Journal Entry

It's been awhile since I've really updated the reader on some specific action I have been taking. Well, I have mentioned my caution approaching the budget talks. Now it's on more people's mind and the market has dropped so I have cashed in. I may be a bit early here but I am not so much concerned about timing at this stage of the game.

Based upon my view on Sector rotation and a secular bull market or parabolic move, I have been accumulating some small positions in 2015 calls for some aggressive bets. (Aggressive meaning strike price very far away, not timing or position size). The plan will also be to buy some 2016 calls when they become available.

Just in terms of sectors, I am looking for the XLI (Industrials), the XLB (Materials) and the XLE (Energy) to outperform specifically.

I will be perhaps be looking at individual names in those sectors with a reasonably low PE, reasonably high growth rate and other fundamentals that I like such as High ROE, High Margins and in some cases paying a dividend and having a history of growth.

When the time comes, particularly near the debt ceiling talks and Germany elections of September, I may position for larger position sizes, and begin trading on a shorter term time frame again. I also want some strike prices that are not as aggressive that can still capitalize if I am right about direction, but perhaps far too aggressive on my target. So going forward the plan will be to get some options with less time expense that are closer to the money..

There is a delicate balance between allocation strategies (adding lower to maintain or increase percentage allocation to that particular asset), and individual position trading (where you have a stop and profit target). I am trying to think of how I can more specifically define and determine that balance for given conditions.

I also am working on looking at historical data as well as individual setups to really try to maximize my allocation rebalancing period and/or price magnitude to trigger rebalancing in a way that optomizes my return. In other words, since there are commission costs, at what point can you let a trade run to based upon a random wakl before rebalancing is a break even strategy in a random walk given a particular position size? Also, at what point do you make that decision given a particular set of circumstances such as the market on a daily basis having a 55% chance of going up an equal amount as it will trade down on an average down day?  What is the minimum "break even" position size given historical market data from November 1st to April 30th for X amount of trading days?

I want to look at various historical data to determine the probability of an up vs down day, and use that data along with running all permutations (possibilities) that the market can go up or down to determine how a 5 day trading period should expect to yield.

This way, I can actually derive long term data based upon short term information. In other words, stocks have never had a single decade where they closed lower than the start of the decade. Even 1920-1930 ended up. However, based upon simply looking at a series of possible outcoms based upon historical data, there is the possibility of it happening and you could in fact calculate the probability even though it hasn't happened yet.

Once you determine the odds of a series of trading days making up a wining or losing trading week, you can use that data to determine the probability for a given month, and then years, and then decades.

This will also help you determine what position size or bankroll you need in order for swing trading to provide a greater edge. If you have an edge beyond the historical averages the market has offered, perhaps you can use a limited sample size to weight the data with historical averages to provide a "safer" approach to deriving conclusions based upon trading systems. In other words, if a certain indicator over the last couple years since information is available has shown stocks go up 60% of the time when the signal was given, nd over the last 50 or 100 years you observe that just based upon seasonal data stocks have gone up 54% of the time, you perhaps can determine a number between 54 and 60% depending upon how relevant you think the sample was, and how confident you can be in the indicator going forwards. Of course it's also possible that the data you have used in seasonal data is less thn accurat and that data to be safe coul be watered down. Using statistics you could theoretically derive a "confidence interval" and be 90% confident that your seasonal data offers greater than X% return over the next 10 or 20 years or whatever. However, Personally I am going to avoid that because I think that gets people wrapped up a little too much on information that may or may not have been a valid enough sample size (or high enough quality). Afterall, I am not trying to nail down an exact strategy, just use some information to improve the accurcy some degree. I see no reason not to error on the side of caution and I don't see why you need to do all this work just todraw that conclusion.

Nevertheless, between a position sizing strategy that has a stop lower and a target higher with a given probability of it ahppening, and a strategy that uses broad based indexes or options on index to rebalance multiple asset classes higher and lower.

In addition there will be more to all of this but I must go now.