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INTRODUCTION We wanted investors to be successful in achieving an above average return while incurring much lower risk. Until a few months ago, these books were distributed by Telescan Inc. and marketed exclusively to their customer base. Recently we decided to directly promote these books since the investment approach we propose is very well suited to the volatile markets like the ones we see now (Summer 2001). BUY THE NEW UPTREND, EXIT
WHEN IT LOSES STEAM In essence you, the alert investor, will make your buy not when the crowd, lead by the consistently ill-timed analysts, is stampeding into a stock, but rather before that happens. So we get in early and exit when the uptrend is losing steam. Keep repeating the process over and over, and you will be surprised with the results. Although the strategy is discussed solely from the standpoint of buying stocks, the very same approach can be used for shorting stocks. In the present market conditions – which we anticipate will last into the foreseeable future – shorting stocks may provide faster returns with lower risk. But it is not for every one, just the smart and risk averse investor who can stick to a basic discipline. The books are as current today as they were at the time they were written (1994 and 1995) because their principles are based on the graphic interpretation of the changes in investor’s psychology. In other words, we use the charts as the tool to evaluate a stock in a similar way as the cardiologist uses an E.K.G. for assessing the condition of the patient’s heart. We did not invent Technical Analysis, we just found a simple way of using it to grow an investor’s funds and protect them from the potential losses that are always around the corner. The bar graphs below were prepared
from the information provided by the J. P. Morgan Fleming Asset
Management Group and cover the performance for the previous 12
months of several investment categories in late December 2000
and late August 2001. The values expressed in the charts are
the results of an investment of $10,000 made one year earlier
from the date indicated in each of the categories selected.
So let us calculate a couple of numbers to figure out what happened in EIGHT months (let us keep in mind that categories with less than $10,000 value were absolute losers):
The above set of numbers tells us that even in the most conservative types of investments, like interest rate instruments, there was a decline in those eight months. Utility stocks, normally carrying attractive dividends, were the biggest losers followed by the large cap growth index, then by the S&P 500, as we must have experienced by now. The lone relative winner: gold, which is supposed to be dead but in our opinion should continue to make a comeback in 2002. Incidentally, you may want to know that we selected four gold stocks between April and June 2001 and closed the positions in less than an average of three months with gains of 17.8%, 30.0%, 27.0% and 10.6% (proof available upon request). If you think that you can protect your money today the same way you did five years ago – or even a year ago as the bar charts above demonstrate - then you do not understand what has been happening in the investment arena. In other words, it is very likely that your present investments are at risk. CONCEPT Today’s availability of low-cost, Internet based data and tools for selecting investment vehicles brings about a total revolution in the choices for better investing. Couple this with online trading, where one can buy 1,000 shares not for $100.00 or more (we all remember those times) but for under $10.00, and you are in a position to increase the return on your investments while being exposed to less risk. But many smart and attentive investors have now awakened to the fact that the stocks they held for several years were down, not up. For every Cisco that one can identify, there is a plethora of stocks that went down, not up. That is, if the company is still around. As you may know, tens of companies each with a market cap above ONE BILLION dollars went belly up this summer. Incidentally, Cisco dropped 80.1% between March 27, 2000 and August 31, 2001. With our system the latest you have gotten out would have been on April 12, 2000, when CSCO opened at $69.75 or down 14.9% (not 80.1%) from the all-time high. Since then the system generated a couple of buys and sells in the stock. So what do we offer to the investors whose accounts are not so large that they can hire a professional manager? We offer books that show how to select stocks that are trending up again, usually after severe, but not fatal, corrections. So we look for stocks that are in a new uptrend and recommend closing the positions when an identifiable pattern warns that staying with that stock may reduce the open profit. That means the position needs to be closed and taxes will be paid later on. Then we will use the proceeds, net of the taxes, for buying another stock that shows a new uptrend has emerged. With this approach it is possible to achieve returns of 20%, 30% and eventually more during an uptrend that usually lasts a couple of months. Actually on page 11 of “Better Timing, Higher Profits” we state that “… typical results in the examples in this report range from 20% to 60% for trades lasting from a few to several months”. And later in the same page we wrote: “The main point … is that the system would have kept you out of the substantial declines of stocks like IBM, IGT, Lotus, Bristol Myers, Sci-Med, Digital, ASA, etc.” as we showed with the analysis of the respective charts. What we say above is valid even when the market goes lower, as has been the case in July and August 2001. We will select the following example taken from pages 20 and 21 from Better Timing, Higher Profits” as we analyzed the weekly chart for Nike from 1988 to 1994. The long trades analyzed had returns of: That is an average of 46% of theoretical gain per trade lasting an average of 28 weeks and represents an annualized return of 85% per trade. It translates into a total return of 187% over an investing period of 112 weeks. But since the trades analyzed covered a period of 260 weeks, an investor could have the funds generated from NIKE sales for other trades during 148 weeks of that five-year period when NIKE chart did not justify buying the stock again. Let us clarify those trades lasted longer than is normal because they were selected from weekly charts, not the daily charts that we will use. Another point is that NIKE is a slow mover and, anyway, today’s stocks move much faster. So the trades will last actually from a couple of weeks up to three months. Even in a crash day, when the NYSE or the Nasdaq exchanges may have 70% of their stocks closing down, there may be 20% of stocks closing up. Thus for the investors who only consider going long, there are still a few hundred stocks among which we can find a couple of tradable buys. This way the funds liberated from the sale of stocks, rather than being idle, can be used for buying other stocks where a buy signal is identified. The bottom line is that even in a severe down market like the one we have been experiencing in the Summer of 2001, there will always be stocks that we can buy using the strategy we explain below (or can be shorted for more aggressive returns). TAX CONSEQUENCES Now we all know that most people have been brainwashed into the Buy and Hold way of thinking. We do not intend to contradict investors using that approach. But we certainly show in our books that the strategy we suggest certainly beats the return from Buy and Hold, and dramatically reduces risk. Let us consider the example above for NIKE and assume that we started with $10,000. We also will assume that each time we closed a trade, we did not use the funds for buying another stock (which would be downright stupid) but rather placed the funds in a money market account yielding no interest. However we will use the funds if we have another signal to buy Nike again. We will not consider any commissions since they are so low (unless using a full service broker), an average of $10.00 for up to 5,000 shares. And as ordinary income tax we will use 35%, certainly the domain of a minority of investors, so this is a worst case from our standpoint. Finally we will assume that, as a prudent matter, the investor will reinvest only the funds net of 35% for taxes, even it they will be paid from three to fifteen months later. The first trade was carried out in February 1990 and closed in August. The $10,000 initial investment generated 46% return, so the funds now are $14,600. The money goes into a market fund but we know that 35% of $4,600 or $1,610 will be paid in taxes by April 15, 1991. So we actually have $12,990 after taxes that we can use for investing again. The money for taxes will be placed in a separate account. The next trade was entered four months later in December 1990 and exited in March 1991 with a return of 33%. The $12,990 has returned a theoretical profit of $4,280 (of which $1,500 will be paid by April 1991) generating funds of $17,270. So we will put the $17,270-($1,610-$1,500)= $14,160 into the money market account for future investment. The account with the taxes money now has $3,110 that will be sent to the IRS by April 15th and the balance will be zero. The third trade went from June 1991 and lasted 35 weeks to February 1992. The return was 74% and the $14,160 that we had available for investing generated a theoretical profit of $10,470. The cash generated is now $14,160+$10,470=$24,630. Of this amount 35% of last trade profit or $3,670 will be reserved for taxes and placed in the special account. By now the funds from the closed third trade are $14,160+$10,470-$3,670=$20,960 and available for investing into a new trade. By April 15, 1992 we will pay the taxes of $3,670 that we have placed in the separate account, just for that purpose. The fourth trade was entered in May 1992 and lasted 27 weeks generating a return of 34% or $7,120. The amount of $7,120x.35=$2,500 needs to be reserved for tax payment. So we now have $20,960 +$7,120-$2,500=$25,580 available for a new trade, while maintaining in another account the funds for paying the taxes. There is a new signal mentioned in the book that we have not included in the calculations above. As referred in page 20, the fifth trade was entered at $50.00 in early 1994 and in September 30, 1994 (date of the Nike chart displayed in the book) the price closed at $59.50, another potential gain of 19.0%. So how did the taxes affected our performance? The answer is quite simple: in a very positive way. Indeed we started with $10,000 and finished with $25,580 in closed trades for a theoretical gain of 155.8% after paying taxes at the rate of 35%. And we still had an open profit of $9.50 per share on 510 shares, another gross profit of $4,840 before taxes. And for almost two years we had the use of the money for investing in other stocks. It is very possible that in the five years from 1990-1994 period we might had exceeded 250% after taxes if we had used the funds for other transactions as they became available. What would be the return with Buy and Hold? From an entry of $26.00 in early 1990, our open profit would be a very rewarding 129% before taxes or 84% after taxes when paid at the 35% rate. In other words, if over five years we funded five trades lasting a total of about three years in NIKE stock and paid the taxes we would have 510 shares by now clear of taxes (the potential profit of the open trade is not included) against the initial 385 shares bought with $10,000 that we are still holding, on which taxes will still have to be paid. The above does not include the profit potential from any interest, or the profits possible by applying the idle funds when not holding NIKE stock. And what about risk? In another words, when the price of NIKE stock went down, how far down did we have to endure the agony before seeing the price recover. What if the stock was not such a prominent company like NIKE but rather one that no longer exists or has the stock trading in the low single digits? Better yet, what if rather than just closing the longs, we would have reversed our longs and shorted the stock at the closing price? Is anyone complaining? One final comment on the choice of NIKE for this analysis. We did not choose this stock because it had the best results (it did not) but because it had a detailed break down of the prices and the duration of each signal, using the elementary techniques shown in the chart. The bottom line is that using an example that is seven years old and that we certainly did not expect to use in 2001, we hope to have convinced most investors that Buy and Sell is far superior to Buy and Hold in spite of the taxes generated. Summing up, the analysis of five trades for NIKE stock over five years till 1994:
STRATEGY When examining a chart we seek to avoid a “sucker’s rally”, that is a bounce in a downtrending stock. Such a bounce will be short-lived since the main down trend remains in effect and it will lead to lower lows, not the higher highs we are looking for. Actually this is the peculiar shape of most chart patterns since March-April 2000, at least until August 2001. It is time to give the reader a warning: with our system we will never be able to get an entry signal at the chart low, nor will we close the position at the high visible in a chart. But even if we will miss the first 10-20% and the last 10-20% of an upmove, we still have the potential for seizing the 60-80% of the move while limiting risk considerably. Since most moves tradable with our system last only a couple of months at best, the trades can present a very good potential for a satisfying return in a few months only, as we saw in the Nike example analyzed above. OVERALL DESCRIPTION OF THE
BOOKS CONTENT
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Please e-mail Alpha Trading Systems for more information. Or call
(281) 759-9925, fax (281) 759-9925. Or write: Copyright 1994-2001, Luiz V. Alvim. The CFTC requires displaying the following notice: Hypothetical or simulated performance results have certain limitations unlike an actual performance report. Simulated results do not represent actual trading. Also, since the trades have not actually been executed, the results may have under or over compensated for the impact, if any, of certain market factors such as lack of liquidity. Simulated trading programs in general are also subject to the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. |
