Important: parameters changed.

As a result of back testing I decided to change parameters for both SPY and Bonds from 2,7 to 3.5,7 and 2.3,6 respectively. I removed all the funds from the table as their parameters also need to be adjusted.

I left our old parameters in place in both charts and the table for the time being.

There is no change in signals for bonds, so we stay in. I have a sizable position in bonds in my 401K account as of today.

There is a difference in SPY. We bought SPY according to our 2,7 signal, so we should stay in. I suggest those who did not buy, stay in cash and wait for a signal with our new parameters.  Those who did, watch closely 122 area. If we get a buy signal from our new parameters then you stay in and switch to the new parameters at that time. If we do not get this signal soon that would mean SPY will likely pull back, so cash in the gain and wait for a signal on the new parameters.

Feel free to e-mail if there is a question.

Just came across a site I recommend everyone to check out

Seems like the author, Michael Hanton, also did not believe in "Mutual Funds will take care of themselves" approach and has done a very good job in developing a system that helps him and his readers to manage their retirement (and investment) money.

Here is a link: 401K Trend

Why is that so many BS articles

like this
http://www.ivillage.com/401k-how-actively-should-you-manage-it/7-a-219565

and not that much information on what it really takes to manage large amount that has been being saved for many years, sometimes three-four decades.

"The good news is that although you shouldn't ignore the account altogether, an annual checkup is really all you need. At that time, check that your investments are diversified according to your needs and goals. Diversification is the key to successful investment management".

Yea, right. One checks his account on December 31 of 2007, slightly adjust his allocation and happily celebrate New Year leaving his account alone until the next checkup at the end of 2008. Give me a break.

Heads up on S&P

If SPY manages to close above 113.51 we will have to go long. Here is a chart (click to enlarge):

Note that the indicator is drawn with our "standard" parameters (2,7) and not with "optimum" parameters. I still have not came up with an optimization algorithm that I'd like. Working on that. All I can say is that it will  make our stops wider like on the chart below:

An article from wikiHow

Though a "recipe" this article provides is quite vague and even naive to some extent, the idea of being in equities when they move up and staying in stable value options (money market) when they go down is what we preach, research and implement.

I am planning to return to this article and show that the approach suggested is better than doing nothing and that the ATR stop based system we follow is better.

Here is a link: How to Manage Your 401k Investments and Choose Your Funds

Vacation time

I'll be on vacation next week. I expect to update the signals on September 17.

We are staying in cash and bonds still despite this rally. I'll update the table and charts this coming long weekend.

Happy Holiday everyone!

No new signals. Backtesting.

There has been no new signals since last update about a month ago. We are staying in cash in bonds.

Meanwhile I have done some back testing and am planning to share my progress.

Stay in cash and bonds

There is no news signals. Stay in cash and bonds.

Thank you for checking in.

No updates this week. Upgrading the software and running back tests.

The market and funds did not move much last week. I am not updating the table as I am upgrading the software,  back-testing our trend following strategy and also experimenting with parameters. Am very exciting with the results that surprised me a lot. Will share this week.

A confession to make - VTINX and MSIQX

Two of the funds followed in the Current signals - VTINX and MSIQX - hit their respective reversal points last Thursday. Click on the charts below to enlarge.

Had the market held the next day, I would have had to buy the funds on Monday despite my rather bearish outlook on the market. I have to admit, I would have hated having to buy at this time and it would've been difficult for me to execute. It would've felt like throwing money into a fire.

There are two distinct issues we should think about.

1. A natural or, at least, common tendency to try to "outguess" the system: It is a completely psychological issue and we have to learn to resist it. In general, trend following systems have low reliability, meaning, only about 40% of trades conducted according to such systems are profitable. That is a given and it needs to be accepted up front.

2. Testing and adjusting the parameters of the system: The parameters of the system can and should be tested and adjusted as needed. A chart below illustrates this.

VTINX hit 10.73 eight months ago and it is still there. Those who have held, have not made any money, but they have not lost money either. On the other hand, those who executed the signals have actually lost about 1% of this position.

For example, if an investor had 100 shares of VTINX, eight months ago his position was worth $1073. He would then have only $1066 after selling his shares for $10.66 in January - see the arrow Down. He would buy 99 shares for $10.76 - arrow Up in March that he would sell for $10.86 in May. He then could have bought no more than 99 shares at $10.80 or above now if we had got a buy signal.

Also, if this is a 401K or other "regulated" plan, then the investor might have been restricted on how often he is allowed to get in and out of a fund (over-trading rules).

One solution to this issues is to adjust parameters to reduce the number of signals. Here is the same chart with three ATR stops.

Another illustration from the last week is Morgan Stanly International Fund. This is how it looks with our standard 2 ATR 7 week parameters

and this is 3.5 ATR 6 weeks

The table has been updated. Market fell. Bonds inched up.

Two of our funds VTINX and MSIQX were about to signal long, but abrupt and severe drop last Friday kept   us in cash. The only position we continue to hold long is bonds and, of course, cash. "Cash is a position." 

Farrand's "We trend follow"

It is always a pleasure to meet like-minded people or their blogs. In my opinion, Chuck Farrand's We trend follow site is worth spending some time with.

Though I can't agree with everything he says - for example, the idea to go in with 100% of the money at once - he's done a fair job explaining and promoting the trend following approach. Also, he presents a decent plan.

I think there are better methods than the MA cross he advocates, but it simple and it works. We'll discuss it in more details when we get to comparing it with other trend following systems.

I kinda liked his "A simple way that you can become your own financial advisor using the trend following plan developed by Dick Fabian" header.

The table has been updated. Market erased last week loss.

Market jumped up erasing losses of the previous week. Nevertheless, ALL equity funds remain on Sell while we continue holding bonds that went down just a tiny bit this week.

The table has been updated. Reversals have got below Sell.

Market continued its move down, so ALL equity funds remain on Sell while we hold Bonds.

Notice that reversal points also came down this week for all funds (except for MS International MSIQX that did not change much over the last 7 weeks) and now stand at or below the last sell points for most of the funds. In other words, when the market goes up we will be buying back the funds for less than we have sold thus locking at least some profit. This is the goal of following the model - staying in cash when market drops significantly.

The table has been updated. Bond index added.

All funds remain on Sell. Bond portion of my account just made 5% year to date.

I know I should have added to bonds long ago. I'll talk about that when we discuss asset allocation and scaling.

I have no chart for the fund I hold, so I added Barclays to the table as an orienter. The chart is beautiful. I may adjust parameters to allow it some more room.

The table has been updated

All funds remain on Sell signal, two approaching their reversal points: Morgan Stanley International (MSIQX) and Vanguard Target Retirement (VTINX).

Is this a good point to sell and raise cash?

I was asked today whether it is a good point to sell mutual funds in 401K and go into cash?

Before I share my view I have to remind you that I am not a financial advisor and what I write here is just my personal opinion and not an advice to buy, hold or sell any security whether in a retirement account or otherwise.

I see I need to put up a disclaimer, I will as soon as I can.

Having said that, my short answer is NO. Before I provide a long answer I need to disclose  that I have sold ALL mutual funds back in May based on the signal of the trend model I am using. See a table here: Current signals

Why is that I would not sell today? Cause it would have been more of an emotional decision than one based on a systematic approach. The whole idea of this blog is to offer a rational approach to managing a retirement account that does not offer too many choices. The approach is to follow weekly trends an manage the risk through an appropriate position size (will talk more on that).

I am taking the question I was asked as an opportunity to illustrate my point that if there is no system in place then we put ourselves in a very difficult position where we worry all the time and try to make decisions based on probabilities. It is still possible but it is not the game most of people like playing.

What an S&P chart shows is that the market is still retracing the plunge from the April high.We talked about that - see this post. It will be difficult for the bulls to drive this market higher being pressured by overhead resistance (see below), yet they managed to break above 1110, and we have to respect the fact.

This ~1110 area now acts as a support while ~1130 area is a resistance cluster (pointing down 50 day EMA is 1120, 50% retracement is 1130 and 50 day SMA is 1140). One important warning sign I want to mention is declining volume. If S&P breaks down below 1110 I'd get out. Until then I'd stay in selling portions of my position into any rally as we get closer to 1140.

To summarize, trading is a difficult and emotionally demanding game most people do not want to be involved with. I devote my time to this blog with intent to offer a simple (it is actually a bit simplistic) approach to managing retirement money; this approach is about following the trend via utilizing a mechanical system and managing risk through position sizing. This approach is not popular among financial planners and somewhat  contrary to what they advice.

Phil Grande one more time

Could not help posting. Phil talks Pelosi, Reid, Meg Whitman, Boxer, exporting jobs, Larry Summers, Wall Street and the market.

Phil Grande radio show June 8, 2010

Protecting Your 401(k) When Markets Tumble

I came across this article that is a good example of what we are being told. The author is a "markets and investing writer for Daily Finance. He spent 13 years covering investment and business news".

I did not expect this Stay Fully Invested advice in an article with Protecting Your 401(k) When Markets Tumble title. Did you?

S&P

Just to be objective, we have to admit S&P weekly looks rather bullish than bearish after somewhat     decisive bounce off of its 105 support. I say "somewhat" cause the move was on a light volume.

That been said, our weekly model remains on "sell" signal, and I am going to stay in cash.

It is not to say the bounce is not "tradable". If market remains bullish for a while we may see SPY as high as 115, but it needs to break above 111 first. It is worth mentioning that potentially it may form the right shoulder of the H&S pattern. I'll talk more on that if things develop in this direction. Below is a daily chart.