Friday, November 30, 2007

Trading Update

This month's trading result is again negative due to a few big losses. But this week (so far) is the best individual week since May, which is encouraging (a couple of other weeks since May came pretty close to this one). The loss for the month is now less than the single biggest losing trade. What am I doing - pretty much pure day-trading with minimal use of "the model".

P.S. 1 December

Trading loss for the month was $1,004. I was down around $2,500 only three days ago so have done very well since then. I'd like to think that that is the beginning of the turnaround. Time will tell. I'm holding one trading position over the weekend - 300 shares of QID the double short NASADQ 100 ETF. Up $279 on that trade.

Thursday, November 29, 2007

Update on Goals

I've kept the 2007 goals on the sidebar but I've taken down the goals for 2008 and beyond as they are looking increasingly unrealistic. Exchange rate fluctuations mean that a goal in any particular currency is hard to hit as do stock market fluctuations for buy and hold investors. Perhaps I could come up with a currency neutral measure of net worth gain. But probably I am going to go for aspirational goals going forward: Increase net worth (increase non-retirement net worth - which is harder), increase trading income, etc. It's easier also to set goals for investment and trading performance relative to a benchmark (Increase non-retirement net worth faster than the MSCI index?). As for the goal of a net worth of $1 million, I now project that that could occur by the end of 2012 rather than 2010. It remains an interim goal but setting any date on achievement of the goal is too hard. I'll do a revised set of goals later in December.

Is that the Bottom?

Howard Lindzon is calling a bottom in the stock market here. Is this the bottom? My model appears to be exiting the noisy conditions that made using it almost impossible and is now giving a much clearer signal. Expect some downside starting most likely on Monday. It is also signalling that we remain oversold not overbought. Conditions look very similar to early August where a consolidation in the market was followed by a plummet to the final lows on August 16th. This could happen and looks like the likeliest scenario to me and is supported by a lot of other stuff I am seeing. But this could be the bottom. We'll only really know when the next low occurs next week - will it be a higher low or a lower low? In the meantime enjoy the rally :) The fundamentals behind this rally are supposed to be the investment by Abu Dhabi in Citigroup and the possibility of rate cuts. Both facts show that things are very bad but help is on the way to stop them getting even worse. The fact that Citigroup needs this capital injection on such bad terms is very bad news. But I guess the market thought that things could be worse and noone might come to Citigroup's rescue.

Sunday, November 25, 2007

Australian Election

I voted yesterday in the Australian Federal Election. Snork Maiden came along, even though she can't vote here, and I was surprised to find we had to stand in line to vote, like (now former) prime minister John Howard in the picture. I didn't encounter that in previous years here (or in England). I voted Labor for the first time here in Australia. Labor seem to have finally moved much closer to the centre than in any time in their eleven years out of power. The Hawke-Keating Labor government before 1996 was a very reformist administration, but after they lost power the party swung left and stayed out of power till now. The Liberal Party didn't seem to have much of an election pitch except to warn of the dangers of electing Labor claiming them to be inexperienced and extremist. Many people seemed to have also decided to give the other guys a chance. Labor's main difference with the Liberals was on their plan to roll back some of the Liberals labour market reforms - this would have put me off voting Labor. What swung me to Labor was their more convincing approach to climate policy. In fact I voted Green with my second preferences to Labor. In Australia we get to order candidates according to how much we prefer them rather than just choosing one candidate. If your first choice candidate doesn't get enough votes to win a seat your votes are transferred to your second choice candidate and so forth. Another unusual feature of Australian elections is that voting is compulsory.

Here in the ACT it is pretty much guaranteed that Labor will win both lower house seats and that the Senate will split one Liberal and one Labor senator. So voting for a minor party can indicate a policy preference while your vote in the end goes to one of the major parties. I've long thought it would be nice if we could de-bundle political parties - choosing different parties to represent us in different policy areas.

Friday, November 23, 2007

Searching NetWorthIQ by Country

Networth IQ has finally added the ability to search by country. Not surprisingly, Australia seems to be the best represented country outside the US. I wonder though how many profiles are in Australian Dollars in fact and how many in US Dollars. Not that it makes a huge difference for Australia at the moment. I know for example that Enoughwealth's profile is in Australian Dollars, while mine is in US Dollars. A nice feature for the site would be allowing people to enter data in their native currency and then for users to read profiles either in the original currency or in US Dollars.

Tuesday, November 20, 2007

Monday Night Trading

I lost money today, but not too badly which was partly the result of a little skill and a lot of luck. Again I got too caught up in thinking about what the model said rather than what the streaming charts were telling me. The NDX model was stopped out again. So it isn't exactly much use at the moment. I went long per the model after the market had declined before the official open - a gap down was likely and this happened. Then shortly after the market (US) opened there was a good opportunity to close my trade profitably. But I stupidly hung on for more gain and ended with a loss instead. Letting your winners run is one of the most common pieces of advice given to traders but it can be very dangerous. I managed to close the trade with only a small total loss by doubling down (a big no-no in the standard advice for traders). Then as I was feeling good at not suffering a huge loss I entered another trade assuming the market was going to continue rising. The market immediately started falling towards the close instead. I closed that trade for a larger but still reasonable loss after the market close and Hewlett Packard's earnings announcement. I did some other every quick trades that won a few bucks here and there. But that second trade was a totally arrogant trade - again believing that the market would rise as the model dictated irrespective of the evidence. I'll slowly hammer this behavior out of my mind - at least until the model begins performing better again. Anyway, I lost half the profits I made since the big loss a few days ago. Am still down badly for the month, but feel I am learning something despite all these errors, or rather because of them.

Monday, November 19, 2007

Petrol Consumption

Amazing that Australia uses more petrol than France that has three times the number of people. Price of filling up a Honda Ciivc here is currently $US60. It would have been lower last November probably when this table was created.

Big Picture Update

A good article about where we currently seem to be in somewhat longer term market cycles. I am also looking for the market to go down after a Thanksgiving rally to a bottom at a similar level to the August 2007 low. In fact I am looking for the final leg of this big triangle to play out:

Support for this idea is provided also by the McClellan Summation:

The stochastic on this chart has plenty of space to fall yet... There are likely several weeks till the bottom is reached. The NYSE McClellan Summation presents an identical picture.

At that point I am thinking to make a major change in strategy and significantly increasing the beta of my portfolio as well as buying financial stock funds like FF and XLF. If the market gets back to the August lows the atmosphere is likely to get very bearish - when everyone agrees on something in the investment world it is probably wrong. Everyone currently thinks the US Dollar will fall and the Australian Dollar Rise. Until very recently they've been right. I've been taking the contrarian bet to a minor degree. 61% of my assets are in Australian Dollars and I aim to reduce that to 50% over time - so I'm not making any big bets on the US Dollar rising - on the other hand we've tried to avoid spending our US Dollars and I haven't converted any of them into Australian Dollars since March 2006. In fact I bought US Dollars in April and May 2007.

Saturday, November 17, 2007

Change of Trading Tactics

Since the big loss on Tuesday I've swtiched trading tactics. I now plan to do pure day-trading in the near term - only betting on the direction of the market for the next few minutes or hour - though I have an opinion based on the model about what will happen in the course of the day I'm not explicitly betting on that outcome. However, I am using the model to decide on the predominant direction to place trades. So for example, on Friday the model was long and so I looked for long trades. If the model was correct these trades would get some extra lift from the overall trend for the day. I've seen some good short trades in the last couple of days but not taken them. As I get more confident I may add these too. I'm spending some time in the evening here after the European market opens to trade and in the morning in the last couple of hours of US trade. The speed and momentum feels very different in these two periods. During the Asian session momentum (volume) is so low it is hard to trade the US futures at all. I've made $550 in these two days. At this pace I could get back to my peak profit level in one and a half months. But there are no guarantees that my success rate - win percent 83% and win-loss ratio of 16.3 - will continue. The win loss ratio (average win per contract in winning trades divided by average loss per contract in losing trades) certainly won't remain so elevated!

Friday, November 16, 2007

Day Trading Environment

Current market conditions are only suitable for day trading in my opinion. The SPX model has been stopped out (1.25% or greater market move against it intraday) 5 out of the last 7 sessions and only one of the model's trades - short on 12th November was a winner (a 1% gain). The model is back where it was on 29th August - ignoring any slippage, commissions etc that would have been incurred in trading it. The NDX model has been stopped out 4 of the last 5 trades with a winning 2.5% trade on the 12th November (and winning trades on the 7th and 8th November, six and seven days ago). I had another small winning trade this morning and then a losing trade where all I lost was the commission (entered and exited at the same price). Still, so far I only made back 10% of my big loss earlier in the week. It is so much easier to lose money than make it (though at least I am more likely to make money on any given trade - 2/3 of my trades win). The models are still long despite the decline of the last two days. It doesn't look that corrective though - a corrective move here would imply that another rally similar to Tuesday's was coming up.

Thursday, November 15, 2007

Globex Glitch Trade

Some glitch took down Globex (the Chicago Mercantile Exchange's electronic futures trading platform). I was actually watching the open of the Australian stock exchange and Australian futures at the time. Then I noticed that the NASDAQ futures were down 12 points or so from the close of futures trading. I couldn't see any fundamental news and the S&P 500 wasn't down as badly. I switched out of my simulation account at Interactive Brokers and into my real trading account. The technicals also looked like a very short term bottom was being made. The Australian market was flat roughly after an initial small sell off (only the Australias and New Zealand markets were trading at this point globally). The model is long though a gap down overnight is possible. So I decided to go long the NASDAQ futures on the assumption that the steep decline was caused by the glitch. I'm also tracking the S&P (ES) market as the trade progresses. The latter market is the most liquid after hours futures market and it is easier to see what is happening in it. The NASDAQ futures can have a spread of a point or more during the Asian trading session and so it can be hard to see what the price action really is by looking at a chart.

11:15 Eastern Australian Summer Time

Japan opened up after the US sold off. This supports my trade idea. Let's see how this goes.

11:25 Eastern Australian Summer Time

The trade finally moves into profitability.

11:40 Eastern Australian Summer Time

I got out of the trade with only a 1.5 point gain. On second thoughts the current price is close to where the stock market closed at 4:00pm US time. There was a big rise in price in the futures after 4:00pm. Maybe the sell-off in NASDAQ futures was justified? Anyway the 5 min stochastic was showing signs of topping out. Is this a case of selling a winner too soon?

Wednesday, November 14, 2007

Starting Over

All my stuff that I shipped from the US was delivered this morning. I haven't done any unpacking yet apart from removing and throwing away the packaging that the shippers wrapped the furniture items in. Now my part of the move is over - Snork Maiden's stuff is still to arrive - and it's time to start rebuilding in a sense as I've mentioned before. Hopefully, the same can apply to my trading. It's been a crazy 5 months - moving internationally, quitting my job, dealing with US immigration issues (and Australian ones for Snork Maiden), setting up home in Australia, and losing money trading pretty much continuously. The investment side of the equation hasn't been too good either, though the soaring Australian Dollar has made USD returns look good. Somehow I don't feel so bad about last night's loss. It's so bad I'm almost not afraid of losses anymore. Not sure if that is good or bad. It is good if it means I have gotten over my loss aversion - unwillingness to take small losses which then turn into large losses.

The Problem is Me

It's not the market nor the model, the problem is me. I just suffered my second worst loss per contract since I started trading futures. The model started the day short but predicted there could be a bounce. I got long the bounce for a while - this first trade was good. Then I switched to short. I knew there was a potential for the model to reverse if there was a strong enough rally. But a rally of that size seemed unlikely. Looks like we got it. I stayed short. Missed the opportunities to get out with reduced losses and then finally gave up. No stop and no discipline. I haven't destroyed all the profits I made earlier in my Interactive Brokers account, but I am getting there. Three bad undisciplined losses this month and this is the worst by far. The model is making money this month. There is no reason why I should be losing. I'm not sure what to do. Do I keep trading and try to stick to the discipline? Stop trading? Paper trade? I really don't know.

Tuesday, November 13, 2007

Effect of Exchange Rate Fluctuations on Returns

My recent net worth reports have shown huge fluctuations due to the volatility in the Australian Dollar-US Dollar exchange rate. Returns are strong in US Dollar terms when the Australian Dollar is rising - even though this is making us poorer in Australian Dollar terms. Each month I calculate the contribution to investment returns from the change in exchange rates under the heading "Forex" in my income and expenditure table and my table of returns on individual investments. In the last few days the Aussie has plummeted resulting in strongly negative investment returns for the month to date. This table shows just how much difference changes in the exchange rate make:

Stripping out the exchange rate results in lower average returns for the year so far (12.8% vs. 20.7%) but greatly lowered volatility and hence a higher Sharpe Ratio, which is a measure of the excess return (above a 5% hurdle in this case) divided by the standard deviation of returns. Both Sharpe Ratios exceed those for the MSCI and SPX total return indices. The SPX has risen less than the 5% hurdle so far this year (3.1%) and thus has a negative Sharpe Ratio. The MSCI has returned 12.8% at this point. A large part of that return is due to the fall in the US dollar. This is a global index measured in US Dollar terms. So really I'm doing neither as good, nor as bad as it might seem. I'm probably really beating the MSCI but not by as much as the crude numbers suggest. I've had two negative months - but both have come in the second half of the year, which has made me feel a bit despondent but the two indices have had four or five negative months.

Here is the same data for the more visually oriented:

BTW I haven't seen any comments in the personal finance blogosphere (obviously there's plenty on trading blogs) so far about this month's so far sharp fall in the indices. I guess it will come soon.

Following up from yesterday's blog. Actually, the model has been doing fine this month so far with only one stop-out so far (Friday). But I've been scared to get back on board due to its poor performance from the beginning of September to 2/3 the way through October. There were heaps of stop outs in late July and early August too. I wish there were a futures contract smaller even than the NQ (NASDAQ E-Mini) and I would be trading it overnight my time (US day time).

Stuff Arrives

Just got a call from the shipper this morning. They will deliver my stuff tomorrow. They could have done today but I need to accompany Snork Maiden to an appointment this afternoon (I'm the navigator). Pick up date was 3rd August, so it's taken a little over 3 months, which is roughly what is expected. Maybe this will help me feel a little more stable once everything is organized. By the way there was a fee of roughly $700 at this end for government fees etc. in passing through quarantine and customs. Snork Maiden is heading for the Melbourne area this evening - her first trip out of Canberra. Unfortunately she won't be in the city and instead in about the most boring bit of countryside one could find (just north of the airport). She gets to go to Perth in December and will be near the city centre but that trip will be extremely rushed. The election campaign is heading towards the final two weeks now and both parties are making more and more ridiculous promises. We need a Libertarian Party here :) Well a real liberal party would be good. I don't agree with many libertarian positions.


The Australian Dollar is down 3 cents today alone and now around 7 cents from it's high. This is the classic "unwinding of the carry trade" - the Yen is up against the US Dollar and all the high yielding currencies are down. I would like the Aussie to go down (so that our US investments are worth more in Australian Dollars), but a slower decline would be prettier for the net worth figures! (as expressed in US Dollars).

Monday, November 12, 2007

Model Facing a Crisis

My trading model has been performing poorly in recent months - the model is frequently stopped out - the market moves more than 1.25% in the opposite direction - far more than in other periods in recent years. As a result I have low confidence in placing trades according to the model. I've been in a desperate search to find a way to improve the model, but haven't found anything better than what I already have. The question is whether this is a temporary phenomenon or are the markets changing in some fundamental way? In the meantime, the best I can do is use the model as a guide to doing some intraday (or intranight) trades. I haven't done many of those recently either. I'm going to experiment a bit with some nonlinear model ideas, but I don't think they are likely to yield anything either.

Tuesday, November 06, 2007

Need to Focus on Trades with an Edge

This morning I fell victim to over-trading/over-confidence. I had been doing pretty well this month so far and then decided to make a trade in the Australian Share Price Index futures. Partly to get over my fear of the size of the contract (about twice the size of an E-Mini S&P contract, four times the size of an E-Mini NASDAQ contract). The results were two losing trades in a row more than wiping out my profit for the month so far. This is the equivalent of my GOOG and AMZN trades last month which turned what would be a winning month trading US index futures into a losing month. I need to focus on the trades where I have a documented statistical edge and not experiment with other sorts of trades where I am just guessing. I haven't succeeded yet in modelling the Australian index. It tends to follow the US market but not sufficiently so for the US models to be reliable indicators. And the contract size is much bigger than what I am trading in the US, so any mistakes can easily wipe out my US-based profits.

Monday, November 05, 2007

Price Dispersion

This is purely anecdotal, but it seems to me that there is more "price dispersion" in Australia than in the US. Price dispersion is the variation in prices charged by different sellers for the same item. It's closely related to price discrimination but the latter is intentional charging of different prices by the same firm while price dispersion is charging of different prices by different firms, though it would also include charging of different prices in different outlets by the same firm which is possibly price discrimination (it's not price discrimination to the extent that costs differ across locations).

Prices certainly do vary in the US from luxury outlets to discount stores and from poor to rich neighborhoods but I don't remember seeing as big a variation between stores that are more or less side by side. For example, you can buy an Oral-B or Colgate toothbrush for anywhere from $1 to $7 within a few store fronts in the Canberra Centre (the big mall in Canberra City). The $1 toothbrushes were apparently intended for the Vietnam or Thai market but are being sold in Australia. Large ranges also exist for food items (particulary fruit and vegetables) at side by side stores. Also for items like bed sheets the range can be very wide for a given quality level. Are Australians less willing to shop around the stores to find bargains than Americans? ("Shopping around" would result in competition and convergence to the same price), or do I have the wrong impression of the US? Or is this just a Canberra (the wealthiest metropolitan area in Australia) phenomenon?

P.S. Just one price I noticed today - haircut at a franchised chain - $A22, U.S. price $US14. Another example of where the exchange rate ought to be - though 63 U.S. Cents is a bit at the low end (it's currently at 92 U.S. Cents).

Saturday, November 03, 2007

Writing Off Croesus Mining

I finally decided to write down Croesus Mining's value in my accounts to zero. The stock was suspended from trading ont he Australian Stock Exchange in March 2006. There has been an ongoing story of the restructuring of the company and stock and the company wants to be relisted on the ASX - though the valuation would be miniscule compared to the last quoted price. So I decided that I will write the price down to zero and if the stock is ever traded again, put that increase in value down as a profit for that month. I am taking the whole loss in March 2006, which now saw a -3.05% return for the month or a loss of $US8,939. I've updated all net worth figures back to March 2006 on NetWorthIQ.

Friday, November 02, 2007

October 2007 Report

All figures are in US Dollars (USD) unless otherwise stated. This month saw a record gain in net worth in US Dollar terms, mainly due to the continuing rise in the Australian Dollar. Net worth also increased in Australian Dollars terms. Underlying investment performance was also strong - strong enough to result in investment gains in Australian Dollar terms despite the drag exerted by the appreciating currency. Trading results were negative but getting better.

Income and Expenditure

Expenditure was $5,940. We paid a year's car insurance and also depreciated the car immediately by $A1250. Dividing the insurance by twelve and using a typical month's implicit car costs (depreciation plus interest) we would have spent $US3,944. This calculation is useful for forecasting future expenses.

Non-investment earnings ($13,280) included a refund of relocation expenses from Snork Maiden's employer. She also got paid by her previous employer. We've told them to stop paying and we may need to pay this money back, but for the moment I am counting it as income. Snork Maiden's retirement contributions ($784) also started kicking in (in theory - we only got the application forms for her superannuation today!).

Non-retirement accounts gained $15,951 with $8317 coming from the continuing rise in the Australian Dollar. Retirement accounts gained $7,964 but would have gained only $948 if exchange rates had remained constant. In AUD terms non-retirement accounts gained and retirement accounts lost for the month.

Net Worth Performance
Net worth rose by $US31,322 to $US490,433 and in Australian Dollars rose $A10,517 to $A529,111. Non-retirement accounts were at $US271k. Retirement accounts were at $US219k.

Investment Performance
Investment return in US Dollars was 5.21% vs. a 3.92% gain in the MSCI (Gross) World Index, which I use as my overall benchmark and a 1.59% gain in the S&P 500 total return index. Non-retirement accounts gained 6.41%. Returns in Australian Dollars terms were 0.49% and 1.67% respectively. YTD we're up 27.3% (USD) vs the MSCI with 18.6% and the SPX with 11.0%. Our non-retirement accounts are up 34.3%.

The contributions of the different investments and trades are as follows:

The returns on all the individual investments are net of foreign exchange movements. Foreign currency gains appear at the bottom of the table together with the sum of all other investment income and expenses - mainly net interest. The Google and Amazon trades were two of the negative contributors. Symbion also fell in the wake of ongoing shenanigans orchestrated by Primary Health, which is attempting to block the merger with Healthscope. Nice gains were seen in listed and unlisted funds and some individual stocks (e.g. Rick's Cabaret). Index trading only saw small gains.

Progress on Trading Goal

See the trading report.

Asset Allocation
At the end of the month the portfolio had an estimated beta of 0.51. Allocation was 31% in "passive alpha", 65% in "beta", 4% allocated to trading, 6% to industrial stocks, 5% to liquidity, 4% to other assets (including our car which is equal to 2.93% of net worth) and we were borrowing 15%. Our Australian Dollar exposure rose to 62% partly due to the rise in the Aussie.

Thursday, November 01, 2007

October Trading Report

This month was again a poor one for trading and a good one for investing. It's somewhat arbitrary what I count as an investment and what I count as a trade. Obviously day trades aren't investments and stuff I hold for more than a year are probably investments rather than trades. In between is fairly murky - I don't count all trades that result in short term capital gains or losses in my trading numbers in these reports. I exclude all Australian trades to start with... Then, for example I sold half my IBKR this month. I held for less than a year obviously. So was that a trade? Or an investment I decided to reduce. Anyway, it isn't included in the numbers either. Nor is my much more successful investment in RICK, which has doubled my original investment at this point. Anything that I might hold for the long term isn't counted in the trading results.

US based trading lost $681 or 3.9% of trading capital. The model gained 2.9% and the market gained 7.1%. Most of the month the model struggled to make any headway and when the model is struggling I usually lose money (negative alpha with respect to the model). Also I didn't trade for the first week and a half of the month. But that was when the model was struggling more... I did better than September but still lost money and had a negative residual relative to the model - in other words I underperformed relative to the model even taking into account my usual negative alpha. From July to now I have had negative residuals even though I made money in August it was still less than typical given the model's performance in that month.

Major losses came from earnings related trades in GOOG (-$706) and AMZN (-$252). Without those non-model based trades I would have had a positive month. I feel that I am turning the corner - my behavior is getting better and I am interpreting my models better now that I am running both SPX and NDX models on a daily basis. I made 2.1% in my Interactive Brokers account after losing 8% in September, 4.4% in August, and 11.5% in July. Progress was very erratic though:

The total value of my Ameritrade and Interactive Brokers accounts were at $57,747 against the goal of $63k (total investment in these accounts since 1997) a gain of $2874 for the month. My goal for trading income for the year is $18,000. At the end of October I am at $12,776. It'll be hard to reach the goal in the final two months of the year, but you never know.