Trading The Miners

Based on the last post, I put together a layout in StockFinder.


In years of back testing, I found that very rarely can you automate a trading system and beat the market consistently for any particular watchlist. However, when you've identified an anomaly in a particular stock, you can get pretty good results.

I used NUGT as the trading vehicle, although in the short positions you would use DUST, but the returns are nearly identical as they are both leveraged ETFs on miners, just long or short.

Here's what the layout looks like.

Basically I'm looking for short term anomalies between the dollar and the price of oil, you can see I used UUP for the Dollar and USO for oil and applied a 5 day Rate of Change to each since these are not long lasting anomalies. The I created an indicator that identifies the anomaly between the two (in green) and added a 7 bar simple moving average to the indicator to serve as a trade signal. All signals will come at the end of the trading day and the trades are entered on the open of the next trading day, giving you time to identify them after market or work. The strategy works well considering the length of the anomalies and the trading vehicle being an ETF which are well suited to short duration trades.


The Results...

After running the back test from December of last year to yesterday (as NUGT is a new ETF created in December of 2010) the results were very good. The test assumes you start out with $100 and each trade will either add or diminish the equity line. The watchlist Equity line is NUGT only, either long or short and returned +72.45% for the test period. Compared to simple buy and hold of NUGT, you would have taken a 13.2% loss. The performance of the strategy vs. Buy and Hold was nearly 200% better (1.9). Over the same period, the S&P-500 returned 7.96%, the Russell 2000 returned 8.93% vs. the NUGT trade strategy at +72.45%


Here's a breakdown of the trades

12 winners, 10 losers with the average trade netting +2.51%. Also impressive was the maximum draw down for the strategy at -7.74%. There were a total of 22 trades during the period with a winning trade rate of 55% and a gain to loss ratio of +2.3.

Annualized returns were much higher at 610%, but this is not a reliable figure to use to asses the strategy, but it does tell us, the more trades in a given period, the better the performance.

Transaction costs have to factored into the returns so the bigger the portfolio the better the performance.

If you are using StockFinder and would like to use this layout, just email me and I'll send it to you.

Retail Money is Leaving the Market

And why not? After Monday's performance, I suspect the bulk of the withdrawals took place for the week. Here's the weekly fund flow data from Lipper.


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- For the third week in a row equity fund investors were net redeemers from their accounts, taking out approximately $5.6 billion for the week ended May 25, 2011. The three-week total now stands at -$12.7 billion, the worst figure for this group since August 2010.

- Taxable bond funds scarcely missed a beat as they accumulated another $3.8 billion this week despite a slowdown in corporate debt issuance that may squeeze good new opportunities ahead.

- The year’s belle of the ball, Loan Participation Funds, saw their inflows slow to less than $500 million as the market for bank loan funds softened for the third week.

- Municipal debt funds had outflows of about $300 million, an uptick from the previous week, but still better than its four-week moving average.

- The High Yield Muni category had inflows for the third week in a row as investors have eyed its nice yields and supportive market tone.

- Money market funds took in $10.7 billion as institutions added $11.3 billion and retail investors withdrew $600 million 

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The above information makes it difficult for Wall Street to pick pockets when there are fewer pockets available to be picked. What would turn this trend around?

Fear and Greed-the fear of missing the boat and the greed of missing the boat.

On a different subject, take a look at this article from Trade-Guild

While yesterday's activity in which the dollar was down and oil was essentially flat, is rather rare. I'm going to try to figure out an average move we should see based on historical data between a rising or falling dollar and oil's performance. However the idea here is when we see the underperformance of crude in a weak dollar environment, you should take a look at buying NUGT for a quick trade. When we see the opposite, a stronger dollar and rising crude, the play would be DUST.

I'll get back to you on the correlation values that should trigger those trades.