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It is with regret that we announce the passing of our good friend and accountant Steve Meredith who passed away on September 18th in Richmond, Virginia. Steve was a regular here at the Van Tharp Institute and he will be sorely missed. Not only was he our accountant and dear friend, but Steve also contributed regularly to our newsletter and was a welcomed speaker at our Infinite Wealth Seminars.  From all us that knew him - we send our sincere condolences to his family and may he rest in peace. 

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Tharp’s Thoughts

Market Efficiency Portfolio

Three Months Later

By
Van K. Tharp

Efficiencies clearly show that the overall market can change quite quickly.  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.  However, the market was not into new high ground as it is now.  By August, 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.  Today, things have reversed and there are 67 stocks above +10 and only 22 below minus 10. 

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 figure.  In February of this year, 80% of all stocks showed a positive efficiency.  By July 15^th only 37.4% were positive, but as of October 10^th, we’d moved back to 64.3% efficiency.  This yoyo effect has provided us with few trends and thus hasn’t been a good time for efficient portfolios, positive or negative.  The market only has a slight upward bias, despite the fact that the Dow has made new highs.  

I was in New Zealand and Australia for the last three weeks and, although the market moved in a much more positive direction, we were only stopped out of one of our shorts, CHS.  However, another is close to being stopped out, HOV.  And two other shorts don’t look so good, LEE and GYI.  Consequently, I exited three stocks at the open on October 11^th.  I still want to maintain four short positions so I replaced them with MLS and MRCY, when the market opened on October 11^th.  Lastly, JRCC dipped to a low of 9.90 and then was stopped out based on our 25% trailing stop at $12.25 on October 10^th at a profit of 2.2R.  It was replaced with FMT.

The upturn was good for our long stocks with SYX now being a 2R profit.  CXW split 3 for 2 and still looks fairly good.  And we will keep LQU which has a slight profit.  However, the efficiency of VTR has dropped to +5.04 and there are many better candidates, so we sold this one at the opening price on October 11^th.  Based on a market that is now 64.3% efficient, I want the portfolio to have six long stocks.  Consequently, we added CPY, OMG, and ENR at the open on October 11^th.  I could have easily moved to 70% long based on the various efficiency ratings, but I really don’t like this market so I prefer to err slightly toward the short side.  On the short side we’ll add MLS, MRCY and FMT.

I don’t like turning over more than half of our portfolio every month, but this is what the system is telling us to do.  We have 16 closed out positions after three months and 14 of them are losses, although very small losses.  I’ve said many times before about how good trading systems can have long losing streaks.  Well we’ve had 14 out of 16 losses and that certainly counts as a bad streak.  Furthermore, we may have many more losses because I hope we don’t have to cash in our winners for some time.

Fortunately, our losses remain small and we have two profitable positions that are now above a 2R profit including one that is realized.  Thus, we are only down slightly on the three months.  Nevertheless, my preference is for a much less active portfolio and to hit stocks that really take off.  This has certainly occurred in the past and we hope it will occur in the future.

Most of our losses have occurred because the stocks stopped being efficient, rather than by being stopped out.  However, why hold positions that no longer meet our “reason for buying them,” especially when there are much better candidates to replace them?

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)
CHS	-$399.78	(1.00)
HOV	-$346.09	(0.87)
VTR	-$97.51	(0.24)
LEE	+$64.04	0.16
JRCC	+$873.90	2.18
GYI	-$175.82	(0.44)
	-$1,506.31	(0.24)

Our closed out loss totals minus $1,506.31, including commissions. 

Our active positions, prior to the new buys are shown in Table 2. 

Open Positions at Open on October 11th
Stock	Entry	Cost	Shares	Stop	Price Now	Value	Profit/loss	R-multiple
Longs
SYX	13.25	1976	148	14.44	18.81	2783.88	807.88	2.0197
LQU	54.05	1960.8	36	43.24	55.25	1989	28.2	0.0705
CXW	42.33	1919.85	45	37.28	46.51	2092.95	173.1	0.43275
Shorts
JRC	7.15	2002.7	278	6.87	6	1668	334.7	0.83675
							1343.88	0.830993

Thus, we have profits from our four open positions with a profit of $1,343.88 against losses in our closed positions of $1,506.31.  Thus, our portfolio on the open on October 11^th was worth $19,837.57 for a loss of about $162 or less than 1%. 

With those changes in mind, let’s look at our portfolio.

The Portfolio on Wednesday October 11th

The new stocks were all purchased at the opening on October 11^th.  We now have six long and four short positions.  The portfolio values shown are as of the open on October 11^th and the new positions are just listed as being new. 

Portfolio On October 11th Open
Stock	Entry	Cost (+$15 commission)	Shares	Stop	Price Now	Value	Profit	R-multiple
Longs
SYX	$13.25	$1,976.00	148	$14.44	$18.81	$2,783.88	$807.88	2.020
LQU	$54.05	$1,960.80	36	$43.24	$55.25	$1,989.00	$28.20	0.071
CXW	$42.33	$1,919.85	45	$37.28	$46.51