Some R&D Progress Made

Below is a chart depicting some of the head way I have made over the last couple of months. The yellow line indicates application of the oracole formula (for now) vs. a buy and hold strategy.  This chart depicts the investment of $250 bi-monthly for 21 years in FCNTX.   Something that could maybe improve the result swould be to invest in the bond market (or other non equity position) during periods that one pulled out of equities.  This analysis assumed that there was a zero yield in the money market account.  Another important note is that this chart was only generated using strictly technical data analysis of the stock price.  There is no fundamental data analysis or external information used to generate the information in this chart.  Also there were no round trip trades employed to generate these results (see the last post).  The Oracole Strategy shown below (yellow line) did not out perform a tradition hold strategy (pink line) for most of the investment period.  This chart would also look very different if one simply looked at the growth of 10,000 over the same period (oracole would out perform after the first market drop).  My next goal is to employ some other technical measures (information external to the fund or equity) to try and improve performance further.

Total Cash Investment: $110,750

Hold Strategy Value: $337,848.13

Oracole Strategy: 383,036.02

Click on chart to expand.


One thing that I have learned during this process is that it is actually surprisingly difficult to beat a buy and hold strategy without employing some other asset class such as bonds, commodities, etc. I have determined some very interesting things in this process. My next step is to employ some additional analysis from external sources to the fund close price, but this is extremely time consuming.

Warning - Round Trip!

The other day I recieved a warning from Fidelity warning me about a round trip exchange.  A round trip is defined as an exchange in and out of a fund within 30 days.  This can result in suspension of exchanging priveledges if done excessively.  Therefore, I am adding additional analysis that attempts to filter for volatility.  The signal recieved on 6/14/2010 and then the signal to sell on 6/30/2010 resulted in a loss, and then the market corrected significantly.  However year-to-date oracole has still outperformed the fund. I am currently sitting on the sidelines until I can improve the oracole strategy.  Below is an image of a draft of the tech tool I am creating (green dots represent buy and red dots represent sell signals):

I feel that I am very close to having a fantastic signal generating tool.

Performance Track

I have started tracking the performance of two mutual funds and one stock that I own based on applying the oracole formula.  The table below compares results of fund or stock performance vs. portfolio performance if the oracole formula is applied.

Currently all of the funds are in a hold pattern (waiting for a buy signal).  As stated in my introduction there is no gaurantee that a loss will not occur. Therefore, it is good that this post shows the previous transaction generated a loss.  The approach to this strategy is that you preserve the wealth you have when the market signals a potential trend downward.  However, I believe that over a long period of time the oracole formula will generate returns that out perform fund or stock performance.

One important point to be made is that the %Gain or %Loss (% G/L) for the Oracole YTD Return are realized gains or losses.

Project "Oracole (a play on my last name)" Introduction
To this date, I have tried to employ to the best of my ability asset allocation, diversification, and cost averaging to grow my portfolio. My portfolio is predominantly invested through a 401 K program at work. Over the last 13 years I have experienced two market crashes in 2002 and 2008, and after this last market crash I consider myself lucky to have seen my portfolio return to cost basis. In both cases, I failed to sell when the market fell, but increased my contributions during these periods. I have always been afraid to sell because I did not have a tool that would indicate when to buy and sell. However, after dismal results, I decided that I need a better investing strategy. I still intend to employ asset allocation, cost averaging, and diversification, but I am going to add a buy and sell strategy to this equation. However, buying and selling (exchanging) within a 401K portfolio offers the following unique challenges:

• Frequency of permitted exchanges is restrictive
• Mutual funds trade only at the close of the trading day
• Fund managers can hold trades up to 7 days from the day a trade was requested

Therfore, for this purpose, I am trying to develope the "oracole" formula to forecast market trends. The formula is made up of a combination of tried and true technical analysis methods. I have developed this formula to be suitable for long term investors who participate in traditional retirement investment plans (like myself). I have back tested this formula on various mutual funds and stocks, and so far it appears to generate buy, hold, or sell signals that maximize gains, preserve wealth, and minimize trade/exchange frequency. I intend to tweak this formula and improve it further over time. I have set up this blog to publicly track the success/failure of the employment of this method to funds that I am invested in.

The strategy of this method is relatively simple. Most funds contain a money market fund. The idea is to use the money market fund as an exchange to a cash (or short position) when a sell signal is generated and to exhcange from the money market fund when a buy signal is generated. The percent allocation can be determined based on bearish or bullish market conditions and an individuals aversion to risk. This is not a new concept, but in conjunction with the "oracole" formula I believe that this will improve the chances of a portfolio to avoid significant losses and capitalize on possible gains.

The primary goal of the "oracole" formula is to provide the average long term investor with a simple tool that can help them avoid the pitfalls of emotional trading. Emotional trading often cause even seasoned investors to buy into a rising market too late or miss a selling opportunity that would prevent significant losses in ones portfolio. Applying the "oracole" formula does not mean that an investor will never realize a loss, but it is designed to minimize those losses. However, with this tool an investor should never experience significant losses as can be experienced during major market crashes.
Please feel fee to comment or contact me via email and let me know if you have any interest. I will be happy to let you know the status of any stock, etf, or mutual fund according to my analysis. As with the ancient Greek Oracles, once you have the forecasted information it will be yours to do with as you please.