Rounding the Cape

Financial portfolio review
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Rounding Cape Horn is one of sailing’s great challenges. It pits sailors and their boats against some of the harshest conditions on the planet.

The Cape sits at the tip of South America. This is an extreme location. Antarctica is less than 1,000 kilometres away.

The local Argentines call this region the End of the Earth. And with good reason. Cape Horn’s latitude is 56 degrees south. For comparison, Tasmania’s South East Cape is a mere 43 degrees.

Frozen polar storms lash the area. The roaring forties give way to the furious fifties and the screaming sixties. The numbers reference the extreme latitudes.

Huge rolling seas humble the biggest ships. Then there are the rogue waves — the Cape’s speciality. These giants can tower 30 metres high.

And that’s not all. This is also an iceberg zone.

At least 10,000 souls and 800 ships have been lost to the Cape. The sailors of old would say ‘below 40 degrees latitude there’s no law; below 50 degrees, there is no God’.

It takes little effort to imagine why.

Nature’s power is largely outside our control. But that doesn’t mean we’re powerless. There are things we can do to manage most situations.

Yes, the Cape is perilous. But it’s also seasonal. We know the biggest gales are likely in the winter. This means sailors can take precautions.

The share market isn’t all that different. You see, stocks too can be volatile. They claim the fortunes of many traders. Financial storms are every bit as unforgiving as their polar cousins.

But here’s the thing. Conditions in the market — just like the Cape — are seasonal. This gives us an advantage. We are able to develop appropriate strategies.

I wrote about the market’s seasonality a few weeks ago. You may remember the sell in May and go away effect. This is the markets tendency to underperform between May and October.

And research backs this up.

A 2001 academic study crunched the numbers on 37 stock markets. The findings were amazing. May to October was seasonally weaker in 36 out of 37 countries.

Australia was one of the test markets. Since 1936, the All Ordinaries average November to April return is about 5.1%. The May to October period shows an average of around 2.4%.

So how’s this year shaping up?

Well, it’s been like clockwork. The All Ordinaries made its highest close for the year on 27 April. It’s been mostly one-way traffic lower since.

Here’s a chart for the All Ordinaries.


Source: BigCharts

Click to enlarge

This shows the price action from 17 November 2014 to 8 July. You’ll notice the green vertical line on the chart. This indicates the end of the seasonally strong period.

Yet again, it appears April was a good time sell. So why don’t we just walk away in May?

The answer is simple. There are still profitable trading opportunities. The key is to use strategies that help keep us out of trouble.

Quant Trader has a number of built-in safety measures. They have two main objectives:

  1. Increase the odds of a good entry
  2. Limit capital losses when conditions deteriorate

 

The last six weeks have put these processes to the test. So let’s see how Quant Trader is faring so far. Have a look at this next chart.

This chart shows the performance of every signal up to Wednesday’s close. The first trade was on 17 November 2014 — the date Quant Trader went live.

The hypothetical profit assumes placing $1,000 on each signal. And it doesn’t take into account costs or dividends.

Now have another look at the All Ordinaries over the same period.


Source: BigCharts

Click to enlarge

The two graphs have some similarity. And that’s what I would expect. The underlying market will always have a large influence.

But there is a key difference. The All Ordinaries is almost back to where began — there is next to no gain. Quant Trader is clearly weathering the correction better.

The reason for this is simple.

Quant Trader only buys intostrength. It automatically excludes stocks in a downtrend from entering the long portfolio. This can make a BIG performance difference.

You see, Quant Trader is cherry picking. The aim is to be long strong stocks, while avoiding — or shorting — the ones pulling the All Ordinaries lower.

It’s a case of buying what’s rising and sidestepping what’s not.

This isn’t to say every signal will be a winner. But it means you’re trading with the trend. In my experience, this shifts the odds in your favour.

Whether you’re rounding the Cape or placing a trade…good preparation is vital. It’s the swing factor that often separates the winners from losers.

Until next week,

Jason McIntosh
Editor, Quant Trader

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slewie the pi-rat
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slewie’s ‘FLATION Report ~for US Friday ~US Dollars only BLOOMBERG COMMODITY INDEX 99.3; +0.2; [+0.20%] 50-dma = ~101.7 US Dollar INDEX 95.9; -0.6 50-dma = ~95.5 INflation, today, with Correlation. here are the numbers from last weeks close [Thursday, 7.2.15], FYI: BCI: 101.9 USDX: 96.1 on the week, then: BCI-USDX DEflation, no Correlation. here’s the BCI 6-month chart: http://quotes.ino.com/charting/index.html?s=CBOT_AW.U15.E&t=&a=&w=&v=d6 this week, on 7.7., these two Indices met, and were equal [intraday] for the first time since 4.15.15. you can see the recent low point on that BCI chart, on 7.7., for yourself. it appears to me that BCI support, at… Read more »
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