Thursday, April 4, 2013

UBT: Profit's father

ProShares Ultra 20+Year Treasury ETF (UBT) broke above the upper boundary, $66.81, of its 20-day price channel on Wednesday. The bull signal was confirmed today as the exchange-traded fund continued to trade above the channel, setting a high (so far) of $68.43.

The "Ultra" part of the name means that UBT uses leverage in an attempt to double the price movements of the underlying bonds. It's a capital gains play, principally, although it does pay a small dividend yield of 0.4% annualized at today's prices.

This has been a day of bad choices.

Two of the stocks that survived my initial screening -- MTW and QLGC -- had earnings announcements appear on the calendar within the next 30 days and so are excluded as potential new positions. (See last night's posting for details of Wednesday's breakouts.)

As I continued the screening process this morning, I tossed out all of the bear signals with volume below 500,000. They clearly won't have options that meet my standards, and they won't have sufficient volume for short sales.

On a closer look, I discovered that it's also not possible to construct a bear position for the two remaining symbols that broke out to the downside. SFUN lacks options, the open interest on RHP's options is too sparse, and neither stock has sufficient volume for short selling.

That leaves the two bull signals. One of them, MES, failed confirmation by dropping back within its 20-day price channel.

UBT, then, is the last symbol standing.

This is the 11th bull signal from UBT since the fund began trading in January 2010. Six of the prior signals was profitable, with an 11.6% average yield. The four unsuccessful trades on average lost 15.1%

Adjusting the yield on profitable trades by the 60% success rate produces a score of 7%, well above my 5% minimum preference.

Note, though, that losses on the failing trades are on average greater than gains on the winning trades.

The near-term uptrend that began March 8 from 62.59 is embedded in a downtrend that began in late July 2012 from $81.35.

There were two bullish signals in that period, neither successful, with an average loss of 4.8%.

The most recent low was lower than the one before, so UBT is still zig-zagging downward. It would take a higher high, exceeding the $75.84 peak of Nov. 16, 2012, to break the downtrend.

The downtrend is embedded in an uptrend that began in early March 2010 from $32.95, and the most recent leg of that trend began from $55.60 in mid-March 2012.

There have been three completed bull breakouts in the most recent leg of the uptrend. Only one of them was successful, but the average winning yield of 16.8% far exceeds the average loss of 4.8% on unsuccessful trades.

At this point I can end the analysis. I don't like the odds in the more recent periods, and I don't like the fact that the stock is presently in a downtrend. The current uptrend that began in 2010 might be attractive for long-term traders, but it's not what I do.

Anther strike against UBT is that it's a bond fund of sorts, and governments bonds at that. My interest is stocks, a far broader market than bonds that is subject to many more influences. The inability of other traders to clearly read those influences and reach an immediate informed consensus gives me my trading opportunities.

Government bonds, by contrast, are overwhelmingly the creature of Federal Reserve policy, driven by a few important economic reports. Treasuries traders know almost everything the Fed knows. Such perfect transparency leaves little room surprises.

I've often said that volatility is the mother of profit. Uncertainty is profit's father.

Decision for my account: For the reasons stated above, I won't be trading UBT.

References

My trading rules can be read here.  A discussion of recent modifications to my trading methods, which haven't yet been incorporated in the original write-up, can be found here.

And the classic Turtle Trading rules on which my rules are based can be read here.

Disclaimer
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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