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Tharp�s Thoughts
Market Efficiency Portfolio
Updated March 12, 2007
By
Van K. Tharp
In preparation to leave for a trip, I prepared this report a week early. I was curious to see what last week�s China sell-off did to the overall market efficiency. The bottom line was that we didn�t get stopped out of anything, and the market decreased in efficiency, but not that much. Overall, the market dropped from over 70% positive efficiency to 65.3% positive efficiency. And the number of stocks ranked over ten decreased from over 200 to146. Nevertheless, the market is still very positive as shown by the chart below. It�s still difficult to find a good short candidate with only 24 stocks below minus 10 in efficiency.
Fortunately, we were not stopped out of any stocks, so I don�t have to make any changes to the portfolio this month.
| Table 1 shows our portfolio as of Noon on March 12, 2007. | |||||||||
| Portfolio as of Noon on March 12, 2007 | |||||||||
| Stock | Entry | Cost* | Shares | Stop | Price Now | Value | Profit/Loss* | R-multiple | |
| LONGS | |||||||||
| LQU | $54.05 | $1,960.80 | 36 | $53.75 | $73.00 | $2,628.00 | $667.20 | 1.69 | |
| CXW | $42.33 | $1,919.85 | 45 | $39.84 | $51.07 | $2,298.15 | $378.30 | 0.96 | |
| MWP | $35.54 | $1,756.46 | 49 | $46.65 | $62.20 | $3,047.80 | $1,291.34 | 3.27 | |
| EWP | $52.12 | $1,734.96 | 33 | $42.50 | $53.61 | $1,769.13 | $34.17 | 0.09 | |
| LFL | $57.80 | $1,749.00 | 30 | $56.44 | $69.81 | $2,094.30 | $345.30 | 0.96 | |
| NU | $26.52 | $1,765.32 | 66 | $21.97 | $29.29 | $1,933.14 | $167.82 | 0.42 | |
| CHL | $42.32 | $1,750.12 | 41 | $36.34 | $44.37 | $1,819.17 | $69.05 | 0.17 | |
| SGF | $18.75 | $1,908.75 | 101 | $15.00 | $16.40 | $1,656.40 | ($252.35) | -0.64 | |
| ALB | $71.55 | $1,732.20 | 24 | $62.91 | $83.88 | $2,013.12 | $280.92 | 0.71 | |
| SHORTS | |||||||||
| JRCC | $9.54 | $1,732.20 | 180 | $7.64 | $7.09 | $1,276.20 | $456.00 | 1.33 | |
| Totals | $3,437.75 | 8.96 | |||||||
| * Cost plus commission, Profit/Loss less commission | |||||||||
ALB has split two for one. Rather than confuse people I have kept the unadjusted price in the table.
Last month, I mentioned that it was �probably a dangerous time for our portfolio because if the market suddenly reverses, we could end up giving back much of our open profit.� And on Tuesday, February 27th we had a shock to the portfolio. Amazingly, we were only hurt significantly in our two Asia based stocks, SGF, our new addition last month and CHL, our China stock. However, neither of them were stopped out.
As a result, our portfolio remains intact and I do not plan any changes for this month. We�ll let the Asian stocks play themselves out for another month. One of our stocks, MWP has now reached a 3R profit, which is the way the portfolio is supposed to work.
All of the closed out positions to date are listed in Table 2.
|
Table 2: Closed Positions on March 12th, 2007 |
||
|
Stock |
Profit/Loss |
R-multiple |
|
FAL |
($2.28) |
(0.006) |
|
BSX |
($183.00) |
(0.457) |
|
DLX |
($184.00) |
(0.459) |
|
AETH |
($132.00) |
(0.330) |
|
AYE |
($56.95) |
(0.142) |
|
CG |
($66.72) |
(0.167) |
|
OGE |
($51.06) |
(0.128) |
|
WPI |
($315.08) |
(0.788) |
|
EBAY |
($381.78) |
(0.954) |
|
CHS |
($399.78) |
(0.999) |
|
HOV |
($346.09) |
(0.865) |
|
VTR |
($97.51) |
(0.244) |
|
LEE |
$64.04
|
0.160
|
|
JRCC |
$873.90
|
2.185
|
|
GYI |
($175.82) |
(0.440) |
|
SYX |
$137.24
|
0.343
|
|
CPY |
($303.60) |
(0.759) |
|
OMG |
($183.18) |
(0.458) |
|
ENR |
($130.36) |
(0.326) |
|
JRC |
$77.84
|
0.195
|
|
FMT |
($268.38) |
(0.671) |
|
MLS |
($655.26) |
(1.638) |
|
MRCY |
($201.60) |
(0.504) |
|
ASVI |
($352.58) |
(0.893) |
|
RHB |
($352.16) |
(0.903) |
|
VCI |
($471.27) |
(1.309) |
|
PLRO |
($414.60) |
(1.039) |
|
|
($4572.04) |
(11.60) |
|
|
|
(0.43) |
Overall Commentary:
Although I didn�t look at the portfolio after February 27th, I had assumed that we were stopped out of a number of our stocks. Had that been the case, I would have closed the portfolio down to start determining what was wrong and how it could be improved. However, we were not stopped out of anything, and I have decided to keep the portfolio running through June. That will give us one year�s worth of data on the portfolio.
I am somewhat disappointed in the portfolio at this point because we should be hugely profitable. We�ve been through a mini-bull market that had seven up months with no significant corrections and even what happened in February doesn�t really count as a correction because the total down movement was less than 10%. As a result, we should be up significantly. Instead, our portfolio is down $1298.99 on March 12th or about 6.5%.
At least one person has said that following the portfolio was a total waste of his time, but what he didn�t realize is how much you can learn from what doesn�t work. And at this point, I�m pretty sure that just a few changes to how the efficiency portfolio is done could make an immense difference.
The efficiency method has already proven itself. Even in 2001, in a huge bear market, the efficiency portfolio was making money being long only. But I made some changes to the way we did this portfolio that I thought would improve things. Those few changes might have made a huge difference in the effectiveness of the portfolio, so we�ll be looking at that this summer.
Until next month�s portfolio review, this is Van Tharp.
About Van Tharp: Trading coach, and author Dr. Van K. Tharp, is widely recognized for his best-selling book Trade Your Way to Financial Fre-edom and his outstanding Peak Performance Home Study program - a highly regarded classic that is suitable for all levels of traders and investors. You can learn more about Van Tharp at www.iitm.com.
The Volatility Cometh
By D.R. Barton, Jr.
Right up until the end of February everything was just hunky-dory for the bullish investing world:
-
The Dow was regularly making new historical highs.
-
The Volatility Index ($VXO) hit all-time lows (showing a complete lack of fear in the markets).
-
Massive, unprecedented amounts of money were pouring into index funds.
-
Intraday and intraweek volatility were at or near 10-year lows.
Yes indeed, steadily rising markets with low volatility were making trend followers everywhere look like geniuses. CNBC trotted out guest after guest who proclaimed the wonders of it all; the roaring 2000s had finally come to roost.
Then a funny thing happened on the way to the celebration. Markets got overextended. Investors got complacent. And the markets took a plunge.
And after Tuesday, 3/13/2007, it looks like the plunging is not over. And equally important for many investors and traders, it looks like volatility has come back with a vengeance.
In fact, daily volatility is at its highest since the fall of 2002! This brings both opportunity and challenges to traders.
Day traders are LOVING this! Markets with this much daily range provide multiple profit opportunities every day. Enjoy it while it lasts!
Swing traders and intermediate-term traders often have to suffer a bit as their systems adapt to wider swings in shorter time frames. A prudent course of action may be to shorten the look-back periods on your volatile indicator (instead of using the standard 14 periods for an AverageTrueRange calculation, use 7). This will allow the system to adapt more quickly.
Long-term traders may find that they�re getting stopped out quickly on positions due to the quick and deep moves. This is a tenuous time for long-term traders because it�s tough to tell just yet if this is a trend change or just a fast pullback.
In all time frames, if your systems don�t have parameters that adjust for volatility (for example if you use % stops or targets) then you must take extra care especially with volatility being 2.5 times what it was two short weeks ago!
Great Trading!
D.R.
About D. R. Barton: A passion for the systematic approach to the markets and lifelong love of teaching and learning have propelled D.R. Barton, Jr. to the top of the investment and trading arena where he is one of the most widely read and followed traders and analysts in the world.
He is a regularly featured guest analyst on both Report on Business TV, and WTOP News Radio in Washington, D. C., and has been a guest analyst on Bloomberg Radio. His articles have appeared on SmartMoney.com and Financial Advisor magazine.
It is Tax Time Again...
We often get emails and calls from our clients concerning their taxes. As all of you know, Van is not an accountant or tax guy and we can�t really answer all of your questions. The best advice that we can give you is to refer you to one company that has specifically been in the business of helping traders with their taxes for close to ten years - Traders Accounting.
As an active trader, if you are having problems understanding what forms to use and how to file them and if you are interested in finding someone who will get your taxes done correctly and keep you out of trouble with the IRS, then please take the time to visit them and see what they have to offer.
www.tradersaccounting.com/2006tax
Which Face do You Put On?
by Melita Hunt
Van and I were just in Phoenix at the Investment University conference. I always enjoy these couple of days away because I get to see people that I haven�t seen for a year, and I get to meet a lot of new people. There are over 300 people attending and a plethora of speakers and companies selling their wares. I spent most of my time in the exhibit area, watching the faces of the people attending the conference and it always fascinates me to watch their responses and reactions to the subject of money and finances.
Some people take the subject of money SO seriously. They actually walk around with a look of pain on their face. The expressions range from confusion and befuddlement to stress and desperation. There are frowns, wrinkled foreheads and pursed lips as people try to decide which sessions to attend, who to talk to, who to believe and what to invest in. On the flipside, there are the smilers. The group who just takes it all with a grain of salt. They wander in calm and relaxed, they come and chat to me about all sorts of subjects and enjoy their experience. There is no hurry, no stress; they are simply here to learn, gather information and decide what is useful. So what causes the difference? Is it a confidence about money or do they just not care as much? Whatever it is there is a distinct difference between the two groups.
So which face would you put on? Does the subject of money cause you stress, concern and bewilderment? Are you searching for the Holy Grail or a miracle answer from someone to fix this area of your life and need to have that answer NOW? Or do you have an abundant mindset and confidence about your finances, knowing that money will always flow in and out?
Knowing where you are �coming from� could make all the difference between a life of smiles or a life of frowns.
You can contact Melita at [email protected]
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