Tuesday, May 13, 2014

Momentum Strategies Report performance

I make it a point to record the performance of the Momentum Strategies Report on a weekly basis.  I believe this is important for providing subscribers (and potential subscribers) with an accurate representation of how the newsletter has performed in the recent past.  Instead of posting the performance in the form of percentage gains/losses (as most newsletter do), the cumulative results are presented in the form of a simple line graph.  The old saying “charts don’t lie” applies in this case.

Below is the performance graph of the last 16 months.  It shows the cumulative performance of the stock and ETF recommendations made in the “Trading Positions” section of the Momentum Strategies Report.

The above graph is an unvarnished reflection of how the recommendations made in MSR have performed since January 2013.  The trend is up, as you can see, yet the performance has admittedly lagged the broad market S&P somewhat.  This is typical of any technically-based trading strategy since it’s difficult to exactly match, or exceed, the performance of the broad market in a bull market due to the use of stop losses during market downturns.  In my experience it’s always best to err on the side of caution since you never know just how far down a market pullback will go before reversing.  The downside to this conservative approach is that the market tends to “whipsaw” a trading system that relies on a stop-loss mechanism in a bull market.

The upside to using a technical trading discipline is that your drawdown and relative volatility will be much lower than that of the broad market.  And in bear markets a technical trading system such as ours will invariably outperform the broad market, even without resorting to short sales.

Providing even more perspective on the long-term use of a conservative technical trading system, the following chart shows the long-term performance of the individual stock and ETF recommendations made in the MSR newsletter.  Keep in mind that we typically employ tight stop losses and only rarely recommend short sales or inverse (bearish) ETF trades.  The following graph therefore mainly represents more than seven years of long-cash positions.

One thing becomes quickly apparent upon a cursory view of the above graph, viz. the lack of volatility from 2009 to the present.  Back in 2007 and the years preceding it, I embraced a much more aggressive trading philosophy and used much looser stop losses when making trading recommendations.  This increased our upside (as in 2007) but also increased our downside during the volatile period immediately prior to the 2008 credit crisis.  This taught me the valuable lesson of embracing tighter standards when screening for potential stocks/ETFs and the use of a much more conservative stop loss system.  It also instilled in me the importance of minimizing the number of trading recommendations at any given time due to the “multiplier effect” during volatile periods (which is a double-edged sword).

In summary, the trading system employed in the MSR newsletter is one of the most conservative, yet consistently reliable systems you will find in any stock market newsletter when it comes to delivering long-term gains without exposure to extreme volatility.  It’s based on the principle of making market commitments only when the odds are decisively in your favor.  Otherwise, a cash position is warranted in the name of capital preservation – the first commandment of the financial markets.