider whether your own trading system is skill or luck. The models I describe each week share some development traits. How does yours compare?

  1. We do not start with “data mining,” a process that explores thousands of possible relationships with hundreds of variables. We begin with a hypothesis and a limited number of candidate parameters. If this sentence does not make sense, you should not be a consumer of systems.
  2. We train on one set of data and keep a generous out-of-sample period. We examine performance over both time periods, making sure that performance is consistent.
  3. We trade the model following the system, carefully watching. We don’t simply monitor results. We look at specific decisions. Are these the type of trades we expect the model to select.

Let’s see what the process means for our experts, each of whom has a dramatically different approach. As usual, I will conclude with a brief observation about the key points.

This Week—Distinguishing Skill from Luck

Holmes

Humans are so impatient! They grow tired of sniffing out bottoms in stocks. I love that process, and I also am a watchdog on risk. I smell an opportunity in Casey’s (CASY) trading at 118.75. A major theme for me is finding a stock that has bottomed and started to turn up. We can find a likely sell price in this case (112.50) and an upside price (130). It is a nice risk/reward ratio, my kind of opportunity. The real beauty of a name like this is it could go much higher. Since I’m a patient dog, I will slide my stops higher if the technical picture looks better.

 

J: Casey’s mostly trades on non-gasoline revenue, but gas prices are still crucial. When people stop to fill up, and have a few extra bucks, they are likely to spend them in the convenience store.

H: They do not allow pets in the store, so I have never seen that.

J: Maybe you could make a comment on the expected earnings decline for 2017.

H: Earnings?

J: Yes. The ‘mother’s milk’ of stock pricing. I would not buy a stock with an unjustified P/E ratio of 22.

H: You need to look at the chart. A stock that declines like this usually has a rebound. I will buy, sell, and ring the cash register. In case you did not notice, I have been making big profits for you.

J: That reminds me. I have to bring up a topic you might not like – Michael Kors Holdings (KORS). This was a featured pick of yours about a month ago.

H: I know. When you are seeking out unloved stocks you will not bat 1000. Not only am I winning on most trades, the wins are much bigger than the losses. That is all you need. You just sell KORS and move on.

J: Thanks for being honest about one of your losers. I agree that you have earned your keep on the overall portfolio. When are you coming back from Mexico?

H: Can you start providing Margaritas in the office?

J: No.

H: I’ll come back anyway, if I am not stopped at the border.

J: The Supreme Court ruled that you can return, but you should not delay.

 

Athena

Advanced Micro Devices (AMD) is my favorite pick of 2017 – so far. I know I get some flak for buying on the highs. After all, if a stock like AMD jumps from $10.37 to $12.24 in a couple days – it’s got to be done, right? Wrong! Take a look at the chart to see what happened.

AMD was not done on the initial spike. I bought in right around $12.28 and we’ve already seen a second pop up to $13.56. I might hang out around for a week or so. If there are no further gains, I’m happy to take my tidy profit and move on.

J: Get real! You are always speculating in stocks that make no profits. Take a look at the chart from Chuck Carnevale’s excellent F.A.S.T. Graphs site.

A: I keep trying to teach you that the market anticipates your “fundamental” changes.

J: You are teaching me? Who is in charge here?

A: Just watch this one. It is a perfect example of how I earn profits for you even when you would never buy the stock because of low earnings. You are too stodgy, professorial, and rooted in the Graham and Dodd era.

J: How do you know about them?

A: I am a goddess. I know about many things… All of you experts on the “fundamentals” can learn something from me.

 

 

 

 

Felix

I will once again begin with my responses to reader votes for the favorites list.

My list provides rankings within each zone, as well as the basics about buy, hold, and sell. The list includes the top overall vote getters from our (free) subscription list as well as some new requests I got during the week.

J: AMD leads the list? Are you copying from Athena?

F: Definitely not. I have owned AMD since August. I am far ahead of that know-it-all goddess.

J: Are you planning to hold on?

F: My buy decisions are based upon a long-term portfolio. The average holding period is 66 weeks. I really do not care what others in the group are doing. My record is the best, despite fewer trades and lower taxes.

J: Does the list represent your favorite stocks?

F: No. It is a rating of the most frequent reader requests. I am answering questions. I am a source of ideas only for my actual clients. Most of my fans are readers or subscribers to the list. I love them and provide answers to questions, but I have my own list of favorites.

J: Fair enough.

F: Please also note that I have been working while the dog was on vacation, lazy Oscar was watching football, and the goddess was navel-gazing.

J: Any new ideas?

F: Not this week. My current holdings are working well. I make few shifts. I remain willing to help readers with questions.

 

 

 

 

 

 

Oscar

I have an exciting new pick, the iShares FTSE/Xinhua China 25 Index (FXI). There was a mysterious dip in November. Prior to that, the region was on an upswing. The 50 and 200 day moving averages are a bit misleading here. Between February and October there was enormous growth; I see potential for that to continue for the next month at least. As an aside – the market seems to agree with me. The bump from late December to now has erased the late 2016 losses.

J: Did you notice any major events in November?

O: The NFL playoffs were shaping up. Basketball was starting.

J: Anything beyond the sports pages?

O: What do you mean?

J: The election of President Trump raised fears of a trade war. Chinese stocks were threatened.

O: My concern about trade is whether the White Sox give away their entire pitching staff and whether the Bears can finally get a quarterback.

J: The trade I am discussing is international. Materials, consumer goods, finished products, currencies.

O: Maybe so. I suspect that most stock traders do not really understand that stuff. They are looking at the charts, just like me.

J: Sad but true. By the way, weren’t you all in on the Falcons.

O: Yes. I really nailed it.

J: I thought they lost. Did you hedge your position or something?

O: Some, but it was still a bad beat. My analysis was great. Terrible play calling.

J: Is that another way of saying you lost your paycheck.

O: I’ll be working hard for the next few weeks. Any way of getting a bonus?

J: We’ll see.

O: Here are my ratings for the top reader interests. Keep the questions coming. My sectors are aggressive, but have less risk than Felix’s picks. I avoid the bad news from random, single-stock moves.

J: Interesting. Do you see evidence of that?

O: I hear about it. People are very worried about something called “tweets” that seem to hit their stocks for no reason. Playing sectors reduces that risk.

 

 

 

 

Conclusion

We all want a crystal ball. The worst ones are traps – giving a few false signals until we go all-in.

The Stock Exchange provides ideas from advanced technical methods. For contrast, you can look at the fundamentals. The weekly tension is palpable.

I try to provide a source of ideas for your trading as well as some reality-testing. Please join in with questions or comments, and see below for easy ways to join in.

Background on the Stock Exchange

Each week Felix and Oscar host a poker game for some of their friends. Since they are all traders they love to discuss their best current ideas before the game starts. They like to call this their “Stock Exchange.” (Check it out for more background). Their methods are excellent, as you know if you have been following the series. Since the time frames and risk profiles differ, so do the stock ideas. You get to be a fly on the wall from my report. I am the only human present, and the only one using any fundamental analysis.

The result? Several expert ideas each week from traders, and a brief comment on the fundamentals from the human investor. The models are named to make it easy to remember their trading personalities.

Questions

If you want an opinion about a specific stock or sector, even those we did not mention, just ask! Put questions in the comments. Address them to a specific expert if you wish. Each has a specialty. Who is your favorite? (You can choose me, although my feelings will not be hurt very much if you prefer one of the models).

Getting Updates

We have a new (free) service to subscribers to our Felix/Oscar update list. You can suggest three favorite stocks and sectors. We report regularly on the “favorite fifteen” in each category– stocks and sectors—as determined by readers. Sign up with email to “etf at newarc dot com”. Suggestions and comments are welcome. In the tables below, green is a “buy,” yellow a “hold,” and red a “sell.” Each category represents about 1/3 of the underlying universe. Please remember that these are responses to reader requests, not necessarily stocks and sectors that we own. Sign up now to vote your favorite stock or sector onto the list!