Tuesday, December 28, 2010

Parking Money

Perhaps some traders can actively manage huge amounts of cash in short-term positions. I'm not one of them.

The span of control is just too large for me to properly manage.

My strategy, instead, is to park 80% of my capital in long-term positions -- slow trades -- and use the remaining 20% for positions that last from days to weeks.

But, as I touched on in my "Myth of the Income Play" essay, good parking places for cash are hard to come by.

I've been scrolling through bonds, and they don't meet my basic requirements: Little chance of default by the issuer and a return in excess of projected inflation, now running around 2%. Oh, and less than a year to go before maturity, so I'm guaranteed to get my capital back pretty quickly, whatever the Federal Reserve does to interest rates.

So, having found dividend-paying stocks and bonds both to be wanting, I now turn to very slow trades on exchange-traded funds, the bigger the better. And none are bigger, in terms of volume, than SPY, which tracks the S&P 500.

I use a monthly chart with a nine-month simple moving average, and the polarized fractal efficiency (pfe) line, the same tool that I recently added to my daily analysis.

The rule is: Go long when the pfe crosses above the zero line and the moving average is trending up; go short when the pfe crosses below the zero line and the moving average is trending down.

Simplicity itself, and the position can be managed with a quick glance at the end of each month.

The past 20 years on SPY have seen three zero-line crosses to the downside, and three to the upside. Presently the pfe on SPY is above the zero line, having approached during the May-June retrenchment, but remaining above zero.

The trades in this analysis are placed the last trading day of the month.

may 1994short$45.81n/a
dec 1994long$44.602.6%
dec 2000short$131.19194.1%
jun 2003long$97.6325.6%
feb 2008short$133.8237.1%
sep 2009long$105.5921.1%
dec 2010n/a$125.8719.2%

The last line, for this month, is change from the last signal to the present. There has been no signal since the fall of 2009.

Total gain for the 20 years is 299.7%, or an average of 15.0% per year. Peak annual inflation during the 20 years was 3.85%, in 2008.

This is the best parking place I've found so far. And by using long-term options -- LEAPS -- the trader can gain some leverage that will multiply the gains.

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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