As regular readers know, the NTSM system uses
Rydex leveraged funds as an indicator of sentiment. These Rydex funds are leveraged funds that
are priced twice a day. By leveraged I
mean that they use options to move twice the direction of the index they
track. The Nazdaq 100 2x strategy fund
will gain 2% if the Nazdaq 100 moves up 1% and, since it works in the opposite
direction too, you can lose money twice as fast if you are on the wrong side of
the trade.
They are intended for trading so there is no
penalty for trading and one can switch long and short positions
frequently. Years ago these funds (along
with the Prudent Bear Funds) were the only way the average investor could easily
short the market. Now there are numerous
ETF’s that trade all day long that make more sense for short term trading and
it is easy to buy options from the convenience of your computer on-line; but
the Rydex funds are still used by many and I use them for long term trading
when I hold a position in the trading portfolio for weeks.
The sentiment indicator is counter to what
you might think. When the indicator
reaches an extreme level of bullishness (i.e., many investors are betting on
upward movement in the stock market) the indicator flashes a sell signal. The opposite is also true – an extreme number
of people betting on a drop in the market is a bullish indicator. So at tops and bottoms the sentiment indicator is a counter
indicator.
But that raises a question; what about on a
daily basis? Are investors more accurate
each day that the funds trade? I decided
to analyze this - hey, what can I say...I'm an engineer. We have odd ideas of what is fun.
I looked at the Rydex 2x funds that NTMS uses
as its sentiment indicator. For each day
that more people were betting the next day would be down, I checked to see if
the next day was actually down. I did
the same for days when most were betting on an up day the next day. (I actually wrote some equations to check
this stuff so I didn’t have to do it manually and checked for the entire year
of 2011.)
As it turned out, investors in the funds were
only right 47.8% of the time. That's worse than a coin flip where you would be right half the time on average and break even. That amounts to a loss of around 5-million
dollars per year (in round numbers) just from folks trying to beat the market
day-trading a few Rydex funds that I checked. Hey! If you're not making money day-trading, don't do it!
Tomorrow, I will check the NTSM system using
the same approach to see if the daily calls of the system (buy, sell or hold) can
predict the next day’s move. I have always said no, because I designed the
system to call tops and bottoms, but it is about time to crunch some numbers
and find out.
The
NTSM analysis is BUY today.
I
bought back into the stock market at S&P 500, 1155 on 7 Oct after the 6 Oct
NTSM buy signal. I remain 100% long in
the long term portfolio (100% stocks in the 401k.). (See the page “How to Use
the NTSM System” – the link is on the right side of this page).
I
am 90% long in the trading portfolio.
Just
a reminder: 100% invested in stocks is way too much for most rational
folks. Don’t do it unless you have a
high tolerance for risk. While I like to
brag about the NTSM's great performance, it did have 2-down years in the last 6. No system is perfect.
