January 1999 - AIQ Systems
Contents
1. AQ Feature A Test Are You a Successful Market Timer sa 1 Sections Market Review ss Readers Forum sess Mechanical Portfolio S amp P 500 Changes EDS Short Model Data Maintenance The Opening Bell Monthly is a publication of AIQ Systems David Vomund Chief Analyst P O Box 7530 Incline Village Nevada 89452 Opening Bell VoL 8 ISSUE 1 JANUARY 1999 MARKET TIMING Do You Have Wuar It Taxes To BE A SUCCESSFUL MARKET TIMER By Paul A Merriman it takes a strong faith and a strong stomach I like this quote from the ue ae works eek legendary Benjamin Graham To WON SS anor ee PEOP ieee achieve satisfactory results is easier actually practice it as a iscipli h than most people realize To achieve dmeiplime Iit cory everyinvestoris superior results is harder than it looks capable of following the disciplines of timing Here are six ques Butnot everybody has tions to help you the right emotional determine if you have makeup to do timing what it takes There are right In real life most no right or wrong people who try are answers only what s ultimately unsuccessful true for you Timing puts inves Six Questions tors on the front lines face to face with the 1 Do you have the realities of the market necessary perse every business day To verance be a successful timer Timing can get you ou ve got to buy and sell a f2. AIQ s Quick Launch Menu and select Help from the menu bar Next select Technical Support and then Product Updates That will launch a web page On that page you can download Service Pack 1 which is a choice in the lower portion of the screen To get a list of what features are corrected with the Service Pack choose Known Issues JANUARY 1999 AIQ Opening Bell YEAR END ANALYSIS THE Best YEAR YET FOR AIQ s MECHANICAL TRADING PORTFOLIO By David Vomund T T he year 1998 was the best yet for AIQ s mechanical trading strategy up an amazing 76 78 The strategy combines the market timing model with the indi vidual stock buy and sell signals Before we examine the strategy let s first look at how the market timing model fared in 1998 Market Timing No Confirma tion In 1998 AIQ s market timing model had some periods of brilliance and some periods where it was off the mark In the end the results were in line witha buy and hold return which is better than what most timers can claim The model started the year ona buy and was ona buy for all but two trading days until April 17 That was impressive because it avoided giving a sell signal ina market environment that turned out to be very bullish From the January 12 buy signal to the April 17 sell signal the S amp P 500 rallied 20 The April 17 sell signal was perfectly timed as the large company stocks ended their uptrend
3. and began to move sideways At the same time small company stocks entered into a bear market The April 17 sell signal was registered three days before the Russell 2000 hit its highest level a level that has yet to be penetrated A quick and profitable trade occurred from mid June to mid July For the first half of the year the market timing model could hardly have been better But that is when the trouble started The July 21 sell signal was well timed as it was registered only two days after the market formed a major top Unfortunately the model registered a buy signal soon after the market began to drop A buy came on July 29 and the system remained ona buy until early September The market experienced a 12 7 loss over this time period which represents the largest loss our system has experi enced since it was introduced in early 1987 Just when confidence in the market timing model was shaken the system registered a buy on October 8 which represents the low point in the S amp P 500 Nasdaq Composite and Russell 2000 The S amp P 500 rallied This mechanical strategy which combines the market timing Expert Ratings with the top stocks on the Weighted Action List report was introduced in May 1992 This was the strategy s best year 20 after that buy until a sell was registered inearly December Despite the late summer setback if you traded the S amp P 500 based on the Expert Ratings you
4. out of the markets One of the most obvious truths about timing and one of the most widely overlooked is that by the time your friends your colleagues your gut and the experts all agree on what you should do it s already far too late for you to extract the maximum opportunity from it If you usually take lots of time to make decisions this is not a suitable arena for you The bottom line for me is that timing is very challenging I believe that for most investors the best route to success is to have somebody else make the actual timing moves for you You can hire a professional Or you can have a colleague friend or family member actually make the trades for you That way your emotions won t stop you from following the discipline You ll be able to go on vacation knowing your system will be followed Most important you ll be one step removed from the emotional hurdles of getting in and out of the market W Paul Merriman is president of Paul A Merriman amp Associates an investment advisory firm specializing in buy and hold and market timing strategies using no load mutual funds He is also editor of FundAdvice com a free internet mutual fund newsletter and free e mail market timing service For a free copy of his latest audiotape The ultimate 20 Strategy call 1 800 423 4893 PLEASE SEND CORRESPONDENCE TO Opening Bell Monthly G R Barbor Editor P O Box 7530 Incline Village NV 89452 AIQ Op
5. services now charge on the basis of flat fee subscriptions Q When I press the ER button while viewing a ticker to review rules that have fired on a buy or sell signal why do I sometimes see rules that are contrary to the ER signal A Itis true that one or more contrary rules may appear regardless of the magnitude of the ER They are shown because all rules including contrary rules have a bearing on the ER However contrary rules are more likely for an ER of 95 5 than for an ER of 100 0 In effect contrary rules downgrade the ER and without the firing of a contrary rule a higher ER would very probably be generated Q When update my data at night I am unable to get the current day s data This happens even when the time is after the current quotes are posted at the data vendor What should I do A Check your system date and time If your date is current ensure that the time and a m p m designa tion are correct Also in Data Retrieval click on Setup Options and make sure the market open and market close are set correctly for your time zone Q DoIneed to have the MyTrack program running in order to use Real Time in Trading Expert Pro A No MyTrack is a separate program and does not have to be running Bug Fix for TradingExpert Pro There is a service pack avail able on the internet that fixes many of the known bugs in the TradingExpert 5 0 software To download the service pack go to
6. 98 Return 22 99 When we publish an article on this mechanical strategy two things invariably happen First people start to follow the strategy until there is a bad period After the 8 drop in August few people stuck with the strategy and failed to purchase the five stocks from the October 8 signal Second people try to duplicate our results and find that the stocks on their Weighted Action List are differ ent than what we are reporting This can happen for a variety of reasons One reason is that we are buying stocks with Expert Rating signals that are greater than 95 The default on the Weighted Action List report uses an Expert Rating value of 90 Therefore you should change the UP ER Criteria on the Weighted Action List report to 95 see page 244 in the TradingExpert Pro user manual In addition only Standard amp Poor s 500 stocks are purchased using this strategy so the reports should be generated on the S amp P 500 list instead of the entire database see page 234 in the TradingExpert Pro manual Because the stocks in the S amp P 500 index change over time your S amp P 500 Year End Analysis continued on page 6 JANUARY 1999 5 AIQ Opening Bell YEAR END ANALYSIS continued structure needs maintenance Since each program that we send out has a current S amp P 500 structure those of you who have upgraded to TradingExpert Pro and have been using a Standard amp Poor s str
7. Russell 2000 broke out market breadthim proved and a 96 buy signal was registered on December 29 Early in the month the upward move ment was limited to technology and internet companies Late Fa Hints ete Ft in the month market participation began to im prove For the year technology groups were the biggest winners Fidelity s Computers sector fund gained an amazing 95 and their Technology fund gained over 70 The worst groups were oil related Fidelity s Energy Service sector fund which contains oil equipment and drilling stocks lost 50 and their Energy fund fell15 m READERS FORUM his Question amp Answer feature will appear regularly in the Opening Bell Send your questions to Editor Opening Bell P O Box 7530 Incline Village NV 89452 Q Ihave a stock in my database that has recently changed symbols How do I rename the symbol and keep all the old history A In Data Manager highlight the old symbol Then click on Ticker and choose Rename Enter the new symbol description and market if needed This will rename the old symbol and also retain all its history Q Iama flat fee subscriber to Dial Data but when I do an End of Day download a cost appears on the Communications log Is this cost in addition to the flat fee A No This cost no longer applies and should be disregarded It is simply leftover from the days when data services charged per quote fees All
8. ars on the right while the scale that corresponds to the number of short selections is on the left a future version of the EDS software will have the ability to produce this graph PR ARG Chaite Chat Mien Drew Epke Tagit indon Hels oas sex 12 1 Oneelementis immediately apparent When the market is ina strong uptrend no stocks are selected by the short model No short selec tions appear from May 97 to August 97 as the market moved higher yn Similarly no stocks appeared from me hid i re TAN i mid January 98 to May of 98 More recently a short candidate appeared nearly every day from July to mid September 1998 and there hasn t been a single selection from mid October through the end of our testing time period MJJAS For Help pears F1 PETE yj a aa SAP 500 Overlay Number of Socks Gong EDS Sgrele Day Fi W W NO ONOWFMANMJI ISI ASO 1 Pi iV I d 4 f i J M ih i MFMAWMJ J When the market environment is shaky the model produces selections and the stocks selected are good short candidates However the model is not good at calling market tops The majority of the selections come after the market has rolled over In fact the time that the most stocks were selected as short candi dates came at a near term low In mid June 98 there was a day in which eight stocks appeared This occurred just before the market staged its final advan
9. ce before the fall correction This analysis should help people to better understand how often signals are registered as well as how the model works W STOCK DATA MAINTENANCE The following table shows past and future stock splits and large dividends Name Ticker Changes Washington Mutual WAMU to Washington Mutual Inc WM Westwood One WONE to Westwood One Inc WON Stock Ticker Split Div Approx Date Stock Ticker Split Div Approx Date Dycom Indust DY 3 2 01 05 99 VISX Inc VISX 2 2 01 14 99 CMGI Inc CMGI 2 1 01 11 99 Transamerica Corp TA 2 1 01 18 99 Gallery of History HIST 2 1 01 11 99 Astec Ind ASTE 21 01 19 99 Flextronics FLEXF 2 1 01 12 99 Sonic Automotive SAH 2 1 01 26 99 Intervoice Inc INTV 2 1 01 12 99 Guidant Corp GDT 2 2 01 28 99 Trading Suspended CKS Group CKSG Cliffs Drilling Co CDG DeKalb Genetics Corp DKB Special Devices SDI CMG Information Svs CMGI to CMGI Inc CMGI Key Energy Group KEG to Key Energy Services Inc KEG JANUARY 1999
10. d somebody who has found the one true path to wealth That path is a myth and nervous investors don t make good timers Confident successful investors know what they want and need adopt a strategy to achieve their objectives and stick with that strategy regardless of what others are doing If your goal is to increase your assets by 10 percent ayear and a timing system lets you achieve that can you be satisfied even when other people are making 12 percent or 15 percent or even 20 percent If so you may have what it takes to succeed as a timer 3 Can you accept that your portfolio will underperform the market This should be obvious but you would be surprised to know how many people forget it A timing system is not designed to produce the same returns as the untimed market When you outperform the market youare likely to be pleased But your pleasure may be mild compared with the fury or betrayal you can experience when your portfolio is underperforming and when your timing system produces a losing trade That s especially true when you just knew that the signal you got from your system was the wrong thing to do 4 Can you accept that your timing system will be imper fect Imperfection is one of the media s biggest criticisms of timing When you are underperforming and experienc ing losing trades that media criticism may shake your confidence The media often says market timing requires you t
11. ening Bell Monthly does not intend to make trading recommendations nor do we publish keep or claim any track records It is designed as a serious tool to aid investors in their trading decisions through the use of AIQ software and an increased familiarity with technical indicators and trading strategies AIQ reserves the right to use or edit submis sions For subscription information phone 1 800 332 2999 or 1 702 831 2999 1992 1999 AIQ Systems JANUARY 1999 AIQ Opening Bell MARKET REVIEW ecember was an active month for AIQ s market timing model After being ona buy from October 8 the system finally switched to a sell mode when it registered a 98 down signal on December 3 A repeat sell came on December 10 when a 99 down was registered Negative market breadth played a big role in both sell signals Looking at the market log more than 80 of the stocks giving unconfirmed signals were on the buy side an indication that it wasn t a major top After the sell the Dow decreased some but there was little downward movement During the sell the Russell 2000 representing small company stocks was in a trading range It wasn t until Christmas that the Russell 2000 broke out of its trading range see Figure 1 The week between Christmas and the New Year is typically bullish for stocks This year pamm Grae y Deer jos Tig geia s Diea aa nje Bt E al amc eT was no excep tion After the
12. f you want more trades simply ease the parameters on the Directional Movement and VaPct rules By requiring the Directional Movement indicator be less than 20 instead of less than 25 100 more trades are produced and the effectiveness drops only slightly To answer this question we exported the EDS Positions page to an excel spreadsheet manipulated the data and then used the Data Transfer Utility to import the data back to AIO wouldn trecommend this process to anyone From our testing results we know that the model is effective in picking short candidates In Figure 2 we see that the average short position gained 1 72 excluding commissions with an 11 day holding period If you The end result of this exercise is displayed in Figure 3 In this graph we show the S amp P 500 along with the number of stocks in the S amp P 500 that EDS Models continued on page 8 F eotedeo3h EDS sabe DX osmem nej se Surma Parson l Erpat Design Munibe of hejer n bart a 1 72 1 Avetege pesod pe heje LAJ 12 10 Naaras ProftLarz Bx 14 4 Avwiege Dinedoven ERL UAE g AS mage ProftLarz z B3 age SPX Proa ix 7x Prabeatalty 60 33 412 Avwage Armd ALL a0 151 2p raal SPX Bas t Amad fint Ado Fee Help pears F1 NUN JANUARY 1999 AIQ Opening Bell EDS MODELS continued appear as short selections using the EDS model The price scale for the S amp P 500 appe
13. ill list recent changes to the S amp P 500 structure in the Opening Bell Data quality is very important to those who want to follow this me chanical strategy TradingExpert Pro makes it much easier for you to get the same list of stocks that we get when we follow the system It is best to install all the stocks in the S amp P 500 from the AIQ historical Data CD even if you feel that all the S amp P 500 stocks are in your database With TradingExpert Pro you can delete all the stocks in the S amp P 500 structure and then install all the stocks in the structure from the Data CD To delete the stocks in the S amp P 500 list use the Advanced Ticker Delete function found in the Data Manager application and delete all the stocks in the S amp P 500 list see page 64 in your TradingExpert Pro manual Next you will want to install the S amp P 500 stocks from the AIQ Data CD In Data Manager use the Ticker Import Utility and install all the stocks in S amp P 500 list see page 42 in the TradingExpert Pro manual Each time there is anew AIQ market timing buy signal I delete and reinstall the stocks from the historical Data CD just to make sure the data is accurate Users can receive quarterly CD updates for 99 per year This process may seem excessive but it helps to insure that the Weighted Action List signals are accurate When real money is on the line an extra hour of work on days that AIQ registers a market tim
14. ing buy signal is a small price to pay E David Vomund publishes VIS Alert aweekly investment newsletter Fora sample copy go to www visalert com or call 702 831 1544 Financial Banks Major group Computer Software group calEquipment group Changes to S amp P 500 Index and Industry Groups The following are recent changes to the Standard amp Poor s 500 structure 1 FSR Firstar Corp replaces AN Amoco Inc FSR added to the 2 CCL Carnival Corp replaces GRN General Re CCL added to the Leisure Lodging Hotel group 3 CPWR Compuware Corp replaces SAI SunAmerica CPWR added to Computer Software group 4 AOL America Online replaces Z Venator Group AOL added to 5 SLR Solectron Inc replaces PZL Penzoil SLR added to Electri 6 JANUARY 1999 AIQ Opening Bell EDS MODELS DAVID VOMUND Opening Bell we created a highly effective Expert Design Studio EDS model for shorting Standard amp Poor s 500 stocks We received a lot of positive feedback on this model and we expect that many AIQ users will use itin the year tocome The analysis in this follow up article should help people to further understand how the model works I nthe December 1998 issue of the To quickly review the model there are only three simple criteria that must be met before a stock can be selected as a short candidate First the stock must move from below to above its Lo
15. linchin paren oupietsy ou iy h d z it for a while become pion T ee U discouraged and then ikei Paul A M gso feel like it You ve gotto au erriman abandon your plan in follow your discipline favor of something you find more palatable If you let your feelings guide you you re likely to bail out of a timing strategy at the very worst time when your investments are down Can you even when you re sure it s a mistake You ve got to do it even when you don t understand why your timing system is telling you to act Nike had it right Just s it re it s so much easier to say adopt a strategy and stick to it for the thanito do long term Can you follow the system Timing is not for sissies Sometimes regardless of how you feel aboutit and Market Timing continued on page 2 AIQ Opening Bell MARKET TIMING continued regardless of what s going on around you Can you resist the temptations to act onimpulse Can you ignore the many hot tips you may come upon every week 2 Are you independent and self assured enough to resist the temptation to constantly look over your shoulder to see how somebody else is doing There aren t many certainties about investing but here s something I can guarantee No matter how your investments are doing there will always be somebody who has recently outperformed you and seems to have struck it rich Nervous investors constantly look over their shoulders hoping to fin
16. o be right twice when you buy and when you sell in con trast to a buy and hold approach in which you have to be right only once when you buy Most of the time you can count on your system to get you into or out of the market too soon or too late to catch the tops and bottoms If getting out at the very top and getting back in at the very bottom are your goals timing is guaranteed to let you down And if that failure will drive you nuts think twice before embarking ona timing strategy because what you will perceive as timing mistakes will erode or destroy your willingness to follow the disci pline Your goal should not be to achieve perfection It should be to put the probabilities on your side Anda good timing strategy will do that 5 Can you ignore the mass media Almost unanimously the popular press seems to have a blind spot when it comes to timing They say timers are misguided and this view is widely echoed by the mutual fund and brokerage industries Can you pull out of the market when everybody else is either getting in or already making money Can you get back in when your friends colleagues the media and possibly your own gut are telling you it s a dumb idea 6 Are you decisive Some people stew and fret and delay making decisions even when they are convinced they should be doing something They are unlikely to be successful timers Successful timing requires quick action to move into and
17. om the Weighted Action List using the opening price the day after the market timing signal The return for 1998 is an amazing 76 78 including commissions Since the portfolio is limited to S amp P 500 stocks the high return is not a result of internet speculation This demon strates that good stock selection is much more important than good market timing No Confirmation Table 1 ER Buy ER Sell S amp P 500 S amp P 500 S amp P 500 Date Date Buy Price Sell Price Change 12 31 97 01 08 98 970 42 956 04 1 48 01 12 98 04 17 98 939 20 1122 72 19 54 06 02 98 06 10 98 1093 02 1112 28 1 76 06 16 98 07 21 98 1087 58 1165 06 7 12 07 29 98 09 03 98 1125 20 982 26 12 70 09 08 98 10 05 98 1023 46 988 56 3 41 10 08 98 12 03 98 959 44 1150 14 19 88 12 29 98 12 31 98 1241 80 1229 40 1 00 1998 Return 28 47 A yearly breakdown of this strategy is as follows 1992 1993 1994 1995 1996 1997 1998 Average 13 53 17 26 35 75 18 90 27 88 37 73 76 78 32 55 Table 2 E Phase Confirmation Buy Sell S amp P 500 S amp P 500 S amp P 500 Date Date Buy Price Sell Price Change 12 31 97 01 08 98 970 42 956 04 1 48 01 14 98 04 20 98 957 94 1123 64 17 30 06 05 98 06 10 98 1113 86 1112 28 0 14 06 17 98 07 21 98 1107 10 1165 06 5 24 08 17 98 09 03 98 1083 66 982 26 9 36 09 08 98 10 05 98 1023 46 988 56 3 41 10 09 98 12 03 98 984 32 1150 14 16 85 12 29 98 12 31 98 1241 80 1229 40 1 00 19
18. s was the strategy s bestyear The following is a review of this mechanical strategy We ran a Weighted Action List reportevery time there was a market timing buy signal an Expert Rating of 95 or greater Only the first signal in a string of buy signals was used and no confirmation was applied The top five stocks that appeared on the Weighted Action List were purchased and held until a market sell signal was registered at which time all positions were moved to cash Only stocks over 10 were purchased and the Expert Rating buy signals on the stocks had to be 95 or greater To obtain percentage return figures we made the following 4 JANUARY 1999 AIQ Opening Bell YEAR END ANALYSIS continued assumptions e Allprofits losses were reinvested in the next block of trading with each of the five stocks receiving an equal amount of capital The buy and sell points of the stocks were the opening price the day after the market Expert Rating e Commissions were factored in using a flat rate of 20 per trade Slippage dividends and money market interest received were not factored in The trade by trade details are found in Table 3 The market timing buy and sell signal dates are listed in the first two columns The third column lists the percentage change in the S amp P 500 index while the fourth column shows the results of trading the five stocks listed in the far right column top five stocks fr
19. ucture from several years ago should reinstall the structure from the current program disk To do this first go to the Data Manager application and make the S amp P 500 struc ture the active structure Then select List and Delete After deleting the old structure you can then install 1998 Results Weighted Action List Table 3 ER Buy ERSell S amp P500 Stocks Portfolio Holdings Date Date Change Change Stock Symbols 12 31 97 01 08 98 1 48 4 93 EMC UIS ADSK BAY DELL 01 12 98 04 17 98 19 54 31 30 DH FJ DELL X ABT 06 02 98 06 10 98 1 76 5 83 LEH DGN LUV SFA KBH 06 16 98 07 21 98 7 12 12 15 MG PFE TWX MCIC ADSK 07 29 98 09 03 98 12 70 8 19 PDG APC PPW MIR BEL 09 08 98 10 05 98 3 41 1 97 AAPL UMG UIS CMCSK LUV 10 08 98 12 03 98 19 88 20 24 LEH BSX BSC NMK MCD 12 29 98 12 31 98 1 00 0 68 LUV AGN DH CCE TMK 1998 Return 76 78 the newer structure from the TradingExpert ProCD You can do this by performing a Custom installation and then installing only the S amp P 500 files see installation instructions in your New Users Guide if youneed help By doing the above you will get a recent structure But you will also want to make the changes to the S amp P 500 structure as they occur To geta list of the changes in the structure or a list of the current S amp P 500 stocks visit Standard amp Poor s web page at www spglobal com The News section will list the changes Starting with this issue we w
20. wer ESA Second the stock s Directional Movement indicator must be less than 25 Third the stock s Volume Accumulation Percent indicator must be less than 20 The actual model can be down loaded off AIQ s web page at www aig com The EDS file can be found under the Educational Products folder When we introduced the model in December we ran the test using a fixed 10 day holding period The results of the test are very similar if you use one of AIQ s traditional stop techniques In Figure 2 we are dis playing the testing results of shorting stocks using a sell strategy of 95 principal protect and 90 profit protect after a gain of 5 For those who wanta longer holding period try a 90 principal protect and 90 of profit after a 10 gain Over the three year testing period there were 184 trades which equates We expect many AIQ users will use this model in the year to come This analysis should help people to further understand how the model works FoLLow Up ANALYSIS ON OUR EDS SHORT MODEL By David Vomund would have shorted the S amp P 500 index instead of shorting the stocks the average short trade would have lost 0 3 This leads to the question can this model be used as a market timing model That is when a lot of stocks appear on the EDS report ona given day does that mean the market will move lower to 61 trades per year Some people expressed an interest for more trades I
21. would have seen a 28 5 return in 1998 The buy and hold return was 26 7 The indi vidual trades are shown in Table 1 Market Timing With Confirma tion In past articles we have reported that applying a confirmation tech nique typically lowers both risk and return That was the case in 1998 Since the AIQ market timing model was deadly accurate in the first half of the year applying a Phase confirma tion meant that you acted on the signals a few days after they were registered The return from each trade was lowered by about 2 as a result of the confirmation delay The benefit of using confirmation came during the late summer selloff The July 29 sell signal was registered in a falling market It wasn t until August 17 that the market rallied enough to bring an increase to the Phase indicator When the buy signal came at the October 8 low it wasn t immediately confirmed so once again some of the profit was lost In the end the market timing model gained 23 using Phase confirmation in 1998 The individual trades are shown in Table 2 AIQ s Mechanical Trading Portfolio We now will review our mechanical model that uses both Expert Ratings on the overall market and on indi vidual stocks This strategy which combines the market timing Expert Ratings with the top stocks on the Weighted Action List report was introduced in the May 1992 Opening Bell and we ve followed it each year after that Thi
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