Monday, October 4, 2010

Slow Trading Portfolio

Usually in this market letter I focus on fast trading in positions lasting weeks rather than months.

However, there's a place in money management for slow trading, and I'm putting together a portfolio to meet that need.

By slow trading I definitely don't mean buy-and-hold-forever it'll-go-up-someday. Instead, my strategy is to use a system that produces trades no more often than every six months or so, if that.

Why do this?

Everyone has money on the sidelines that they don't want to risk in short-term speculation. Older people are loathe to risk their money in short-term speculation because they don't have a lot of years left in which to earn back any losses.

The dirty little secret of money is that it is all speculation. Conservative mutual fund buy-and-hold investors, who would be shocked at the idea of speculation, have lost their shirts twice so far in this young century.

The most conservative investors of all -- people who keep their money in T-bills -- have been putting their funds in the biggest bear market of all times.

For any money that fails to keep pace with inflation is money that is losing its value. Inflation these days is running about 2% (the average of the changes in the last three months, annualized). The 90-day Treasury bills are paying 0.16%.

So the T-bill holders are losing about 1.8% a year. Would you buy a stock that was guaranteed to lose like that? Not I.

My strategy for slow trading uses the 50-day moving average (a quarter) and the 200-day moving average (a year). It has these rules:

a) When the 50-day moving average crosses above the 200-day moving average, open a bull position.

b) When the 50-day moving average crosses below the 200-day moving average, either move to cash or open a bear position.

The short version: 50-day-ma above the 200-day ma = bull phase. 50-day-ma below the 200-day ma = bear phase. Simplicity itself. It is important to note that new positions should be opened at the time the signal is given. If the stock is in the midst of a phase, then keep your money on the sidelines until a new phase kicks in.

Later in the week I'll put up some backtesting that I've done using this method.

Meanwhile, here's the beginnings of a portfolio, sorted by phase.

Bull phase: QQQQ, JNK, GLD, EEM, D, NLY

Bear phase: SPY, USO

Note that QQQQ just entered bull phase, and NLY entered bull phase in July but has not yet moved significantly higher. So these are candidates for immediate entry.

Dividends are a nice bonus for this sort of investing, and I've listed them below.

QQQQ tracks the Nasdaq 100, usually called the "tech-heavy Nasdaq". Dividend: 0.9%.

JNK tracks high-yield corporate debt. Dividend: 8.6%.

GLD tracks the metal gold. No dividend.

EEM tracks emerging markets. Dividend: 1.2%

D is the electric utility Dominion Resources. Dividend: 4.2%

NLY is the real-estate investment trust Annaly Capital Management. Dividend: 15.5%

SPY tracks the S&P 500, usually called the blue chip stocks. Dividend: 2.1%. The 50-day moving average is rising and closing in on the 200-day ma, so I would expect a signal soon.

USO tracks crude oil. No dividend.

That's it. I'll be keeping and eye on these and posting whenever there's a change.

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