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| Professional Tactics of Day Trading | September 16-18 | Cary, NC |
| Peak Performance and Systems Development | September 23-29 | Sydney, AU |
| 17 Steps to Becoming a Great Trader* | October 23, 24, 25 | Cary, NC |
| How to Trade Mutual and Exchange Traded Funds* | October 27, 28, 29 | Cary, NC |
| Peak Performance 101* | November 3, 4, 5 | Cary, NC |
| Peak Performance 202* | November 7,8,9 | Cary, NC |
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* These October and November back-to-back workshops include a dinner at Van Tharp's Home. These workshops also have combo pricing. By attending back- to-back courses you save even more. |
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Learn More...workshop descriptions, dates, pricing...
Tharp’s Thoughts
Market Efficiency Portfolio
Two Months Later
By
Van K. Tharp
Efficiencies have continued their downward trend since we started the portfolio. In February of this year the market was amazingly strong in terms of efficiency. We had 406 stocks with ratings above 10 and only 11 stocks with rating below minus 10. It was very hard to find a good short candidate. Now look at the chart below and you’ll see how things have changed. The market moved as low as having 26 stocks above +10 to its current value of +39. Stocks below minus 10 moved from only 11, to as many as 91, and there are now 32 at that level.
There is another way to measure the efficiency of the market. What percentage of stocks have an efficiency rating above zero? This information has been charted in the second chart below. In February of this year, 80% of all stocks showed a positive efficiency. As of September 8th, this number was 53% and has been as low as 37% in mid July. It hasn’t been a good time for efficient portfolios, positive or negative. The market is pretty neutral right now, based upon efficiency.
My ideal trading for this system would be to perhaps change one stock each month. That would probably mean that we were making lots of money in the others. Changing the stop from 10% to 20% meant that we didn’t get out of anything. However, there is another reason to get out of a position when it no longer meets the criteria that caused you to buy it. For example, if you buy a stock with a positive efficiency above 10 and that efficiency drops below 5, then it is hardly one of the top efficiency stocks in the market. This happened with all of our positive efficiency stocks during August. So much for a great up market.
Similarly, when you buy a negative efficiency stock with a rating below minus 10, then that rating moves to above minus five, it certainly is no longer one of the best negative efficiency stocks. So why hold them when they no longer meet the criteria by which you’d expect to make money?
For this reason, I have eliminated the positive efficiency stocks, AYE, CG, and OGE, that we purchased last month – all at losses. In addition, I have eliminated three of our negative efficiency stocks, WPI, EBAY, and PFCB. PF Chang’s, although we had not been stopped out, has actually become a positive efficiency stock, now rated at 4.43. We exited all of our positions as of the close on September 8th.
Table 1 shows all of our closed out positions.
|
Stock |
Profit/Loss |
R-multiple |
|
FAL |
($2.28) |
-0.01 |
|
BSX |
($182.82) |
-0.46 |
|
DLX |
($183.56) |
-0.46 |
|
AETH |
($132.00) |
-0.33 |
|
AYE |
($56.95) |
-0.14 |
|
CG |
($66.72) |
-0.17 |
|
OGE |
($51.06) |
-0.13 |
|
WPI |
($315.08) |
-0.79 |
|
EBAY |
($381.78) |
-0.95 |
|
|
($1,425.05) |
-0.36 |
We now have nine losses, totally $1425.05, including commissions. Our active positions, prior to the new buys are shown in Table 2.
|
Stock |
Entry |
Cost |
Shares |
Trailing Stop |
Price Now |
Value |
Profit Loss |
R-multiple |
|
Shorts |
|
|
|
|
|
|
|
|
|
LEE |
26.29 |
1998.04 |
76 |
31.548 |
23.23 |
1765.48 |
$217.56 |
0.54 |
|
JRCC |
22.06 |
1985.4 |
90 |
18.36 |
14.99 |
1349.1 |
$621.3 |
1.55 |
|
HOV |
27.33 |
1980.09 |
73 |
32.796 |
26.17 |
1910.41 |
$54.68 |
0.14 |
|
JRC |
7.15 |
2002.7 |
278 |
8.58 |
6.64 |
1845.92 |
$141.78 |
0.35 |
|
|
|
|
|
|
|
|
$1035.32 |
0.26 |
|
|
|
|
|
|
|
|
|
|
Thus, we have profits from our four open positions of $1035 against losses of our closed positions of $1425.05. Our portfolio on Monday was worth $19,610 for a loss of $390 or about 2%.
The market is fairly neutral and I found eight good shorting candidates and eight good long candidates. My bias is slightly negative because we’re going into a very strong negative cycle for the stock market. Thus, we’ll add four long positions—CYP, SYX, LQU, and CXW— and two more short positions—GYI and CHS.
I looked at the most positive stocks and picked the four that looked the most efficient. I also looked at the most negative stocks and picked the two that looked the most efficient from a shorting viewpoint. Hopefully, next month there will be no changes to the portfolio, which means we will have done well.
With those changes in mind, let’s look at our portfolio.
The Portfolio on Tuesday’s Close
The new stocks were all purchased at the opening on September 11th. We now have six shorts and four long positions. The portfolio values shown are as of the close on Tuesday, September 12th. Basically, as of the close, on Tuesday, we’re down about $600 or about 3% (that is our closed positions have a loss of $1425, while our open positions show a profit of $830.)
|
Stock |
Entry |
Cost |
Shares |
Trailing Stop |
Price |
Value |
Profit |
R-multiple |
|
Now |
Loss |
|||||||
|
Longs |
|
|
|
|
|
|
|
|
|
VTR |
$39.95
|
$1,957.55
|
49 |
$31.96
|
$39.74 |
$1,947.26
|
($10.29) |
(0.026) |
|
SYX |
$13.25
|
$1,961.00
|
148 |
$10.60
|
$13.78 |
$2,039.44
|
$78.44
|
0.196
|
|
LQU |
$54.05
|
$1,945.80
|
36 |
$43.24
|
$52.97 |
$1,906.92
|
($38.88) |
(0.097) |
|
CXW |
$63.50
|
$1,905.00
|
30 |
$50.80
|
$67.33 |
$2,019.90
|
$114.90
|
0.287
|
|
Shorts |
|
|
|
|
|
|
|
|
|
LEE |
$26.29
|
$1,998.04
|
76 |
$29.03
|
$23.85 |
$1,812.60
|
$170.44
|
0.426
|
|
JRCC |
$22.06
|
$1,985.40
|
90 |
$18.36
|
$14.64 |
$1,317.60
|
$652.80
|
1.632
|
|
HOV |
$27.33
|
$1,980.09
|
73 |
$32.71
|
$28.65 |
$2,091.45
|
($126.36) |
(0.316) |
|
JRC |
$7.15
|
$2,002.70
|
278 |
$8.30
|
$6.53 |
$1,815.34
|