23.27% Return for September 2011

. S&P futures opened the month of September at 1211.75 and closed the month at 1125.75, losing 86-pts and shedding (-7.09%) of its value. In contrast, the following proprietary counter-trend trading strategy delivered 282-pts or +23.27% in S&P profits, which is an alpha of 30.36 meaning that it beat the stalled benchmark by more than 30%. September has been a horrendous month for all types of investment and trading disciplines regardless of timeframe. In fact, one can argue that the entire year of 2011 has provided a great deal of challenge for nearly all investment classes.   Why is this happening? It is happening because there remains a compelling list of unresolved structural flaws still weighing down upon the global financial sphere. If you want to gain insight and exposure to disciplined trading strategies like this one, subscribe to the PILOT today. . Bucking the Volatile Whipsaw Trends in September About the only place to have hidden in September was amid a strategy that deployed a counter-trend tactical approach to the manic vicissitudes of the S&P 500. The chart below reflects the $14,140 in monthly profit achieved counter-trading a single contract against the bipolar price action in the S&P futures throughout the month of September. > Documented below is the list of trades associated with the outstanding results this short-term counter-trend trading strategy achieved in the month of September: In the month of September, the strategy executed 18 trades. Of the 18, nine were winners and nine were losers equating to a 50% win ratio. For the month, the nine winners brought in $14,680 in profits and the nine losers gave back total of (-$1,937.50) in losses. The average winning trade produced a profit of $1631, while the average losing trade produced a loss of only (-$215). . Inputs, Results, and Historical Statistics The applied short-term counter-trend strategy has been in place and executing trades since January 3, 2007. We used US $40,000 to capitalize this short-term trading account. Also included are commissions at $2.35 per side, slippage of $6.25 per trade, and an assumed risk-free alternative return of 2%. . . .> . . . Since 2007, the graph and the mark-to-market analysis table below illustrate this strategies average monthly profit/loss for each seasonal month of the year. The last mark-to-market period highlighted in the table below is not an average listing but rather the ACTUAL results achieved in the month of September. . Conclusion: If you want to gain insight and exposure to disciplined trading strategies like this one, subscribe to the PILOT today. dis~ci~pline/ Noun: Training to act in accordance with rules; drill:militarydiscipline. Activity, exercise, or a regimen that develops or improves a skill; training: Punishment inflicted by way of correction and training The rigor or training effect of experience and adversity A set or system of rules and regulations Activity, exercise, or a regimen that develops or improves a skill; training: A branch of instruction or learning: the disciplines of history and economics . Trade Better/Invest Smarter Joe Russo aka ~ the PILOT Publisher and Chief Tactical Strategist Elliott Wave Technology Elliott Wave Technology provides a suite of Winning Solutions designed to assist those who wish to trade better and invest smarter based upon the practice and deployment of proven trading strategies in concert with expert and unbiased chart analysis.

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CHECKMATE

Looking for the Holy Grail? Well, here it is...

Breaking Up with Netflix
Our long-term bullish investment exposure to Netflix ended on Monday September 19, 2011.

Though price drew down some 48% from peak value, we exited our 2 ½-year long-term investment with a return in excess of 450% at an exit price of $159.69 per share.

On August 1, 2011, when Netflix fell just 13% from its all-time highs, we began hedging 30% our long side exposure by moving short the shares at $266 in Short-Term trading accounts. We continue to let profits run on these short positions.

We took further measures to hedge long exposure back on August 2 when we moved short an additional 30% of our long-term investment exposure at $261.74 in Mid-Level speculative accounts. We continue to let profits run in these accounts. We are now net short the shares across-the-board.

Direct Strategic Diversification: DSD

<What Is It, and Why You MUST Acquire It to SURVIVE & PROSPER

If you wish to avoid tragedy, you must adopt the strategy.

Simply stated, strategic diversification is a means by which to engineer a direct and measured level of protection by instituting multiple time-frame long/short investment/trading tactics. This simple and direct approach is far superior and replaces the convention where one attempts to adhere to a long-only approach in the quest to find non-correlated issues or sectors to diversify the deployment of capital in effort to hedge, enhance, or mitigate risk.

This type of direct diversification is far superior to conventional means, and is essential to adopt in order to effectively hedge, enhance, and mitigate risk in all market conditions.

How is this strategy working out for our portfolio?
PHENOMENALLY WELL! The vast majority of our net positions and equity curves are RISING, STABLE, ADEQUATELY HEDGED, and performing brilliantly - delivering alpha well in excess of the benchmark S&P. The strategy has performed in this manner amidst all of the financial turmoil experienced over the past decade. In other words, we are consistently KICKING ASS on an absolute basis and shall continue to do so. How is your strategy working out?

This form of strategic diversification is a direct hedge and enhancement tactic that augments long-term investment exposures by deploying Mid-Level and Short-Term strategies, which tactically trade with and around larger core positions.

As an aside, many of the largest brokerage firms and top-tier investment banks will convey in their prospectus disclosures that although their funds strategic approaches are historically sound, that there is simply no way to avoid the downside risks associated with events like those which occurred in the 2008-2009 financial crisis. Those with a minimum of one million dollars or more pay a minimum annual fee of $10,000 or 1% of their account size (plus a % of profits) for the privilege to participate in select hedge funds of such sort. To that, we say BUNK!

How Does One Accomplish This?

The simplest way to accomplish this is by deploying three separate brokerage accounts. One earmarked for Long-Term investments, one for Mid-Level speculation, and the third for Short-Term trading.

These general methods of strategic diversification are exactly what we spell out for subscribers on a daily basis.

In the Netflix example, approximately 60K in investment capital was required to work such a strategy. One would have needed to pony-up 35K to acquire the initial long-term stake, and an additional 25K split between the two other accounts to engage the issue using Mid-Level and Short-Term trading tactics.

Here is how one may have followed along. On December 27, 2008, we executed a long-term investment shift in Netflix by moving long 1,234 shares at $28.46 at a cost of $35,119. Below is a graphic journal summarizing the results we have achieved using the proprietary (DSD) Direct-Strategic-Diversification tactics throughout the course of our ongoing engagement with Netflix.

The Results
Averted Tragedy using the DSD Strategy 
Although our engagement history goes back much further than 2007, for the purpose of this example, the three tables and equity graphs below provide recent snapshot histories of how the multiple timeframe DSD strategy has performed through September 23, 2011.

Do bear in mind that each of the three proprietary accounts employs robust strategy-specific tactical shifts unique to their specific objectives.

The tables document each accounts entry and exit by date with a signal bias, price, number of shares, and a profit/loss ledger for each trade. In addition, to the right of each table is an associated equity graph representing the detailed path of profitability produced from each account.

Following the crash in Netflix, note the massive 48% drawdown from peak equity illustrated in the graph to the right of the Long-Term investment history listed in the first of our three tables.

Despite the fact that our long-term investment returned in excess of 450%, without the hedges in place courtesy of our Mid-Level and Short-Term trading accounts, it would have been extraordinarily tragic nonetheless to stand by and witness peak equity cut in half before taking profits.

As such, breaking up with Netflix was NOT that hard to do. In fact, we never really broke up. We remain engaged (from the short side) and Netflix continues to give us plenty of good lovin' just like she always has. What a catch!

The DSD strategy delivers similarly impressive results throughout the broad markets, individual stocks, Bonds, ETF 's, Futures, Commodities, and FX Markets. For subscribers, we combine many of these markets in our daily recap of the proprietary DSD portfolio.

As further testament to the DSD strategy, below is a side-by-side comparison of the S&P 500 from 1960 - 2011 on the left, and the equity curve produced by our Long-Term investment exposure to the benchmark on the right.

Bear in mind that the side-by-side comparison charts below are simply an apples-to-apples comparison of the one-to-one stability, alpha, and absolute returns achieved in the strategic Long-Term trading account vs. buying and holding the S&P throughout the 50-year period. It does not include the equally robust hedge, enhancement, and risk mitigation benefits derived from our Mid-Level and Short-Term trading accounts.

Conclusion:
Avoid Tragedy - Adopt the Strategy
One of our ultimate goals is to develop and bring to market a small family of DSD hedge funds or ETF' s that strictly adhere to the coordinated disciplines that embody the Direct Strategic Diversification methodology.

As simple as it is, even when spelled out in black and white, many people simply do not have the patience, courage and discipline to adhere to, properly execute, or consistently manage the strategy protocol.

In contrast, a strategically dedicated ETF or Fund would execute perfectly, and thus create an ideal solution for millions of ordinary investors who lack the essential patience and discipline to tap into this Holy Grail of investing.

One of the directives would be to make sure that these products would be within the reach of the common investor. Since the strategies execute automatically, fees should be relatively low. Another objective would be to keep the minimum account size requirements within reach of the ordinary investor instead of restricting access to accounts of a million dollars or more.

If you think that you (or someone that you know) might have an interest in participating in the development of such products and/or have a unique skill-set or hands-on experience at any level of related operational development, please feel free to contact us to share your thoughts.

Until then, the DSD portfolio shall remain available via the Chart-Cast Pilot by subscription only.

Trade Better/Invest Smarter

Joe Russo aka ~ the PILOT
Publisher and Chief Tactical Strategist
Elliott Wave Technology

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Elliott Wave Technology provides a suite of Winning Solutions designed to assist those who wish to trade better and invest smarter based upon the practice and deployment of proven trading strategies in concert with expert and unbiased chart analysis.

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Measuring Alpha

The DAILY BULL

Alpha, What Is It? 

W

e have all heard the term alpha as it relates to finance. The term has come to the forefront recently courtesy CNBC s well-advertised Delivering Alpha Conference, and of course, by way of the popular financial website Seeking Alpha. 

What does alpha mean relative to finance? In short, alpha is a technical risk ratio used in modern portfolio theory. 

Simply stated, alpha represents what a portfolio manager or investment strategy adds to or subtracts from returns relative to the baseline performance achieved by a benchmark index such as the S&P 500. 

A positive alpha of 1.0 means the fund or strategy has outperformed its benchmark index by 1%. Correspondingly, a similar negative alpha would indicate an underperformance of -1%.

Today as promised, I am going to share with you a snapshot measure of my long-term investment strategy delivering an alpha of 720 during one of the most uncertain economic environments in the past 50-years. 

In a previous article, I discussed the common human condition of reacting to the present vs. deriving wisdom from the past. Well, it should come as no surprise that the majority of Traders and Investors suffer the exact same malady of reacting emotionally and reflexively to the current market conditions vs. employing a precise and preconceived plan of action. 

I also compared the current uncertain economic and investment environment to that of a similar and arguably much more severe 16-year period, which ran from 1966 1982. Moreover, I had explained that to navigate effectively during such times, that one must re-adjust expectations accordingly and develop the tenacity and the will to prevail. 

Granted, what I describe in the previous paragraph is far easier to articulate than to actually accomplish.

How Does One Accomplish This? 

Obviously, one must have a preconceived and trusted strategic plan of action (or strategy) in place that will alert them to respond accordingly to ALL market conditions BEFORE THEY OCCUR. 

HELLO readers, these precise strategies of adept preparedness are exactly what I have developed, historically back-tested, and currently employ in real-time. 

Take a close look at the measuring alpha chart provided and observe my strategies long-term engagement tactics throughout the course of the last bout of uncertainty from 1966-1982.  In the 16-years spanning 1966-1982, the S&P 500 traded within a wide 126% range from 62.68 on the low end, to 141.96 on the upper. The measuring alpha chart begins on February 11, 1966 at a price of 94.06, and concludes some 16-years later at a price of 101.44 during the week of August 13, 1982. 

The Results  (Machines Don' t Lie Folks) 

From start to finish, and despite the 126% range, after 16-years of turbulent bull and bear markets the benchmark S&P index advanced a paltry 7.84% - in 16-years!That translates to a severely sub-standard annual rate of return of roughly 0.5%, which is an exceptionally easy benchmark to beat from an alpha perspective. 

Over the same time frame, my strategic approach delivered 65.74% in Total Returns and captured 63% of the entire trading range for the period.Bear in mind that this performance measure does NOT include the 35.25% return resulting from the previous bull market; instead, it begins with the 9.35% loss on short positions taken in March of 1968 and ends with the 21.2% profit taken on long positions in September of 1981.Of the 8 position shifts taken over the 16-year period, only 2 resulted in losses, and the remaining 6 were profitable shifts in long-term investment bias. 

These statistics translate to a 75% win rate on long-term directional shifts, which produced a profit-measured win-to-loss ratio of nearly 3-to-1.As an aside, the historical annual rate of return for stocks is around 8%. During this prolonged 16-year period of extreme stress, wild swings of abrupt bull and bear markets, my strategy delivered an annual rate of return of 4.10%, more than half the historical average vs. the sub-standard 0.5% derived from the benchmark itself. 

Summary 

Not only does my strategy ride the certainty of powerful bull markets with ease, but it also traverses the gray skies of prolonged uncertainty with the grace of a gazelle. Mission Accomplished - Next. 

This and other strategies, which I have designed for different timeframes, markets, and objectives, are currently at work in today s markets and continue to perform remarkably well. 

Trust me, as the equity curve attests; though it looks easy and painless after-the-fact, maintaining the discipline to heed the signals and endure the open trade drawdowns is far more difficult than sticking ones head in the sand and just hoping for the best. 

Three Poor Long-Term Options 

The following are three common mistakes made by investors and traders alike:

• They freeze like a deer in the headlights, do nothing, hope for the best, and take comfort that they are not alone. Hope in concert with the paralysis of denial is a strategy doomed toward complete and utter failure. 

• They sell everything near a market high, go to cash, disengage, and rest assured that they are preserving capital knowing that their money will stagnate until they put it back to work. Feeling brilliant, after a big drop in prices, the markets come back, so they think it is safe to get back in. Shortly after they do, the market begins to tank again - now they are back at square one. They continue repeating this process until they give up all together realizing they have done no better than if they had left well enough alone. The old adage is true; you CANNOT time the market, not that way anyhow.

Last and the very worst is that...

• They hang on until they can no longer stand the pain, and then they sell everything near a market panic low. OUCH!

If you find that you are making any of these common mistakes, wish to Part Company with the masses, and distinguish yourself and your investment accounts as alpha-enabled, then join us as we continue to navigate successfully amid this challenging period in market history. 

Next: Breaking Up With Netflix 

In closing, there is a whole lot of news surrounding the pounding that Netflix is taking of late. As you may know, Netflix is part of my portfolio. In a future article, I will share with readers the complete history of my engagement with Netflix, which will illustrate how my tactic of strategic diversification rules the day - even amid market environments with 90% plus correlation to the S&P. 

Until then, 

Trade Better/Invest Smarter

Joe Russo aka ~ the PILOT

Publisher and Chief Tactical Strategist

Elliott Wave Technology 

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Elliott Wave Technology provides a suite of Winning Solutions designed to assist those who wish to trade better and invest smarter based upon the practice and deployment of proven trading strategies in concert with expert and unbiased chart analysis.

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Why Has the Market Yet to Crash?

An Old Type of Business-As-Usual One could easily misperceive the 17-years of entitlement rally from 1982 through 1999 as normal and representative of the type of certainty necessary to carry out business as usual. In my view, striving toward returning to another cycle of excess to compensate us for enduring more than a decade of uncertainty is akin to a junkie going on a bender simply because he has endured the pain of sobriety for a few weeks. How soon we forget. Prior to the launch of our aptly coined 17-year entitlement rally, we experienced 16 turbulent years of incredible uncertainty from 1966 through 1982. History clearly documents that our last period of prolonged uncertainty contained a host of very similar if not far more pronounced levels of existential questions surrounding the durability of our economic future. Before one concludes that the Dow is destined for a total collapse, one should never rely upon the simple fact that stocks go up and down without factoring in an underlying fundamental truth, which is that stocks possess an inherent bullish bias. That is why markets have yet to crash. Witness 1966-1982. It is simple to understand that after a prolonged bout of uncertainty that durable solutions (flawed as most of them were) will inevitably surface to unshackle the gridlock. Witness 1982-1999. It is also simple to understand that after a prolonged period of too much certainty that complacency, imprudence, and greed begin to permeate and destroy the economic landscape. This ignorant but quite human process is the very essence of the quintessential boom and bust cycle. No matter how much sense it may make to learn from history rather than react to the present, as a collective, we cannot seem to grasp this simple essential wisdom. Although challenge and adversity is unavoidable, the way in which we cope with such episodes is a conscious choice of our collective leaders alongside those with the highest of influential powers. The growing number of well respected voices who place direct blame on the fed, corrupt politics and the lobby power of transnational mega-corporations for the insanity and pain caused by these repetitive cycles are likely correct to a large extent. Until we acquire the collective and political resolve to mandate an impartial foundation of, logic, reason, and historical wisdom to legislate stable and sustainable policies, it is likely that our economic DNA shall remain poisoned with the flawed boom and bust disease. Successfully investing and trading in such environments can be extremely frustrating. To navigate effectively, one must re-adjust expectations accordingly; develop the tenacity, and the will to prevail. Delivering Alpha On Wednesday, as advertised, US treasury secretary Tim Geithner and the CNBC cast of guests delivered some much-welcomed alpha with decent follow through on Thursday for good measure. In short, alpha is a technical risk ratio used in modern portfolio theory. Simply stated, alpha represents what a portfolio manager or investment strategy adds to or subtracts-from returns relative to that of a benchmark index such as the S&P 500. In a future article, I will share with readers how my investment and trading strategies measure up in terms of alpha. Stay tuned. Until then, Trade Better/Invest Smarter Joe Russo Publisher and Chief Market Analyst Elliott Wave Technology Elliott Wave Technology provides a suite of Winning Solutions designed to assist those who wish to trade better and invest smarter based upon the practice and deployment of proven trading strategies in concert with expert and unbiased chart analysis.

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