2005 In My Rear View Mirror - Are You Listening?

By: Greg Miller | Mon, Jan 2, 2006
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It has been a good year for us. Others have not been so fortunate.

The Market Listener Trader finished the year with a 40.9% gain using our "listening" approach. This is a very respectable gain considering the fact that the other major indices were very flat on the year.

INDU

SPX

OEX

NDX

COMP

-0.6%

3.0%

-0.7%

1.5%

1.4%

For me, it has been another learning year. We have been much more disciplined in our trading and have seen our trend-following strategy and cash stops deliver very good results in a minimally trending market. Our cash stops have kept us out of trouble on the short side and our persistence when on buy signals has been a winning combination.

Trade Statistics

I am very pleased with our Win/Loss Ratio of 2.0, but the reason we did so well in 2005 is that we cut our losses short and let our winners run. Our average gain on a winning trade was 5.36%. Our average loss on a losing trade was only (-1.74%).

2005 Only

Winning Trades=

8

 

Losing Trades=

4

 

Win/Loss Ratio=

2

 

Best Win Trade=

10.0%

 

Worst Loss Trade=

-2.8%

 

Average Gain per Trade=

3.41%

Average Gain per Winning Trade=

5.36%

Average Loss per Losing Trade=

-1.74%

The above stats are based on trading using the Dynamic and Ultra funds leverage.

Volatility was fairly low as measured by our calculated stop levels (using Average True Range + a factor) which were generally in the range of 30-40 NDX points. The average for the year was 38. Early in the year we had some readings in the high 60's and late in the year, some in the low 20's. This measure of volatility gives us some indication of how closely we can set our stops without getting knocked out of the action prematurely. Stops in the 60 range would put us at about a 4% loss potential based on a round number NDX price of 1500 (8% loss leveraged).

Forecast for 2006 - Yah Right, Only God Knows!

You should know me well enough by now to know that I avoid prediction at all costs. There are some things to consider though, that might impact our adaptive and stop level strategies and help us to prepare us for the trading year ahead.

Higher Volatility - Wider Stops
The bad news is that we are likely to see more volatility in 2006 than in 2005. The bulls and bears are likely to have more intensity in defending their positions. Selling will be met with buy programs and short covering and this should cause our stop calculations to be much larger than even the 60-68 numbers seen in early 2005. The impact on our trading will be that we will have to set stops much farther away from the current NDX price to avoid being whip-sawed. Once again this year we will set Sell stops closer than Buy stops.

Cycles Provide Opportunity
It's likely that the market mavens know that we are coming to the end of the business cycle, the consumer cycle and the war cycle,.... ALL AT THE SAME TIME!!! This means that market index prices are likely to be lower for the year with several peaks and troughs in between as hope alternately floats and falters. This kind of market is what we as trend followers thrive on. We love the peaks and valleys as long as they come in gentle swings of 2-3 months each. We expect 2006 to be a good year for our trading accounts.

Change of Heart in January 2006
It is likely that the entire character of the market will change in early 2006 as more money managers change tactics and move more toward picking stocks instead of indexing while looking for incremental gains. Some sectors could thrive, while others might wilt. This could have a slightly detrimental effect on day-trading and on our Market Listener strategies which are linked to an index basket of stocks. The index baskets may increasingly fall out of favor, leaving the indexes to "flounder" around the 200 day moving average as the winners and losers tend to average each other.

Avian Flu Mutation
The World Health Organization is currently on Phase 3 Alert, just one step below Phase 4 in which they would recognize "evidence of increased human-to-human transmission". The potential for a pandemic is apparently very real and could have the greatest impact on our lives and the markets since the great depression.

The Options Explosion
It's a no-brainer that during times of minimal stock gains, options volume will grow tremendously as traders look for more leverage. Put selling may level off as traders go with the leverage on equity stock call options in sectors that are out-performing. The popularity of complex options strategies will likely proliferate and covered call strategies will be a good bet.

Bonds, Gold and the Crashing US Dollar
I don't have much input for you on bonds, gold or the dollar index. Robert McHugh recently opined that the Fed had decided to hide the M3 money supply numbers because they know in advance that their next monetary tactic will be to depress the long end of the yield curve (yes, accentuating the curve inversion by buying bonds) in an attempt to keep mortgage rates low and the housing mortgage market from collapsing. Interesting thought.

Other Trends That Are "Sure" Things

Stick With the Listening Approach
As I read various financial newsletters and articles posted on the internet, I find that many trading consultants seem to want to produce a plethora of charts, data, macro/mini/micro wave numbering, colored bars, arrows and all sorts of graphics. This wild attempt to find the holy grail of trading systems is very tempting. Most any system will work for a time, but when discontinuities occur, and they will, most systems fall apart. My reading has convinced me that the best approach is to ignore the hidden black box systems and authors with 40 page reports and keep it simple. Watch the price trends. Look for extremes in sentiment and ratios. And employ close stops to tell you when you are flat wrong.

Back To the Real World - Current Market Conditions

{Market Listener Subscribers get current signals, stops and commentary on market conditions. The Member's page of the website is updated almost daily and full weekly reports are available for a discounted price of $199.00 per year.}

From the Point & Figure chart below the minimum downside target is 1600 on NDX or another 3% lower.


NDX Point & Figure Chart

If the selling momentum picks up, we could re-visit the October lows of 1515. I suspect we could get to that 1515 mark, but that might take several weeks and would be punctuated by sharp multi-day rallies

Also note that the NDX has just broken below the 50 day moving average. The 200 DMA is at 1563 where we could find considerable support. The 50 DMA is still quite vertical and would have to roll over and cross the 200 DMA before we can even begin thinking about a growling bear market.


14 Month NDX Trend ZigZag

Moving On to Sentiment

Before we look at the VIX, I would just like to remind you that we have posted the SPX/VIX ratio chart on our website Member's page. There you can see that it has come off of its recent peak and needs to drift back down to its 80 day EMA to find support.


2 Year Weekly VIX

The VIX has just bounced off of an important low and the 8 week EMA has only just ticked up in the last week. This chart is whispering,... or should I say whistling in the dark that all is well with the equity markets and there is only a wisp of uncertainty. Given the fact that the VIX has bounced off of double-bottom lows over the last 5 months, this chart is telling us that there is a LONG way to go, in terms of VIX points, before the options players get too worried about future market volatility.

The next chart is a little different look at the CBOE put/call ratio. In this chart we have used the "Equity" put/call ratio, symbol $CPCE in StockCharts.com and inverted it by using the $ONE:$CPCE inversion symbol. Normally we use the "Total" CBOE put/call ratio which includes equities, ETF's and indexes. CPCE only includes options on equities and ETF's (which trade like stocks).

By inverting the put/call ratio we can view the chart better as it correlates to buy and sell signals in the markets. Extreme highs become sell alerts and extreme lows become buy alerts.


18 Month Weekly CBOE Equity "Call.Put" Ratio - Inverted Put/Call

So what does the above chart tell us? It is saying that the equity options traders are still very bullish and they do not see any fear or price uncertainty in their pricing of equity options. Thus we may have a divergence of opinion between the CPCE and market price. But we must remind ourselves that the CPCE covers a broad range of stocks while the recent downtrend in the Nasdaq over the last 4 weeks has not be fully reflected yet in the S&P 500.

To learn more about who is leading whom, we simply pull out our NDX/SPX relative strength ratio chart.

Nasdaq Relative Strength/Weakness

From the next chart we can see that the recent Nasdaq tech leadership may have come to an end and may be leading us lower. Remember that the last trend leg can evaporate should this ratio once again turn higher


3 Year Weekly Data - NDX/SPX Ratio - 5% ZigZag

Our Stop Level
{For Subscribers Only}

Where do we go from here and how to Listen for the Next Signal?

We are preparing ourselves for some irrationality as the markets open on Tuesday. The momentum boys did not get their post-Christmas rally and they are not happy about it. They will do everything that they can to get the shorts to cover. The wild card is the institutional buyer. They are the 800 pound gorilla in the room and the markets will move on their buy or sell commands.

Watch the VIX and CPC put/call ratios. If these start moving to new lows as prices rise, then the bull could be back in town.

Watch the Member's Home page on our website for alerts if the market is acting crazy. This is the quickest way for us to get information to you.

The Markets Are Whispering - Are You Listening?

Market Listener Trader Signals & Results

CURRENT RESULTS
40.8% 20.3% 40.9%
YTD 6 Month 12 Month

Signal
Date
Slo.
Stoch.

(fast)
StochRSI
(fast)
CCI
(fast)
MACD
(Variable)
Trigger Inputs
Proprietary
or Other
ML Signal 3
--- --- Recent Signals Not Shown
Nov 07, 2005 Buy Buy Buy Buy   Buy
Oct 31, 2005 Buy Buy Buy Sell Cash Stop Cash
Oct 28, 2005 Sell Sell - Sell   Sell
Oct 19, 2005 Sell Buy - Sell Cash Stop Cash
Oct 05, 2005 Sell Sell Sell Sell   Sell (100%)
Sep 30, 2005 Sell Buy - Sell   Sell (50%)
Sep 15, 2005 Sell Sell - Buy   Sell
Sep 14, 2005 Sell Sell - Buy Cash Stop Cash
Sep 07, 2005 Buy Buy Sell Buy (mod.)   Buy
Sep 06, 2005 Buy Buy Sell Neutral Cash Stop Cash
Aug 08, 2005 Buy- Buy Buy Buy   Sell
Aug 04, 2005 Buy Buy Buy Buy Cash Stop Cash
July 08, 2005 Sell Buy Buy Buy   Buy
June 24, 2005 Sell Sell Sell Buy- Cash Stop Cash
May 13, 2005 Buy Buy Buy Sell++   Buy
May 06, 2005 Buy Buy Buy Sell+ Cash Stop Cash
Feb 11, 2005 Sell Sell Sell Sell   Sell
Feb 04, 2005 Sell Cash Sell Sell Cash Stop Cash
Jan 14, 2005 Sell Sell Sell Buy   Sell
Dec 31, 2004 Buy Buy Buy Sell Proprietary Cash
Oct 15, 2004 Buy Buy Sell Buy   Buy
Oct 08, 2004 Buy Buy Buy Buy Cash Stop Cash
Oct 01, 2004 Buy Buy Buy Buy   Buy
Sep 24, 2004 Buy Buy Buy Buy Cash Stop Cash
Aug 20, 2004 Sell Buy Buy Sell+   Buy
Jul 16, 2004 Sell Sell Sell Sell   Sell
³ This Market Listener signal is our base signal. The MACD is our primary weekly input, but can be "out-voted" by the other faster or proprietary indicators on a daily basis when we need to go to cash to implement our Fault Tolerant Cash Safety Stop (FTCSS). You should not base your trading on this or any other single indicator. Our trend following system can dynamically adjust parameters based on current market conditions including volume and sentiment factors. We also employ proprietary indicators which can override the current model.


Mutual Fund Restricted Trader (MFRT)

Mutual Fund traders with trading restrictions (timing or significant fees) are currently on a CASH signal.

MFRT trades are more conservative since these traders are limited by trading frequency restrictions and fees. MFRT trades are included in the Market Listener Subscription.

NOTE: The Market Listener Trading Signal is different and much quicker than this Mutual Fund Restricted Trader (MFRT) signal.

We want to wish you all a very prosperous New Year.

We very much appreciate our subscribers and readers and look forward to our interaction together as we learn, listen, comprehend and enjoy the benefits of wise trading in 2006.

- Greg


Listen To What He Says

NAB Psalm 100:1-5 {A Psalm for Thanksgiving.} Shout joyfully to the LORD, all the earth. Serve the LORD with gladness; Come before Him with joyful singing. Know that the LORD Himself is God; It is He who has made us, and not we ourselves; We are His people and the sheep of His pasture.

Enter His gates with thanksgiving And His courts with praise. Give thanks to Him, bless His name. For the LORD is good; His loving-kindness is everlasting And His faithfulness to all generations.

I am working on the art of listening and hope that you are also.

Best Profits,


 

Greg Miller

Author: Greg Miller

Gregory W. Miller, P.E.
The Market Listener
An Educational Newsletter for Stock Market Trend Timers

Paid Subscribers receive mid-week alerts to market changes that impact our system. The alerts advise of changes in stop level or signal changes prior to the Friday close of trading.

The Market Listener Trading System - My adaptive trend following trading system is the result of years of mistakes. I always seemed to be zigging when I should be zagging. My investing was based too much on emotion and inputs from so many varied newsletters and methods. After what has been literally years of personal research into cycles, Elliott Waves, artificial intelligence and many other systems, I have learned that my own trading style is best handled by avoiding the "art" of prediction at all costs!!! When I looked at moving averages for indication of trend direction, it seemed that they too were always 180 degrees out of phase with what I should have done. My conclusion, after many losses and much frustration, is that I needed to keep it very simple and let the market tell me what it wanted to do. In particular, I wanted to follow the trend, which is your friend, until the market whispered, or shouted to me that it wanted to change directions. And then, I found that Stochastics and Rate of Change indicators help me go to cash until the trend reverses or continues. Thats how my trend following system & its cash management component developed. I trade Rydex Venture and Velocity funds by which I can go short (x2) or long (x2) the NDX (NASDAQ 100 Index). I hope my newsletter and its insights can give you an education on alternative investment strategies. You might find your own technique or modify mine.

Links:
Rydex Funds: www.RydexFunds.com
Stock Charts: www.StockCharts.com

About the Author: Gregory Miller is a registered Professional Engineer (PE) in the State of Texas. He has been involved in electrical engineering and projects in the U.S. and some far-flung regions of the world. Greg has studied the markets for decades and enjoys applying his analytical abilities and computer number crunching to the science of investing.

Copyright © 2005-2006 All Rights Reserved by Gregory W. Miller

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