Message From TraderJanie
I’m sure you’ve noticed QiT has introduced a new S&P 500 portfolio and in today’s newsletter I would like to delve into this latest addition to QiT’s cache of portfolios.
Then I’ll return to a subject we’ve touched on previously but I think needs to be discussed again. That is what you should do if you have an IRA and the retirement portfolios are all in cash. I believe it’s extremely important to understand trading in a bear market is quite a bit different than trading in a bull, in particular if you trade an IRA type account.
So grab yourself a cup of java and let’s get to it.
The main reason QiT typically trades Russell 2000 stocks is grounded in the fact we like the volatility those stocks undergo. And it follows that we like the volatility because it gives us the biggest bang for our buck (the best profit to risk ratio). The downside is typically higher volatility equates to lower volume. This, in turn means QiT has to be very careful that its membership does not trade enough volume to influence price, an item we’ve discussed ad nauseam and something I will not get into here.
QiT members have asked what do we do when our accounts grow and we can no longer trade the lower volume portfolios. Higher volume stocks characteristically will have less volatility thus lower Compounded Annual Return (CAR), since it takes a lot more money to throw them around but we needed to take a look and see what we could come up with. Turns out we were able to put together an awesome strategy that accommodates larger accounts and still has a reasonable CAR, the most valuable aspect of the new S&P 500 portfolio.
What exactly goes into the S&P 500 portfolio?
- Trades only S&P 500 stocks
- Goes long and short (shorts do the heavy lifting in bear markets)
- Is a momentum strategy
- Maximum number of positions is 8
- Uses no volume filter
- Uses a Limit order to enter (all QiT portfolios use a Limit Order to enter)
- Uses an Exit at Market for we don’t need to worry about affecting the Open Cross
- Has never spent much time below its circuit breaker.
Here is the truly awesome equity chart for the new Conservative Portfolio.
Here are the stats
Let me know what you think.
What should I do if I have an IRA and the Retirement Portfolios are in cash?
We’ve raised this subject many times in past newsletters but I want to answer this question a little differently today. First of all, the succinct answer is, “When trading small cap stocks, you have to have an environment that is conducive to going long only and if you don’t you go to cash.” There is just no other way to put it.
On the other hand, you’ve probably seen from the backtests that QiT’s portfolios have done well in bear markets but just looking at the numbers will not tell you the whole story. In order to get good returns in a retirement account in a bear market, you have to live through some pretty brutal periods. If you don’t want to trade through those stretches, then you have to step away.
Let me explain. Here is a chart of the MR Retirement from 2006 to 2010.
MR Retirement fell under its circuit breaker November 12, 2007 and never clamored back above until July 18, 2008, a full 9 months with no trades. Looking at that chart I’m sure you are all asking wouldn’t it have been nice to have taken advantage of the rally off the March 2008 bottom. Problem here is when the March 2008 bottom was the hard right edge you had no idea it was a bottom and to have taken advantage of the rally, you would have had to have endured the entire stomach wrenching drop from November 2007 to that bottom.
How many could have survived that stretch?
Let’s take a look at that part of the chart but with numbers. Here is the monthly profit chart for this portfolio.
If you hadn’t stepped aside in early November 2007, you suffered the entire -11.50% decline that month, then you had to stomach the -22.70% annihilation in January and, to top it off, another -11.7% was obliterated from your account in March. Of course you took advantage of the 18.9% gain in May but I’ll go out on a limb here and bet you had thrown your computer out the window by that time.
I went to see The Revenant last weekend and during the first ½ hour there was a riveting and extremely graphic scene of a bear attacking, Hugh Glass (played by Leonardo DiCaprio). The bear had Glass in her mouth (it was a mama bear) and she was shaking him from side to side, clawing at him taking chunks off his hide, in a truly brutal and (spoiler and graphic language alert) viscous attack.
When she was done, Glass was almost dead. If you traded through that timeframe, that is how you would have felt, almost dead.
This conversation between DiCaprio and the Revenant director sums it up very well. Leo recalled his confusion upon reading the bear attack in the script. “You read the screenplay and it’s like, Hugh Glass fights the bear,” says Leo. “So what do I do? Do I give him a right hook? How do I fight a bear?”
His director responded, “You don’t. It’s not a fight at all. You’re just being mauled and it’s like a giant cat throwing you around the forest, like a ball of yarn.”