Author: Beau Wolinsky, KC Capital Management
Covestor model: Quantitative ETF
In January we saw a seasonably strong rally, despite indications that we were overbought for nearly all of the month. When the market came down a little before the end of the month, we got a sign that it was oversold. The volatility that it took to reach this level of oversold condition was very small.
We took a long position in the ProShares UltraPro QQQ (TQQQ) on January 31, after selling our UltraPro Short QQQ (SQQQ) position on January 25. We reversed short to long as I think the rally this month is poised to continue for at least 5 more trading days, followed by the first pullback of more than 4% for 2012. I am hoping to capture most of the remaining upside in this rally. It seems the whisper number for NASDAQ 100 index value is 2,500.
Our models did not have as much edge this month because neither of our short entries (long SQQQ) were accompanied by Price Physics signals. Typically, we find waiting for confirmation of those will lead to more robust results, but we’ve found the performance you lose by waiting for those is really not worth the risk of missing potentially profitable opportunities.
While we know we have a lot more edge whenever we have Price Physics signals to accompany our pairs trades, I feel especially that whenever we do try to time our pairs entries with Price Physics entries the exits will typically lead to more frequent trades that shouldn’t be part of a model that cannot daytrade. Therefore, unless we’re placing a discretionary trade based on our pairs trades, we will use our Price Physics methods to help us find opportune exits timing the market with a combination of the two strategies.
I’ve generally preferred to take all pairs signals, and even though it’s unfortunate to have been stopped out of our trades, the additional losses we might have taken had we not used the pairs signals for entries would also mean additional opportunities in the future could be missed. I would rather trade a highly robust model most of the time than miss profitable trade setups simply because both of our models do not agree.
The model had a good 2011, but we missed most of the variants of more profitable trades in the latter half of the year. We modified our models in the last four trades of 2011, and while we didn’t have as strong results as we had hoped, I am confident we can capture a decent since inception return – in the 30-50% range – before our first annual year of performance is recorded on Covestor.
