Today's Market
by Dr Invest

Some of you are wondering if this is my sad Christmas, with me sitting in a corner drinking my hot cocoa all by myself. The trades I began in November did not turn out the way I had expected. A whole list of bad news stories kept the market down, with my selected stocks going up one day and down the next.

What kept me secure were the RULES of TRADING. I had already determined that I would lose no more than 6%. And at one point, all the selected stocks neared negative 6%. The market regained its footing and my selected stocks rose once again.

I patiently sat by, watching and waiting. FDO (Family Dollar) seemed to only move up in price, only to fall again and again. Believing FDO to be overbought, I sold FDO before occuring losses. DLTR (Dollar Tree) seemed to rise and fall with every news report on the prevailing outlook for Christmas sales. Although DLTR had some significant gain, I felt it best to sell before Christmas just in case the report of Christmas sales fell short. Even if the report of Christmas sales is up for 2011, it is likely that a week after Christmas, the market will have long forgotten the Christmas market glow. I do think that DLTR is a good LONG-TERM investment, but I would prefer to re-purchase  DLTR after the stock has declined a bit.

I have chosen to keep CATM (Cardtronics ATM) which is an international company, making agreements with banks world-wide to support their banks with their ATM products. This stock grew 60.9% in 2011, and with good reason; it has solid financials and will likely continue it move upward in the year ahead. Because of that, I will keep a STOP-SELL on CATM at 6% below it's daily close price. This is a fairly tight STOP-SELL but will insure that a significant downturn will be sold. As we move into 2012 I will purchase more of CATM being careful to sell all of CATM, rather than lose the core investment.

For instance: An initial purchase of $10,000 of CATM grows 20% with a STOP-SELL set at 6% below its present gain; this means that the least I will make in a sudden decline in the market is 14% of $10,000 or $11,400. When I have seen that CATM continues to TREND UPWARD, I will purchase another $10,000, making my total investment $22,000. Once again, I will set my STOP-SELL at 6% below the closing price of CATM. If, at this time, CATM suddenly declined, CATM would sell at 6% below its present price or for $20,680. (Remember my CATM was purchased in November and is now valued at 14.88% at the end of December. I will want to patiently wait until CATM grows to 20% before adding to the investment.)

As you can see by the above example, that the orginal $10,000 with a 6% STOP-LOSS, put $600 at -risk; but now, after adding an additional $10,000 to the orginal $10,000 for a total of  a $20,000 invesment, you put none of your investment at-risk and even gaining $680 in this scenario if the market suddenly turns downward. 

Assuming that CATM continues to grow even another 20% in 2012, with the $22,000 in CATM stock, the investment would grow to $26,400 for a profit of $6,400. Again, in the market you can assume nothing and must constantly adapt to the changes. The market can be better than you ever dreamed or worse than you ever imagined. ALWAYS USE STOP-SELLS and be prepared to get out of the market.

STOCKS

FDO - Family Dollar  was SOLD with a 1.72% gain
DLTR - Dollar Tree was SOLD with a 4.93% gain
CATM - Cardtronics ATM was not sold and presently has a 14.88% gain

                              The average gain over the three stocks being 7.1%

This does fall short of the 10% to 12% I had hoped to gain, but I am celebrating this Christmas. In two months, I was able to see a 7.1% gain in the fall trading season. Time will vindicate or incriminate your decisions in trading the market. For now, I have every reason to celebrate.

The MPT (MODERN PORTFOLIO)

If you are following this blog, I hope you are reading ALL of the ideas. Harry Markowitz, the father of the Modern Portfolio Theory and winner of the Nobel Prize in Economics is clearly a lot smarter than most of us.

Someone suggested that by putting 50% of your money in the ETF called, BND (a general bond fund) and 50% of your money in the EFT called, VTI (for US stock portfolio) you could beat the market and follow the MPT. (Modern Portfolio Theory)

Here is how we test that idea. Go to www.etfreplay.com and select BACKTEST ETFs. Then select: BACKTEST EFT PORTFOLIO. Under EFT 1 enter: BND and under EFT 2 enter: VTI. Go to the weighting column and give them equal weight or 50%. You will see the graph showing that without your management of only these two ETFs, your return for 2011 would have been 4.8%. In today's market, that return is admirable, especially when you consider that most portfolios have lost profit this year.

Let me give your two other EFTs to add to this portfolio and let's see how these additional ETFs will backtest. Add under the symbol column, TIP and VNQ giving each of the now four ETFs equal weight at 25%.  Your portfolio for 2011 would have returned 8.3% or almost double of 4.8% with only BND and VTI.

MAXIMIZING YOUR RETURN

By using these four ETFs (BND, TIP, VTI, & VNQ) you can see good results with little personal management. You can, however, maximize your return with minimal management by selling any ETF that moves below the 200 day simple moving average.

For example: Go to www.yahoo.com and then select FINANCE, at the top left you will see GET QUOTES, enter the ETF symbol... in this case VTI and hit the yellow button. In the left hand column that is blue, look for CHARTS and select INTERACTIVE at the bottom of the chart you now see, select 1M for one month. The chart will show VTI for a one month period. Always select 1M, so your Simple Moving Average will be correct in relationship to the price. Go to the top of the chart selecting TECHNICAL INDICATORS and then select SMA and set the SMA to 200. This is the 200 day SIMPLE MOVING AVERAGE. Now look at your chart. You will see the SMA marked on the chart. If the price is above the 200 day SMA, buy the EFT. If the price of the ETF moves below the 200 day SMA, sell the ETF.

On this date, the price of VTI is below the 200 day SMA, don't buy it. One other caution, the price of the ETF must remain above the 200 day Simple Moving Average for 30 days before purchasing the ETF. (Note: The price of VTI is moving close to the 200 day moving average, but needs to move above it and hold there for 30 days before you purchase VTI.) As of today, VNQ, a real estate investment ETF recommended here, moved above the 200 day moving average only 5 days ago, stay out of VNQ until it stays above the 200 day moving average for at least one month. Both BND and TIP prices are above the 200 day SMA and would qualify at this time for an investment. It is also advised by the IVY PORTFOLIO that after you buy one of these EFTs, you hold them for at lease a month, even if they fall below the 200 day moving average for a short while. If the price is continuing to move above the 200 day moving average, stay in the ETF for another month.

This is a simple portfolio to manage and without a lot of trades, can be very profitable. Most importantly, any ETF can be sold just like a stock. Unlike bonds, that you have to sell to someone else, or mutual funds that can only be sold at the end of a day, an EFT can be sold when you want to sell it.

Consider simpliflying your portfolio by using BND and VTI.  If you want to improve the return, add VNQ and TIP. Manage the four EFTs in your portfolio by removing an EFT that falls below its 200 day simple moving average. Having managed this portfolio by using the 200 day SMA would have returned 10.5% over 2011 and out performed the majority of the Financial Advisors recommendations.

CHANGES TO 2012 PORTFOLIO

Because of the volatility in the market, the Modern Portfolio will be my consideration as we move further into 2012. 1/3 in cash, 1/3 in stocks, 1/3 in bonds is the ideal. The Modern Portfolio theory suggests 50% in bonds and 50% in stocks, but one can modify the portfolio as best fits the investor. I would want 1/3 in BND and TIP and 1/3 in VTI and VNQ when their price is above the 200 day simple moving average. The final 1/3 kept in cash will be used for some stock purchases, but returned to cash after trades. The concern is that the EuroEconomy will affect the U.S. economy and move us closer toward a recession. Keeping the gains and retaining the core investment will be the goal.

(note: the above information is for entertainment only and not to be used for investment advice.)