Monday, April 1, 2013

UMX: Drowning in illiquidity

ProShares Ultra MSCI Mexico Capped IMI (UMX) is an exchange-traded fund that tracks 99% of the Mexican equity market via the MSCI Mexico Investable Market Index. The fund is weighted so that results are double the index results.

UMX alone among the four survivors of my analysis of Thursday's bull and bear signals is trading beyond its price channel today, thereby confirming the signal. (See my posting of the breakouts from Thursday night.)

FLR, MENT and FFBH all failed confirmation.

UMX, with an average volume of 668 shares a day, is among the smallest of exchange-traded funds. It came on my radar only because of changes in the way I assemble my universe of stocks and funds for analysis. (I discuss the changes and why I made them in my essay, "Building a Better Universe".)

In trading Thursday, before the Good Friday market holiday, UMX broke above its 20-day price channel. The move above 52.41 was the 13th breakout since May 2010, when the fund began trading.

Seven of the 12 prior breakouts was profitable, with an average yield of 11.3%. The five unsuccessful trades had an average loss of 6.9%.

Adjusting the winning yield by the 60% success rate produces a score of  6.6%. (I prefer a score of 5% or better.)

The breakout came as part of an uptrend that began in mid-September 2011 that spiked to $62.73 on Dec. 31, 2012, an outlier that retreated immediately. A more reasonable resistance level is $55.22, the high set four days after the spike.

(Spikes are always a problem with low volume symbols. There aren't enough traders to form a stable consensus, so  black swans abound.)

Before Thursday, the price has broken beyond the price channel six times during the uptrend. Four of the breakouts were successful, with an average yield of 12.4%. (Although the spike was a breakout, it closed near where it had begun, so the spike contributed little to the yield average.)

The two unsuccessful trades had an average loss of 3.3%.

The problem with UMX is liquidity. The volume is so low that there is a good chance that it would be difficult to exit a position.

An alternative trade is the iShares MSCI Mexico Capped Investable Market Index Fund (EWW), which tracks about the same universe as UMX does, but without the double leverage and with much greater liquidity. EWW on average trades 3.4 million shares a day.

EWW broke above its 20-day price channel on March 26. However, it has only even odds for successful bull signals, so its didn't make it past my screens. (It's bear signals have a 70% chance of failure.)

Decision for my account: No trade. I am passing UMX because of the low liquidity. EWW under my rules isn't a trading candidate because of insufficiently high historical odds of success.

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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