While the action of the major stock indexes in the US tell a story of all things good, and speak of easy-street, 2009 was a difficult year for many traders and investors - including AK - as well as tough times for consumers, workers, businesses, and the economy as a whole.
Stock market volatility proved to be a challenge, as early promise of the January rally turned into a February crash to new lows, smack before the plunge reversed and the mother of all rallies began. The speed of those transitions played havoc for those following the trends, especially when leverage was used. Indeed, those swings highlighted the dangers of trading leveraged ETFs, as such leveraged investment vehicles returned much less than was expected, leading to losses sometimes when profits would have been expected. Then the mother of all rallies turned into the Energizer Bunny, refusing to yield even to a modest correction, which is something not seen for such prolonged periods throughout history. This made it very difficult for traders to make money - except for the diehard bulls who ignored all the risks, something that lost them a fortune in 2008, returning some of those losses this year as they lucked out with their buy-hold-hope gamble.
About mid-year we undertook a new leg of research designed to answer the question of how best to use leveraged ETFs, or whether traders should use them at all, given the slippage problem of diminishing values over time unrelated to the performance of the underlying index. Since much of this research had to be done manually, and went back as far as 1973, this took a great deal of time and effort, with many interesting findings eventually leading to a dead-end results-wise.
A pattern did emerge overtime that pointed us in the right direction, though it took a great deal of effort to find the correct balance of additional return versus unwanted volatility of portfolio values. That research is now complete, and we are excited to be offering these improvements ready for 2010. These findings highlight the correct allocation of funds based on risk and reward, as well as saying when to use leverage and when not to. Of course, nothing is perfect when it comes to trading the financial markets, as downside swings and volatility is impossible to remove entirely. But our new improved system does stack the odds of the large swings landing heavily in our favor, as well as limiting the downside swings as much as possible.
The research findings of the new system also tell us clearly how much additional profits we left on the investment table this year, as we compare the shoulda, coulda, woulda versus reality. We are not happy with our performance of 2009, as our new system shows exactly how much better we could have done. The good news is that investing is perhaps one of the only activities where we get better as we age, as the more experiences and challenges we face, the more likely we are to find answers to those challenges, especially when such past battles are examined using a rigorous research approach the likes of which AK employs.
Our past system was great, making approximately 14% per year on average for long only, and 19% per year long/short (trading the stock indexes,) and enough to land us in the #3 rankings spot at TimerTrac (a verification service that monitors performance of investment newsletters) over the past three years with 15 trades versus 200-400 of the #1 and #2 placed newsletters, with AK delivering a 105% return versus a loss of 21% for S&P500 over the past three years.
Our new system, in testing, delivered 28% long only, and 40% long/short, so the best just got a heck-u-va lot better. While there can never be a guarantee of stock market performance as no one can know the future ahead of time, we believe strongly that the research results can be repeated for real going forward. Of course some years will be better than others, and one in four to five years is expected to deliver a modest loss or modest profit, with the other three or four home run years. We are excited to be facing the new year with these improvements in our arsenal, especially since 2010 has the potential to be one heck of a volatile year, and where there is volatility there is opportunity to profit.
Team AlphaKing wishes you and yours a happy holiday and prosperous new year.
401K investors should be invested in money market funds, though we expect a new trade early next week.
Kevin Wilde, Chief Trading Strategist, AlphaKing.com
