The Case for Brazil & How to Trade It
--Zero Losses--
THE IMPORTANCE OF TIMING--Brazil (EWZ) +1,080% vs 560%
7.11 years June 21, 2002--July 31, 2009
Worldwide ETFs Portfolio--Hypothetical
The Signature-Rank MethodSM
See Comments below
(Definitions and System Rules at the bottom of the page)
Chart Clarification. The actual portfolio signature-rank number is 9.5. The equivalent
number
reported in the chart above is an inverted value for visual positioning.
PREAMBLE
For 20 years, my company, of which I was the head, engaged in the complicated and subjective practice of 'fundamental' analyis in determining what stocks to buy and sell for our clients, nearly all of whom were trustees of public and private pension funds, endowments, and other instutional pools of assets.
That was our fixed policy. As you know, it comprises studying and weighing a logical and reasonable multiplicity of factors such as, what does a company make or do? Who is its competition, its markets, its managament's experience, its productivity, extent of government regulation? etc. None could fault that approach. It's what most prudent investment managers do. Further, it is commanded by federal law under Section 404(a)(1)(B) of the Employee Retirement Income Security Act of 1974. You may be breaking the law if you don't do it.
But there is another school of analysis and action which totally ignores and exludes fundamentals, believing as it does that price is the only thing that matters. Present price contains all that is known or knowable about a stock or fund (or anything that trades in an active, public market, for that matter). Therefore, track, analyze, and act on the behavior of prices to the exclusion of all else. You may belong to this school--as I do, and have, for nearly a score of years now.
All this is an apologia for my brief excursion in the next paragraph into the remote, unused (for me) terrain of fundamentals regarding the subject fund of today's essay, Brazil.
Two years ago, Brazil's ETF was the object of a somewhat similar article (here) and a later article (here) wherein I alledged that my selection of Brazil was arbitrary--and it was. Today, curious, I asked myself what were the quantitive reasons behind its steadily exuberant price performance and found myself sitting fascinated on the terrace of fundamentals gazing at countries' GDPs massed on the World's horizons.
Brazil is ranked 8th largest of all the economies in the world. There are between 180 and 190 of them, depending on whose list you use. Its real GDP growth last year was 5.1% vs World 2.5%. These data are attractive fundamentals and help 'explain' its price-behavior strength. The other side of the coin is: the price knows all that is knowable about Brazil and moves accordingly, based on the facts I have just cited, plus others. There is an old saying, Follow the money. Its companion is, Follow the prices. That's what we do.
PRICE BEHAVIOR
If you were invested in Brazil during the notorious six months of May tthrough November last year, you suffered the horrendous drawdown of -70% below the peak value of your investment. If you did not sell out on the way down or at the bottom, you would still show a drawdown of -42% today, fourteen months after the all-time peak in price.
Technicals trump fundamentals always. But, as I have often suggested, it depends on your personality. Still, the case for timing in this instance today is strong, and easy, and simple, while requiring minimal, infrequent action--average: one trade per year; total cumulative gain +1,080% vs -0.2% for the S&P500, a compound gain of +41.5% per year for the system.
In the seven years of this study, there have been no realized losses. Every exit level occurs at a point higher than entry.
You can see the pentup energy episodes in the chart, building up momentum for each price launch to higher prices.
TABLE OF RESULTS
Brazil (EWZ)--Signature-Rank MethodSM
Seven Years 2002-2009--Hypothetical
|
Dates |
|
Prices |
|
wks |
|
cum |
|
|
Entry |
Exit |
Entry |
Exit |
held |
%P/L |
tot % |
SP500 |
|
6/21/2002 |
|
Cash |
|
|
|
100 |
989 |
|
1/24/2003 |
3/21/2003 |
7 |
8 |
8 |
14.1 |
114 |
896 |
|
3/28/2003 |
4/23/2004 |
8 |
16 |
56 |
88.7 |
215 |
1141 |
|
8/13/2004 |
6/30/2006 |
16 |
39 |
98 |
150.0 |
538 |
1270 |
|
11/24/2006 |
8/8/2008 |
44 |
75 |
89 |
68.8 |
909 |
1296 |
|
4/3/2009 |
4/10/2009 |
43 |
45 |
1 |
4.1 |
946 |
857 |
|
4/17/2009 |
4/24/2009 |
44 |
44 |
1 |
1.4 |
959 |
866 |
|
5/1/2009 |
7/31/2009 |
47 |
58 |
13 |
23.1 |
1180 |
987 |
Compound average return 41.5% per year
Position still open as of 7/31/2009
Avergage holding period 8 months
Average profit per trade 50%
Losses none
Note
It has long been a stated goal of mine to devise a system that would produce 40% per year or more and limit the worse drawdown to 20% or less. This is the first time I have broken that annual profit barrier. The astonishing thing, to me at least, is that there have been no losses. That renders null the usefulness of the drawdown concept. If a system exits with a profit every time, drawdowns just don't matter.
It tickles the imagination to think of a small handful of country funds in the class of EWZ, which would produce returns like these and do so loss-free.
POSTAMBLE
The original holy grail story in history may or may not be true. It cannot be proven one way or the other.
In the worldwide trading community, the 'holy grail' is the perfect trading system. A perfect trading system is one that makes money on every trade and never loses. Most people, including me, believe it does not exist. But if it does, and it were yours, you would keep it silently private, would you not? Then, as far as all others are concerned, it would continue to be non-existent. Yet . . .
I blush to confess the thought crossed my mind, could this be it, my simple, signature-ranking systemSM elevated to the status of grail, the first such known discovery and disclosure in all of trading history?
Impossible. For the simple reason that all things fail eventually, especially trading systems. And yet . . .
So far, so good--over seven years (a mere pittance of time) no loss appears. In ten years, I would start to believe. In 15, my belief would grow. In 20, more so, etc., from here to eternity. In the future, continued grailship will depend on one factor and one factor only: the perpetual absence of loss. And that will be a function likewise of one characteristic only: of whether EWZ can generate enough energy of upward price mometurm coming out of buy signals to carry into profits before next sell signals occur.
Even the double whipsaw of multiple bars--showing confusion--in April of this year, was coming out of a preliminary rocket shoot of +46% over 19 weeks previous, from bear low to launch point. That's quite similar in magnitude or duration or both to previous launches. Looking at the precedents, the current launch looks like just one more in series, with a positive resolution ahead. (Caution. I remind myself we do not forecast here. Stark verboten.)
The Psychology of Time. The human animal, like the rest, craves action. Horses and dogs run. Fish swim. Birds fly. Man drives fast cars, rides rockets, speeds through the seas. With this trading method you can go for almost two-thirds of a year at a time without making a single trade. Boring. We can pick arbitrary, reasonable time targets, as we did in the first Brazil study (here), but look at the magnitude of profits we leave behind. Would you rather do a trade a year over seven years or one trade a month every year and make more money but have no losses the first way?
Drawdowns are immaterial if you act only on signals since there are no losses.
For those among us, who have missed a buy signal and are impatient to wait for the next one. (The longest wait-time between entry signals has been two years, three months--too long for anyone to wait.) A safeguard to prevent buying at the absolute peak of a price move just before a drawdown is to divide the size of your intended total final position into three or four parts and space each entry portion several weeks apart, separately, one portion at a time. Your average entry price may be higher or lower, but your loss will be less if a sell signal emerages before you complete your full position. (If you are paying too much in commissions, multiple, separate buys for one position may no be feasible.) Another, possibly better, alternative to control the risk would be to use long-term call options.
Next. A future Systems Tips letter will study the results of the signature-rank methodSM applied to the world's strongest GDP engines. Beyond that, if any or all of them match or exceed EWZ's performance here, a possible system expansion will be in the wind.
Note. The prices in the table are Friday closes. Actual transactions would be recorded as opening prices the next trading day the market opens. They may be lower, higher, or unchanged, with equal probability, from the previous close, affecting reported results for better or worse. Results are before expenses, dividends, or interest from cash equivalents, if any. The system held cash 28% of the time, earning additional profits at the money-market equivalent rate. The effect of that would raise the final system value number on the chart and in the cum tot% column in the table from 1180 to 1234, and the compound rate in the table footnote from 41.5% to 42.4% per year.
How rankings are determined. This note, first posted in 2005, may help explain how the rankings are derived.
Definitions and System Rules. The rank of a stock in a portfolio is the numerical standing of performance (profits over time--numbered from 1 to n, 1=best) of the stock relative to all the other stocks in the portfolio. The 'signature-rank' is that fixed-rank level of each stock as its own benchmark, above which it will give its own best cumulative performance over time (it's equity curve). It is found by testing each numerical level one at a time, e.g., 1, then 2, etc. Logic would expect a signature-rankSM to be found somewhere not far from the median rank of all the stocks in the portfolio. There are 23 stocks (ETFs) in the Worldwide ETFs Portfolio. The median rank is 11.5. I found EWZ's signature-rankSM empirically to be 9.5. Rules: Any weekly rank above the signature-rankSM, buy and hold the ETF. Any weekly rank below it, sell and go to cash. (The current rank is easily seen in the weekly Rankings table--sample here. It is, as of today, No. 1).
Posted
8/16/2009 6:20 p.m. EDT
|
|
Back
| Subscribe
|