Missing Retirement Contribution

My missing retirement contribution is now showing up on TIAA-CREF's website. But it's been parked in a money market fund despite my instructions in the application forms. Well, I'll move it and change the instructions online for future contributions. Just a reminder to make sure that your instructions are carried out as requested.

TFS Capital Distribution

So far I am very happy with my investment in TFS Capital's Market Neutral Fund. The fund distribution for 2006 has just been announced:

Short term capital gains: 0.0895
Long term capital gains: 0.1272

After my discussion on this blog with one of the portfolio managers I had been a bit concerned that the distribution might impose a big tax burden, which is one of the downsides of actively managed open-ended mutual funds held in taxable accounts. Recent investors have to pay taxes on investment gains from the past which they haven't benefited from income wise. But this distribution is not bad. It is only a 1.6% yield and the short-term long-term CGT composition is close to the 40/60 mix of futures trading. And my gain so far in just over a month of holding the fund is 5.3% (pre-tax)!

Initial Assessment for December and 2006

It will take quite a while it seems till I have final figures for December and 2006. One reason is that my supplemental 403b plan isn't showing up on TIAA-CREF's website - I e-mailed them to query this. I guess I should at least get a paper statement for the end of the quarter some time but that will take a long time. As of today I am at a net worth of around $365k which represents a gain of $95k in net worth - 95% of my goal for the year. Total after tax earning including salary, investment gains, retirement contributions totalled around $121k with around $26k of spending. Of that income. $69k came from non-investment sources and net income tax paid and $52k from investments. Changes in exchange rates contributed about $12k of the latter. Net realized short-term capital gains on stocks (not counting mutual fund distributions) were around $8k. Trading the NDX added just $2300 for the year with December adding $60. But at least the losing streak of the last few months has ended. The rate of return on investment (pre-tax) was about 18% and 23% on non-retirement accounts as my retirement accounts have been quite conservatively invested.

As numbers are finalized over the next few weeks I will present a lot of reports on the different factors and how they contributed to the results for the year. The main thing though is I am now at a stage where investment earnings are covering living expenses though there is no guarantee that that will continue. In 2005 my investment return was only 3.4%. On the other hand I continue to learn and improve (as objectively measured by indicators such as my portfolio alpha). Over the last three years my alpha is 10% p.a. relative to the MSCI and 14% relative to the S&P 500. Beta is 0.6-0.7. That means in an average 10% year for the indices I should return between 18-22%. If the indices fall 10% I should return on average more than 12% in theory... But I can have a bad year too unrelated to index performance. Is this enough yet to consider myself "financially free"? Obviously I need to manage my money actively and a bad year could have very significant impact. So I consider myself on the verge of being able to make a living as a trader/investor but still need to accumulate more assets and show a more consistent and better trading performance.

December alone added about $10k to net worth with a 2% investment return and about $2000 of spending. If I could keep that up I would easily meet next year's goals :)

Hedged Trading

Another new idea. Seem to be a lot of these as I struggle to find a method that fits my psychology well and uses the model signals. Trade 1 NQ and 200 SPY (S&P500 ETF) in opposite directions. So say I am short 1 NQ then buy 200 SPY. This is equivalent to trading a position of $20 times the NDX and the opposite direction $20 times the SPX. Here is a chart of NDX/SPX:



Reasons to use SPY rather than a futures contract as the hedge:

1. I don't have enough money in my futures account to trade 5 NQ and 2 ES which is the correct ratio of futures contracts and I can trade the SPY part in my Ameritrade account.

2. The tax deduction on stocks is greater for a loss than on futures. As the hedge is expected to lose it makes sense to use stocks for this side of the position.

3. The leverage for stocks is lower and an apparent reduction in leverage is psychologically beneficial.

I've done some simulations and over the last year a fully levered (initial margin for NQ of $3750 and 50% margin for stocks) 1 NQ - 200 SPY position behaves pretty much the same as an unlevered 800 QQQQ position. The strongest gaining days are bigger in terms of percentage gain though - the worst losing days are about the same. So I am now experimenting with this idea live. Of course, if the trend is clear I can remove the hedge and even keep the hedge in the same direction and reverse the main position when the trend reverses. Not sure if I will just use the hedge when I am unclear on direction or all the time.

Last night I watched the movie "Pi". Really crazy movie. Anyway, I'm not like that guy though I am looking for patterns in the stockmarket and have studied the Talmud etc in the past :) One example - he didn't actually trade :P

Buy Signal?

NDX stock futures ran up a lot overnight but are now retreating. NDX needs to be about +5 from the close to trigger a crossing of the moving average and a buy signal. It was +11 at around 6 am but now is back to +4.75. Think I will wait for the new housing number at 10am to make a decision whether to go long.

Pair Trade Update

Just checking how the "pair trade" is working out. The concept was fine but if I think of just NCT and IYR in isolation I shorted too much IYR. So far I lost $251 on IYR and gained $259 on NCT. My IYR short position is worth -$8228 and my long NCT $3229. I should have shorted fewer IYR and if I had the trade would be nicely profitable despite the fact that IYR rose. NCT has turned out to be much stronger than the average actual property owning REIT.

NQ Chart

A possible Elliott-Wave interpretation of the market action of the last month (using the NQ futures chart) ... we would be currently in wave 4 of the final downwave of the correction with just wave 5 down to go to complete this month long correction. Then expect a rally to exceed the 2006 highs. Up till wave b of B it had looked like we were in a triangular correction... but soon the breakout from the triangle failed and a larger corrective pattern developed. This happens all the time with E-Wave which is why it is such a hard tool to really use for trading.

Oversold!

I just realized that in fact we are now in "oversold" conditions - the stochastic oscillator is below 20. This hasn't happened for so long I wasn't paying attention. According to the trading rules one ought to be short here not long! I entered a long trade this morning with just one contract. Now will look to exit it.

How Could I Add $105k to Net Worth?

2006's results (to be reported in detail after January 1) were helped by foreign exchange gain and a small ($6-7k) inheritance amount. I doubt foreign exchange will add much this year and it may even take away unless I successfully trade foreign currency. The Australian Dollar is close to 80 US cents and it is hard to imagine it going much higher. The US Dollar could be bottoming. The second part of the inheritance could come this year or not. Legal procedures are extremely slow. I expect it would be about twice the value of the first one but we don't really know. So let's assume all these factors are zero. I also assume that my tax bill in April will be zero - I have been over-withholding and I think it is sufficient to meet the required tax.

I can expect the following - my employer contributes 8% of my salary to my 403b and I am now contributing the maximum allowed contribution. Combined these come in at $1750 per month. If I spend at the same rate as this year, I should still be able to save $1000 a month after tax. Total from "contributions" would, therefore, be $33k for the year. In my previous post I stated a goal of making $19k from trading. That would be a 46% return on those accounts mentioned. This year I only gained $3k from QQQQ/NQ trading. So it seems like a lot. If I can succeed in adhering to my model it isn't though a very high goal. Viewed another way, it is about 1/2 the average US salary and only a step on the way to becoming a succcessful trader. If we assume that I do achieve this then the required return on my investment portfolio is 14%. This also is high, but not impossible. This year the S&P 500 exceeded that. Of course returns could be much lower and my spending much higher. But this is a goal, not a forecast, and the point is that it should be hard but not impossible to achieve.

2007 Net Worth Goal

Though we haven't yet completed 2006 I have added my 2007 net worth goal to the sidebar. $470,000. At this point I look like reaching $365k for 2006 - an addition of $95k to my net worth. $5k short of my goal but far above the amount I wrote I would be happy with. So next year's goal is to add a little more to net worth than this year - $105k. Also at a constant growth rate, $470k is on the growth path to $1 million at the end of 2010. My second goal is to end the year with as much in my three self directed US investment/trading accounts - at Ameritrade and IB as I put into them ( I also have a 403b and an account with TFS Capital - those are doing fine). Currently my net investment has been $60k, but there is only about $41k in the three accounts. I've added that goal to thje sidebar with the amount achieved in parentheses - I'll update it periodically. If I add or withdraw money to the accounts the goal will shift. These two goals are pretty simple I think. A "stretch goal" as people say is pretty obvious - reaching a net worth of half a million dollars :)

Overnight Trading

I'm struggling to develop a trading strategy which won't involve me staring at the market all day. The idea behind developing the "model"... But seems it is psychologically hard to just follow the model directions and leave a position on all the time until I have a reasonable cushion of profits from trading the model. This doesn't make any sense from the point of view of traditional neoclassical economics, but does make sense from the perspective of behavioral economics. Noting that overnight moves in the stockmarket tend to be much smaller than intraday ones (a well-known economic anomaly) I think I may have an alternative trading strategy:

1. At the close of each day place a trade as directed by the model.

2. In the morning observe the direction of the market from the 8:30am timing of most major U.S. macroeconomic announcements to about 11am.

3. If the market is moving in the direction forecast by the model take profits after a substantial move is made.

4. If the market seems to be going in the opposite direction get out fast.

For example, this morning the market was up slightly before the open but nothing significant. Then came the big fall after the open. Around 9:45am was the ideal time to cover the position. Or just where I decided to go long, a little later. This trade would have made around 13-14 points or $260-280 per contract. The clue that this is doable is that I decided to go long at NQ = 1775. So I'm capable of making the right decision in principle and just need to build that into a strategy.

Making a trade every day also makes it easier to take time out from trading. The psychological difficulty of this strategy is being disciplined to ignore the market for the rest of the day once I've closed the overnight trade. I'll call this strategy "overnight trading" as opposed to "day trading" :)

Of course if the market appears to be in a very strong trend it would make sense to place a stop and let the trade run after observing the morning conditions. This might be easier if I trade say 2 contracts and close one in the morning and let one run if conditions look favorable.

Santa Rally?

The market has been going up since July so maybe it is rather late in the day to talk about the "traditional" year-end "Santa Rally" in the stock market. But this period from the day before Christmas till a few days after is also a time of seasonal strength in the market. The model was still short going into this morning, but only marginally so and will probably be long by the end of the day. So I went long at NQ = 1775.00. Still trying to work out if that was the right move. More ominously for bulls is that at this turning point we are now clearly out of the persistently overbought conditions that have prevailed in the last few months. All my indicators are now coinciding and indicating a turn here. This isn't the case in the overbought state. So after this short rally be on the look out for a significant downtrend to develop.

12:14pm

Stopped out at 1771.25. I put the stop at the low of the day so far and it was taken out. If I'd just stuck with the model, which was still short, I would have been up... Not sure, may wait till after Christmas to place another trade.

Don't Add to Successful Positions?

Brett Steenbarger writes in his blog to take some profits when a trade works out. This seems to run counter to the idea of letting winners run. Figuring out when to take some profits and when to let the trade run is a very tricky judgement. What I've learnt to my expense in the last couple of days is that when a trade works out well don't add to it even when there looks like plenty of upside left in theory. That's a less extreme version. Rather look to see if you should reverse direction and if so, then think of making a larger trade when you reverse direction. The market opened down yesterday and so dumbly I added to my short position and then the market ran up all day. Turning my winning trade into a losing trade. I covered some and then more this afternoon when the market finally began to reverse down again. Took some losses and left some of the position on the table to see if my original concept will work out.

Volatile Weather and Markets and the Demise of Mutual Funds?

This morning there was snow on the ground here in Burlington, VT and there were occasionally snow showers throughout the day. The markets opened steeply lower following a 15% plunge in the Thai stock market and the housing and PPI reports. The US Dollar fell a bit and the markets recovered, with the Dow and S&P 500 ending up on the day. The wave does look corrective on the NDX and the late day sell-off came pretty much where one would expect. The original model forecast was for Wednesday to be the first down day, so I am still expecting a down move tomorrow (which might rescue some of the bad intra-day trades I did today :)).

An interesting article about the potential demise of active mutual funds. Seems that the PF community is on board with the beta part of the story (buy index funds, ETFs, or futures) but doesn't recognize that some managers actually do add value (beta). The question is why pay a manager of a mutual fund or hedge fund to generate both alpha and beta returns when the beta can be bought very cheaply elsewhere. Maybe hedge funds as well will be forced to move to a model where managers are only rewarded for supplying alpha. Contrary to what the author writes, hedge fund managers are in most cases currently rewarded for both alpha and beta.

Closing the Australian Beta Trade

As the model has now switched to sell, I closed out the Australian positions I opened to increase my portfolio's beta. The results are as follows:



This is a margin account and so all the money to buy the shares was borrowed and the cost of interest needs to be figured into the profit. All the numbers are in Australian Dollars (1 AUD = 0.78 USD).

Overall I am happy with the result of this experiment :) But the after tax profit is a small fraction of the gross profit. Trading 2 NDX E-Mini (NQ) contracts is a similar size trade in terms of the underlying value of shares traded. Here is an imaginary NQ trade on Interactive Brokers which generates the same pre-tax profit of AUD 900. The results (in USD) would be as follows:



This trade actually provides more beta than the Australian trade I actually did. Fees are dramatically lower and the tax rate is lower too. The after tax profit on the Australian trade was USD 284. By the way, trading a single stock in Aus would only have lowered the combined fees by AUD 40 over what I paid to trade 3 different stocks as for this size trade CommSec charge 0.12% of the trade value (+ an AUD 10 fee for each trade on a margin account).

Early Reversal

Today's action resulted in a new downtrend starting earlier than expected.... though my old acquaintance Ground Zero was already short... the fluctuations in the market seem to be getting shorter in frequency. The breakout from the supposed symmetrical triangle failed as a result - it worked - but now we have fallen back into the triangle zone before making a new high on NDX. I'll close all the long trading positions and then look if I will actually take the short with a limited size.

I spent most of today travelling to Burlington, VT. Amazing how mild it was and how green the landscape sometimes looked on the way up here.... Definitely nothing like a Vermont winter here.

SEC Plans to Increase Net Worth Required to Invest in Hedge Funds

To $2.5million. I don't understand why the U.S. authorities want to keep hedge funds as a club only for the rich, which is the opposite of the trend in other countries. It is especially ridiculous given the increasing number of long-short mutual funds. Anyway, it is much easier to lose your money playing with options, borrowing to buy high-priced houses at the peak of the housing market, and in any number of other ways. Maybe some big hedge funds who won't be affected by the rule want to reduce the competition?

Perfect Storm

This morning's CPI and wage data. Stocks and bonds soared and the US Dollar dropped on the news. Perfect for more my portfolio. But will the massive opening gap hold, or should I sell my stock positions. QQQQ was $44.40 before the news and now is at $44.78 a few minutes later. There is a potential for $45 being an attractor today as it is options expiry day....

12:39pm

The NDX gap pretty much did fill in the end and $44.50 is looking like more of an attractor than $45. I should just trust the model and stay long through Tuesday I guess... The Aussie and 10 year bonds retraced a lot of their surge too.

Two More Australian Positions

Just bought 1000 shares of NWS.AX and WDC.AX. The former - the News Corporation - is one of my favorite trading vehicles and it was down at the open today. The latter - Westfield - was on my shopping list yesterday and today was recommended by Clime Capital's CEO Roger Montgomery in his monthly letter to shareholders. Westfield is a huge owner and developer of shopping malls in Australia and the United States. It was founded and still run by the Lowy family. Frank Lowy is one of Australia's billionaires. Both these firms are family companies in a way though publicly traded. Still, I'm not planning an investment here really just a short term trade. Beta of the portfolio is now 1.31 and borrowing 41% of net worth.

The triangle set-up I talked about yesterday worked out and the rally on the NASDAQ does not seem complete yet. The model is signalling that the rally should last through the end of Tuesday at this point. I might be selling a lot of stuff Monday night (Tuesday in Australia) through Tuesday :)

Bullish?

After the market managed to close up slightly and stay within the triangle the model is still forecasting upside for the next several days. Actually, a higher close would have made the model bring forward the next downtrend to start sooner. If the NASDAQ manages to break out of the triangle to the upside we could expect a significant rally. So I decided to start increasing my beta further. The plan was to buy 4-5 large cap high beta stocks in Australia. So far I only bought 3000 shares of AMP ($A9.58). If the trend is confirmed I will add more positions. What gives me pause and made me put the question mark in the title is that already the All Ordinaries index's rise so far this evening has resulted in a sell signal using my older "autoregressive model". But that model is rather unreliable and this could simply mean that a strong trend is underway.... Anyway best to be cautious. This move takes my portfolio beta up to 1.17 and total borrowing to 28% of net worth. Another of the stocks I was thinking about buying - Wesfarmers - has, of course, run up sharply since I decided not to buy it today :)

Surprisingly Strong Retail Sales

U.S. retail sales were up 1.1% in November. The consensus forecast was 0.2%. As a result, stocks and the U.S. dollar are up and bonds down. NQ futures are up 7.75 points at the moment (my positions bought yesterday are now in the money). I was actually worried the retail sales number might be low and sold out of a QQQQ position I bought yesterday afternoon just before the number came out and then bought back in just after for a loss of 3 cents per share (I sold the shares for an 11 cent profit - 3 cents is the difference between my buy and sell prices). Yes, I'm still very jittery.

10:28am

Oh well, the market closed the opening gap... and then some. Sometimes the gap closing trade works and sometimes not. I don't have a good theory about this yet. A lot of traders are watching this triangle:



I think it should break upwards, but at this point we are close to testing the downside.

FOMC Day

And I gingerly stepped back into the market... So far, just one NQ Mar 07 contract @ 1805.50. If an uptrend takes hold I may add to it. Though it was announced this morning that the US trade deficit narrowed significantly the USD is weak (AUD = 0.7864). Bonds are up slightly and stocks are down. I am a bit apprehensive of getting too bold before the FOMC announcement at 2:15pm. Bernanke is in China, so don't expect any surprises. The most significant thing that could happen I am thinking is if Jeffrey Lacker doesn't dissent from the decision and state that he thinks interest rates should be raised as he has at recent meetings. That could be bullish for stocks (or maybe not - my TA is pointing up in the stockmarket so I suspect it would be read bullishly - rather than a sign that the economy is even weaker). It would certainly be bullish for bonds and bad for the USD.

3:17pm

It's been a catching falling knives kind of day. The model was forecasting a slightly down day (after the level I mentioned yesterday didn't hold). So when the market opened down I thought that was a good time to buy. The market fell much more before the FOMC announcement though... Lacker dissented again. Apparently he is rotating off the FOMC after this meeting. At least the model is forecasting an uptrend now for the near future as I'm underwater on the two contracts I ended up buying (there was a third which I sold for a small gain). Bonds are up and the USD down after the announcement while stocks are up though very volatile.

I Know What's Going to Happen...

but don't do anything about it.... same story as last week. The model forecast today as a down day, but my read of the intraday (and daily) charts came to the opposite conclusion. So I was hesitant to do anything. If the market stays up near it's current level (13-14 NDX points) the model forecasts Tuesday as an upday. Basically the market is forecasting a favorable FOMC report tomorrow afternoon. I'm pretty sure I can make money from trading on a full time basis but letting my attention drift can be fatal. And I can't fully focus on it. So that's why I'm not acting. I guess that is better than making more losing trades. And losing money makes me nervous and do dumb things.

This upcoming rally seems likely to be very short-lived though. I think it highly likely we are in an ending diagonal or some other topping action that will last much of this month.

On the foreign exchange front, my guess is that the US Dollar has just completed a fourth wave since October and new wave down is getting underway. This wave if it materializes will take the dollar to the support level that has held in the last couple of decades of 80 or so. Some kind of rally would seem likely from that point even if ultimately the support fails, even though I actually think that unlikely. Prices are already very high in Europe relative to the United States. In the end I believe that relative purchasing power will limit moves in currencies. If this is the case, the US Dollar can only keep on falling relative to the Pound and Euro if there is significantly higher inflation in the US than in Europe.

Hyperopia

Interesting academic article which I found from today's New York Times Magazine. I've pondered whether some PF bloggers, particularly those in their 20's are being over-responsible and self-denying. At least based on what they write publicly. I don't regret not saving money during that period of my life and going into debt in order to study, travel, and enjoy life. Nowadays, I am pretty frugal but mainly because I have only gradually increased my material standard of living over time. I am not in any kind of struggle to avoid spending money. I just don't want a lot of "stuff". My saving also isn't directed at some distant "retirement" but rather at achieving "financial freedom" as soon as possible.

Anyway, the point of the article is to test the idea that over time feelings of guilt about not being responsible and overindulging oneself tend to decline, while feelings of regret about missing out on life's pleasures tend to intensify over time. The authors believe that their experimental results support these hypotheses.

Risk Aversion

Seems I've become very risk averse. That's why I set such a tight stop yesterday morning. But that resulted in me losing money on a day when I had predicted the market direction correctly and should have been making money. I thought about getting short around lunchtime. But was scared the market would run up again. It didn't. The market fell more in the afternoon. I'm still out of the market this morning and am watching the big employment reported. My guess was the market would move up in reaction. So far it has, but I didn't place a trade. Maybe there are times when you should just take a break from trading, like from all things. I'll think about getting into the market again next week (of course I am always 100% invested in a mix of stocks, bonds, funds etc., I am talking about short-term trading. Today is the last class of this semester. I've set my schedule for next semester to make it easier for me to trade. Teaching 4 days a week from 12-2. Plan on heavy market data days to get to campus fairly early and watch the pre-market, market, prepare class etc. Major action in terms of setting a direction in the market tends to be over by 11am I find... setting a stop after that is a lot safer than before 10am which is when my first class is at the moment.

The model trend should remain down over the weekend even if today is something of a rebound day. It is too early to tell if the initial uptrend will hold. Bonds are down and the dollar and stocks are up at this point. As often is the case, it is hard to see what in the report generated the spike in interest rates.

9:17am

Now stocks are down, the dollar is down, and bonds are off a little. Glad I didn't put a long trade on.

12:09pm

Got back from class and NDX is up 20+ points! Now the long trade is looking very good.... glad I'm just not trading :) Bonds are off quite a bit and the US Dollar is rallying strongly.

Ouch - Stopped Out!

So far it looks like I predicted the direction of the market correctly yesterday. Had a meeting from 9-11 this morning and I set a stop. The stop was set at NQ (December) = 1808 which was the point where the stochastic would rise above 80 and negate the sell signal from the day before. The stop was hit and then the market dived. Lost $140 on the trade - guess it could be worse. But even when I'm right I am losing money which is discouraging. I'll wait for a bounce and re-evaluate whether to go short again.

Model Switches to Sell

The model switched to sell at today's close. If the NDX had closed above 1802 the model would have remained on buy. This is a rather negative omen for bulls given that the high yesterday (c) did not exceed the previous high around Thanksgiving. As I mentioned, the move down from the top looked like an impulse wave in Elliott Wave terminology. The move up since then (a), (b) , (c) now looks like a corrective wave. So the coming wave down is a wave 3 or wave C.

November Report

Investment Performance
Investment return in US Dollars was 2.67% vs. a 2.88% gain in the MSCI World Index, which I use as my overall benchmark and a 1.90% gain in the S&P 500. The trading accounts lost money again... The contributions of the different investments and trades is as follows:



The returns on all the individual investments are net of foreign exchange movements. The biggest single contribution to US Dollar returns was the foreign currency gains, which appears at the bottom of the table. Powertel made a nice gain this month.

Asset Allocation
At the end of the month the portfolio had a beta of 0.89 (a 1% rise in the market would result in a 0.89% increase in the portfolio). 58% of the portfolio was in stocks, 46% in bonds, 7% in cash, and loans totalled -22%. The remainder was in the hedge fund type and real estate investments, futures value etc.

Net Worth Performance

Net worth rose by $US12,188 to $US354,596 and in Australian Dollars gained $A6809 to $A449,083.

Income and Expenditure



Core investment income is total investment gains before taking into account the change in exchange rates. Other income is salary and retirement contributions. Expenditure was $US1592 - almost exactly the same as last month - only 38% of take home pay ($4125).