Weekly Newsletter 08/10/07
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Market Summary Weekly Breakout Report Top Breakout Choices Top 2nd Chances New Features Tip of the Week
Prior editions of this newsletter with our valuable Tips of the Week are available here.
 Weekly Commentary  

Market Summary

The market roller coaster concluded the week on an upward swing propelled by massive injections of cash by the central banks. The extent of these interventions was explained by the WSJ here. For the week, the DJI gained 0.44%, the NASDAQ Composite added 1.34% and the S&P 500 rose 1.44%. This action was welcome and overdue considering the seriousness of the liquidity shortage. It was disappointing that rumors earlier in the week that Fanny Mae and Freddie Mac rules would be loosened were scotched by President Bush on Thursday who said they must complete a ``robust reform package'' before the government will allow them to buy home loans beyond current federal limits. Such a move could have provided relief for the ailing housing market.

Our NASDAQ Market signal reverted to 'enter' on Wednesday after a strong accumulation day (see chart), but we have little confidence that this can be relied upon in the current market turbulence.

By Friday, the Fed futures market was betting on a rate cut at the next meeting of the FOMC on September 18. If this expectation holds, it will be generally good for stocks as bond market yields fall, assuming markets stabilize. The injection of liquidity and a cut in rates would likely have an inflationary effect, however, so it remains to be seen if a rate cut will eventuate considering the Fed's statement on Tuesday that inflation remains their primary concern.

 New Features this Week Additional Value that we added this week

Unilateral Pairs Trading Tool Enhanced

The buy and hold return for the symbol being traded was added to the results summary.

A series of charts showing the inter-relationship btween the two symbols is available by clicking the 'View Analysis...' link:

And a Portfolio Value charts is also available:

This Week's Top Tip Tips for getting the most out of our site

Unilateral Pairs Trading - Some Interesting Results

In addition to the enhancements described above, we've started to do some work on the possible results that can be obtained from this trading system. The results are preliminary but show that the system has a lot of potential if the right pair of ETF's are chosen.

We backtested the system for all ETF pairs that had a correlation of at least 0.75 for two time periods: 2001 until the present and for the year to date. The best performing pairs are shown below with the results for QQQQ/SPY for comparison.

Backtest Period ETF 1 ETF 2 Total Profit % Long Profit % Short Profit % QQQQ/SPY
Profit %
Buy and Hold ETF1
1/1/2007 - 8/9/2007 VWO
(Vipers Emerging Mkts)
IAK
(iShares DJ Ins)
56.4 8.2 48.3 0% 22.5
1/1/2000 - 8/9/2007 SMH
(HOLDRS Semiconductor)
EWW
(iShares MSCI Mexico Index)
823.7 487.0 336.6 408.18% -58.7

Notice that the best profit in 2007 was made largely through shorting. The best return from only going long was by trading EWM against IAH for a total return of 25.49%.

While these results are indeed interesting the pairs that gave the best return do not appear to be logically related. Until there is a rational basis for selecting the pairs to be traded, beyond that they should be highly correlated, there isn't a basis for building a trading strategy. That is the next challenge we will address.

There are two excel compatible files of the backtests if you would like to see them: backtest2000.csv and backtest2007.csv.

Any comments on this strategy would be welcome.

Investment Advisors Using our Service

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 Market Summary Overview of market direction and industry rotation
Index Value Change Week Change YTD Market1
Signal
Dow 13239.5 0.44% 6.23% enter
NASDAQ 2544.89 1.34% 5.37% enter
S&P 500 1453.64 1.44% 2.49% enter
 Best Performing Index
1 Week 13 Weeks 26 Weeks Year-to-Date
S&P 500
1.44 %
Dow Jones
-0.89 %
Dow Jones
-5.1 %
Dow Jones
6.23 %
 Best Performing Industry (by average technical score over each period)
1 Week 3 Weeks 13 Weeks 26 Weeks
Aerospace/Defense - Major Diversified Aerospace/Defense - Major Diversified Foreign Utilities Tobacco Products, Other
 Most Improved Industry (by change in technical rank2)
Aluminum
+ 54
Aluminum
+ 99
Long Distance Carriers
+ 213
Long Distance Carriers
+ 210
Charts of each industry rank and performance over 12 months are available on the site

1The Market Signal is derived from our proprietary market model. The market model is described on the site.
2The site also shows industry rankings based on fundamentals, combined technical and fundamentals, and on price alone (similar to IBD). The site also shows daily industry movements.
 Weekly Breakout Report How confirmed breakouts performed this week
# of Breakouts
Period Average1
Max. Gain During Period2
Gain at Period Close3
This Week 22 14.85 7.35% -0.21%
Last Week 13 14.23 9.03% -2.56%
13 Weeks 323 16 8.39%
-5.52%
Sector
Industry
Breakout Count for Week
ELECTRONICS
Semiconductor - Integrated Circuits
2
COMPUTER HARDWARE
Computer Peripherals
1
COMPUTER SOFTWARE & SERVICES
Business Software & Services
1
COMPUTER SOFTWARE & SERVICES
Information Technology
1
COMPUTER SOFTWARE & SERVICES
Healthcare Information Services
1
DRUGS
Biotechnology
1
ELECTRONICS
Printed Circuit Boards
1
ELECTRONICS
Scientific & Technical Instruments
1
FINANCIAL SERVICES
Closed-End Fund - Equity
1
FOOD & BEVERAGE
Processed & Packaged Goods
1
FOOD & BEVERAGE
Beverages - Soft Drinks
1
HEALTH SERVICES
Medical Instruments & Supplies
1
HEALTH SERVICES
Medical Appliances & Equipment
1
LEISURE
Restaurants
1
MANUFACTURING
Industrial Electrical Equipment
1
MATERIALS & CONSTRUCTION
Heavy Construction
1
MATERIALS & CONSTRUCTION
General Building Materials
1
METALS & MINING
Steel & Iron
1
REAL ESTATE
Property Management
1
SPECIALTY RETAIL
Specialty Retail, Other
1
WHOLESALE
Basic Materials Wholesale
1
1The average number of breakouts in each week over the previous 13 weeks.
2This represents the return if each stock were bought at its breakout price and sold at its intraday high.
3This represents the return if each stock were bought at its breakout price and sold at the most recent close.
 Top Breakout Choices Stocks on our Cup-and-Handle list with best expected gain if they breakout
Category
Symbol
Company Name
Expected Gain1
Best Overall VII Vicon Industries Inc 74
Top Technical ACAD Acadia Pharmaceuticals 37
Top Fundamental CVD Covance Inc 19
Top Tech. & Fund. CVD Covance Inc 19
1This is the gain predicted by our Expected Gain model if the stock breaks out. Expected Gains for all cup-and-handle stocks are published on our site.
 Top Second Chances Stocks that broke out this week and are still in buyable range
Category
Symbol
Company Name
Expected Gain1
Best Overall RADS Radiant Systems Inc 60
Top Technical SPNC Spectranetics Corp. The 0
Top Fundamental SSYS Stratasys Inc 38
Top Tech. & Fund. SSYS Stratasys Inc 38
1This is the gain predicted by our Expected Gain model after the stock has broken out which uses the volume on breakout as a predictive term. Because the model variance is +/- 38% the expectation can be negative.

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