People Trading BIDU Also Traded…

Back in September 2007, I started periodically posting snapshots from the optionsXpress Trading Patterns feature and chose to highlight the highly speculative Chinese internet search firm, Baidu (BIDU), then trading at 299, as my guinea pig. Over the course of seven months, I twice updated what traders who traded BIDU were also trading at optionsXpress when BIDU was at 380 on 10/30/2007 and when it was at 350 on 4/22/2008.

I just captured the most recent Trading Patterns update, which shows traders who are trading BIDU (currently at 185) are still active in the most volatile names in agriculture, financials, shipping, solar, and casinos. The stocks on the top ten list: Potash (POT), Mosaic (MOS), Citigroup (C), JPMorgan Chase (JPM), Bank of America (BAC), DryShips (DRYS), First Solar (FSLR), and Las Vegas Sands (LVS). Also on the list are two ETFs, QQQQ and SPY. Either optionsXpress customers have been cleaning up on the short side or they are a little early to the bull party.

[source: optionsXpress]

Portfolio A1 Performance Update: 6/30/08

Per reader request, what follows is a snapshot of Portfolio A1 for the month ended June 2008.

The chart below shows the equity curve and some summary performance statistics for Portfolio A1 since the equities only (no ETFs or options), long only portfolio was created on February 16, 2007. During the 16 ½ months since inception, Portfolio A1 has posted a cumulative return (exclusive of dividends) of 23.9%, while the benchmark S&P 500 index has declined 12.1%. This adds up to a net performance of +36.0% for the portfolio vs. the benchmark.

The graphic to the right provides some additional performance details for Portfolio A1 vs. the S&P 500 index over a variety of time frames. For the second quarter of 2008, for instance, Portfolio A1 returned 17.6%, while the S&P 500 was down 3.2%

For the record, Portfolio A1’s current holdings include: Mosaic (MOS); TBS International (TBSI); PetroQuest (PQ); DreamWorks Animation (DWA); and Homex Development Corp (HXM). Portfolio A1 also shares some common ancestry and has a stock ranking system that is similar to the VIX and More Focus Aggressive Trader model portfolio – one of the four model portfolios that I update transaction by transaction for the VIX and More subscriber newsletter.

Finally, I would be remiss in not reiterating that Portfolio A1 was created with tools developed by Portfolio123.com and is managed via Portfolio123.com’s tool set. For more information on Portfolio123.com, please refer to an earlier post on the subject, Portfolio123.com: The Engine Behind Portfolio A1.

Portfolio A1 Performance Update: 5/31/08

Since I continue to receive inquiries about Portfolio A1 as well as my new subscriber newsletter model portfolios, I thought I would provide a snapshot of the portfolios at the end of each month.

The chart below shows the equity curve and some summary statistics for Portfolio A1 since the portfolio (which is equities only, long only) was created on February 16, 2007. During the 15 ½ months since inception, Portfolio A1 has posted a cumulative return (exclusive of dividends) of 19.8%, while the benchmark S&P 500 index has declined 3.8%.

The graphic to the right provides some additional performance details for Portfolio A1 vs. the S&P 500 index over a variety of time frames.

For the record, Portfolio A1’s current holdings include: Mosaic (MOS); TBS International (TBSI); PetroQuest (PQ); World Acceptance (WRLD); and Brasil Telecom Participacoes (BRP). Portfolio A1 also shares some common ancestry and has a stock ranking system that is similar to the VIX and More Focus Aggressive Trader model portfolio – one of the four model portfolios that I update transaction by transaction for newsletter subscribers. At some point later this weekend, I will provide some details about the performance of the subscriber newsletter portfolios.

Finally, I would be remiss in not reiterating that Portfolio A1 was created with tools developed by Portfolio123.com and is managed via Portfolio123.com’s tool set. For more information on Portfolio123.com, please refer to an earlier post on the subject, Portfolio123.com: The Engine Behind Portfolio A1. [For the record, I have no affiliation with Portfolio123.com]

Portfolio A1 Beats SPX by 15.5% in First Year, Helped by Commodity Theme

With two of the five focus positions in agriculture and energy, the commodities theme has been good to Portfolio A1. W&T Offshore (WTI), the oil and gas exploration and production company, is now up 15.4% in the two weeks it has been in the portfolio. Last week’s biggest winner was Terra Industries (TRA), which posted a 10% gain for the week, moving up with the red-hot nitrogen fertilizer space.

After one full year of performance (since the February 16, 2007 inception), Portfolio A1 officially goes in the books with a return of +8.23%, compared to a -7.25% move in the benchmark S&P 500 index over the same period, a net performance gain of 15.48% by the portfolio over the benchmark.

In terms of risk-adjusted return, the graphic to the right shows that Portfolio A1 has had an average beta of 1.48 and an impressive annualized alpha of 23.58% during the first year that the portfolio has been up and running.

In many respects, this portfolio was established to provided focused approach to "fishing for whales." That approach has been largely successful if a little inconsistent during the first year, landing such strong momentum stocks as of MOS, DRYS, TEX, PBR, RIO and others. Part of what makes finding so many big winners possible is a very high annual turnover. At 674%, this is clearly a trading portfolio, not a buy and hold approach. Losses are generally cut quickly and a new hook goes over the transom almost every week. I look forward to seeing how the portfolio fares in the second year, as we begin that year with what looks to be an extremely challenging investment environment.

Portfolio A1 Bounces Back

While it was not a big bounce, the fact that Portfolio A1 bounced 1% more than the benchmark S&P 500 index did last week has to be considered a good sign. After 49 weeks, the portfolio’s 6.4% gain still compares quite favorably to the 8.6% loss in the SPX over the same period.

New addition Terra Industries (TRA) led the way with an 8.6% gain for the week, after taking the fertilizer baton from previous portfolio anchor, The Mosaic Company (MOS).

The 2008 year to date numbers (through Friday) show that Portfolio A1 has fallen faster than the SPX – -12.8% vs. -8.7% – with the superior cumulative performance numbers for the portfolio largely a reflection of a superb fourth quarter in 2007. Some may see this as a possible anomaly, but this portfolio is set up to ‘fish for whales,’ a theme I will expound upon in the future.

There no changes to the portfolio this week.

A snapshot of Portfolio A1 is as follows:

Portfolio A1 Falls as Mosaic’s Run Comes to an End

It was fun while it lasted, but it had to come to an end eventually. The Mosaic Company (MOS), which had run up an eye opening 176% in the first five months it was in Portfolio A1, is now gone from stable, victim of a rule that automatically culls any stock that falls 20% from the high recorded during the holding period. Also shown the door as a result of a 20% drop is Brazil Telecom Participacoes (BRP).

Replacing MOS and BRP are LG Philips LCD Co. (LPL) and Terra Industries (TRA). LG Philips LCD Co. is a Seoul-based $16 billion joint venture in the display business between two global giants, LG Electronics and Royal Philips Electronics. TRA, a nitrogen fertilizer company, demonstrates how some portfolio ‘rules’ can backfire, as this company is a direct competitor of Mosaic in the fertilizer business and at only 10% of Mosaic’s market capitalization is actually a much riskier play in this sector. Nevertheless, the stock ranker has spoken and TRA should do well if this week turns out to be a bottom. As far as the wisdom of holding an LCD manufacturer at a point where consumer demand appears to be drying up, I am skeptical, but this remains a 100% mechanical portfolio, where my perspective does not matter.

After falling 11.4% last week, Portfolio A1 is still sporting a 5% gain since the February 16, 2007 inception, considerably better than the 9% loss in the benchmark S&P 500 index during the same period.

There no other changes to the portfolio this week.

A snapshot of the Portfolio A1 is as follows:

Portfolio A1 Makes Big Bet on Brazilian Telecoms to Start Year

For the first time in awhile, Portfolio A1 gave back some ground to the benchmark S&P 500 index last week. Even with last week’s sub-par performance, since the February 16, 2007 inception, Portfolio A1 now has a cumulative gain of 20.7%, compared to a 3.7% loss for the SPX.

After falling 7% last week, Sinopec, a.k.a. China Petroleum & Chemical Corp (SNP) has been dropped from the portfolio, victim of a rule whereby a position is automatically closed once it falls 20% from its high during the ownership period. Also dropped were Norwegian energy and aluminum giant Norsk Hydro (NHYDY), but in this instance as a result of a declining rank from the stock ranking system. The ranking system partly reflects several technical factors and picked up on the fact that NHYDY’s stock has also struggled and is down about 17% for the first two weeks of 2008.

Replacing SNP and NHYDY in the portfolio are returnee Fresh Del Monte Produce (FDP) and a second Brazilian telecom company: Tele Norte Leste Participacoes (TNE), an integrated fixed line and mobile telecom provider with a $9.5 billion market cap. TNE joins long-time favorite BRP to give Portfolio A1 an unusual mix of 2/5 Brazilian telecoms in this five-legged portfolio. By design a focused five stock portfolio is intended to make significant bets in specific sectors and regions, but it is unusual to find this type of concentration in the portfolio, which uses a maximum sector weighting of 30% to place sector limits on all new purchases. The reason there are currently two telecom companies in the portfolio is that Mosaic (MOS) has had such a strong run (up 175.7%) that it now comprises 42% of the portfolio, so that it is possible for the other four holdings to split the remaining 58% with two companies in one sector that do not total to 30%.

Note that the portfolio has no provision for limiting the concentration of holdings by country or region.

There no other changes to the portfolio this week.

A snapshot of Portfolio A1 is as follows:

Portfolio A1 to Best SPX By 20% in 2007

On the heels of a strong fourth quarter, it looks as if Portfolio A1 will finish 2007 with at least a 20% advantage over the benchmark S&P 500 index since the portfolio’s February 16^th inception. With one trading day left in the year, Portfolio A1 has a 23.4% gain, a full 21.8% better than the 1.6% gain in the SPX during this period.

I will publish some additional statistics once 2007 is in the books, but suffice it to say with the likes of MOS, DRYS, TEX, PBR, RIO and others in the portfolio over the past 10 ½ months, we have been fishing in very rich waters.

In addition to the usual equity curve and summary information, I have added a list of positions that were closed out during the year.

There no changes to the portfolio this week.

A snapshot of the portfolio is as follows:

Portfolio A1 Finishing Year With Big Gains

What was largely an up and down year for Portfolio A1 through Thanksgiving has suddenly turned out to be a very successful one, thanks to what is shaping up as a very strong finish. Essentially even on the year at Thanksgiving, Portfolio A1 is now up 19.3% just two weeks later, putting a lot of space between the portfolio and the benchmark S&P 500 index, which is now showing a 3.4% gain since the portfolio’s February 16^th inception.

While a bullish run in Sinopec (SNP) and a resurgent DryShips (DRYS) have helped, the 121% gain in Mosaic (MOS), added to the portfolio in mid-August, is the primary reason that the portfolio has made such impressive recent gains.

Given that the portfolio is putting up such superb numbers, I am inclined to reverse my previous thinking and continue to highlight it here past the end of the year, rather than start a new portfolio from scratch.

There are no changes to the portfolio this week.

A snapshot of the portfolio is as follows:

Portfolio A1 Moves Up Smartly

It was a very good week for Portfolio A1 – and an excellent week for the portfolio’s top three holdings. With Mosaic (MOS) gaining 13.4%, Sinopec (SNP) up 13.7%. and DryShips (DRYS) surging 22.8%, it is not surprising that the full portfolio tacked on 10.6% in a remarkable week.

With less than a month to go in the trading year, Portfolio A1’s cumulative 12.2% gain is 10.4% better than the meager 1.8% gain in the benchmark S&P 500 index.

Despite the recent success, the portfolio is not standing pat, as beverage company PepsiAmericas (PAS) is being swapped out for Fresh Del Monte Produce (FDP) in a move that I cannot attempt to explain. As fun as it has been watching and commenting on the doings of this mechanical portfolio, I am looking forward to rolling out a discretionary portfolio at the beginning of the new year.

There are no other changes to the portfolio this week.

A snapshot of the portfolio is as follows:

MOS and PCR Slow Down Portfolio A1

The run in Mosaic (MOS) certainly was not going to continue indefinitely, but last week’s correction was rather dramatic, as the MOS chart shows. Compounding an already difficult week, Perini (PCR), whose addition to the portfolio caused me to raise an eyebrow at last week, did nothing to assuage my concerns, losing 7.5% in the first week.

The result is that Portfolio A1 now sits with a gain of 5.7% since the February 16, 2007 inception, still comfortably ahead of the 0.2% gain in the benchmark S&P 500 index. As is evident from the bottom two graphics, this enhanced performance has come with considerably more risk than the SPX in the form of a much higher variability of returns. The next iteration of this portfolio (to be launched at the beginning of 2008), will aim to minimize risk somewhat more than the current portfolio, while continuing to seek out stocks like Mosaic that can supercharge returns. The ride will no doubt be just as interesting – and hopefully more profitable and instructive.

There are no changes to the portfolio this week.

A snapshot of the portfolio is as follows:

Mosaic (MOS) Continues to Lead Portfolio A1

The title is probably a considerable understatement, but what else can you say about a stock that is up 91% in only ten weeks in the portfolio?

The amazing run of The Mosaic Company (MOS) has helped to push Portfolio A1’s performance to a cumulative return of 14.15% since the portfolio inception on February 16, 2007. This is 8.67% better than the 5.48% returned by the benchmark S&P 500 index during the period.

Mosaic’s performance has triggered a number of thoughts about portfolio design, backtesting, and the likelihood of catching lightning in a bottle. Simply stated, in the 8 ½ months that Portfolio A1 has been up and running, it has purchased 27 stocks. Almost half of these stocks are up 50% during this period and 30% (MOS, DRYS, BRP, PCU, PBR, RIO, CNH, and SNDA) are up an astonishing 100% or more. The bottom line is that I believe it is possible identify stocks that have a high likelihood of doubling or tripling in one year (with attendant risk, of course) and build portfolio rules to maximize the probability of capturing those gains during the time they are held in one’s portfolio. I will expand upon this going forward, but Portfolio A1 should provide some evidence to support that contention.

There is one change to the portfolio: Navistar International (NAVZ) has been dropped and is being replaced by returnee PepsiAmerican (PAS), the beverage bottler. There are no other changes to the portfolio this week.

A snapshot of the portfolio is as follows:

Portfolio A1 Pulls Away from SPX

It was a crazy week, but when all the dust had settled, the 3.0% loss in Portfolio A1 was less than that of the 3.9% drop in the benchmark S&P 500 index. With last week in the books, the cumulative return for Portfolio A1 since inception sits at 9.2%, almost three times that of the 3.1% return for the SPX during the period.

DryShips (DRYS) led the way up from Monday through Thursday, before falling 8.9% Friday. The only stock to finish the week in positive territory was The Mosaic Company (MOS), which added 1.3%, but as it is the portfolio’s largest holding (28.7%), the gain provided the portfolio with a disproportionate boost. Going forward, this dry bulk carrier and fertilizer producer should provide important clues about not only the health of the economy, but about pricing power in these two sectors as well.

Since the rules of this portfolio are such that it is long only, I expect Portfolio A1 to be tested once again in the coming week. If the bulls return before the week is over, I think this portfolio is well positioned to continue to outperform. If we have another week selling and a whiff of an extended bear, I suspect this portfolio will have difficulty continuing to outperform the SPX with the current holdings.

There are no changes to the portfolio this week.

A snapshot of the portfolio is as follows:

Correlation Ideation

Let’s say, for the sake of argument, that you are intrigued by the 71% gains that MOS has logged in the past eight weeks in Portfolio A1, but for whatever reason do not want to own that particular stock. Perhaps you have an opinion that the fertilizer stocks are overbought or that a supercycle is just beginning in this sector. Which stocks should you be looking at? I recommend visits to three free web sites that can help you answer this and other related questions: Market Topology; Sector SPDR Correlation Tracker; and DeepMarket.com’s correlation tool. Each of these sites has some particular strengths that I discuss below.

My first stop to evaluate correlation data is usually at MarketTopology.com. Once there, you need to click on the Equities Markets: USA link to arrive at their “i-work” page. From here, just enter the ticker and either click on the ‘Calculate’ button to return data in a table (usually the better choice) or try ‘Map’ to see a graphical representation of the securities with the highest correlation. There are several other boxes you can use to filter the results; these should be self-explanatory and ripe for experimentation. In the case of MOS, the four highest correlations returned are POT, CF, AGU, and TRA – all companies in the fertilizer sector. The next two most correlated securities are both materials ETFs: VAW, the Vanguard Materials ETF; and IYM, the iShares Dow Jones Basic Materials Sector Index Fund. It is these types of discoveries that make tangential company and sector research more fun and interesting. Note also that the table also has a column for ‘Average Daily Volatility’ for those interested in identifying highly correlated stocks or ETF that are significantly more or less volatile than the baseline security.

Among the three sites discussed here, the ease of use award would probably go to the Sector SPDR Correlation Tracker, which simply asks for a ticker and generates three lists: highest correlation sector SPDRs; highest correlation stocks/ETFs; and lowest correlation stocks/ETFs. As an added bonus, you can generate java comparison charts for any four securities on these lists for additional analysis. Let’s say you are interested in the FXI, but prefer to take a position in an individual stock instead of the ETF. Using the Sector SPDR correlation tracker, you would be pointed in the direction of CHL, CEO, LFC, and BIDU.

At the bottom of the list is DeepMarket.com, which scores high for content, but low for aesthetics. Their correlation tracking tool lists the top 5 highest positive correlations and (lowest) negative correlations for the past 10, 30, 100, and 200 day trading periods. The site provides the correlation coefficient and a rudimentary line chart, but little else. What I do like is the ability to slice and dice correlations over four different time periods (the longer time periods probably provide the most value,) but apart from that feature, the other two sites are to be preferred.

I should mention that while I have focused on positive correlations here, each site provides a list of the most extreme negative correlations as well. While these generally are not as strong correlations as the positive correlations, they do provide and excellent jumping off point for someone looking to add securities to a portfolio that may be inversely correlated to some of the portfolio’s riskier holdings. This type of approach is admittedly more art than science at the individual security level, but for those unable to evaluate portfolio level correlation data, it is a substitute worth exploring.

Portfolio A1 Gains 9.8% in Week

The highly volatile Portfolio A1 roared past the benchmark S&P 500 index last week, with a stunning gain of 9.8% on the week. The gains bring Portfolio A1’s cumulative return since the February 16, 2007 inception to 12.6%, which is also 5.3% greater than that of the SPX during the same period.

Two stocks were responsible for most of the weeks gains: DryShips (DRYS) was up 23.1%; and The Mosaic Company (MOS) added 17.7%. The gain in MOS brings the fertilizer producer’s cumulative return to an eye-opening 71.4% in the eight weeks it has been in the portfolio – far and away the best performer in the portfolio to date.

It has been a dramatic roller coaster ride for this portfolio over the past three months, which makes this a good time to reiterate that the purpose of this portfolio is to aggressively maximize capitalize gains in the context of a concentrated, high risk strategy. One glance at the equity curve tells the story.

There are no changes to the portfolio this week.

A snapshot of the portfolio is as follows:

Portfolio A1 Continues Upswing Behind Red Hot Mosaic (MOS)

Thanks to the Fed rate cut, three of Portfolio A1’s five holdings logged gains of 10% or more last week, led by a 12.2% gain in The Mosaic Company (MOS), which now sports an impressive 39.7% return in the five weeks it has been in the portfolio. Also part of last week’s winning trio were DryShips (DRYS) and Navistar (NAVZ). By the time the abacus was put to bed, the gap between the benchmark S&P 500 index and the portfolio had closed to 7.9%, the lowest margin since the mid-August plunge. With a total return of -3.08 since the February 16, 2007 inception, it is beginning to look like the portfolio may soon be back in green.

In the never ending quest for better performance (while keeping a deaf ear to any concerns about high turnover) this week the stock ranking system has jettisoned Sanderson Farms (SFM) in favor of Terex (TEX), an infrastructure play with significant exposure to China. A returnee, Terex was a very strong contributor to the portfolio earlier in the year.

There are no other changes to the portfolio this week.

A snapshot of the portfolio is as follows:

DRYS Slows Portfolio A1’s Advance

After rallying impressively over the past three weeks, Portfolio A1 lost momentum last week, due in large part to a 8.5% decline for the week in DryShips (DRYS), after JPMorgan expressed some concern about the drybulk sector.

With four of the five holdings in the red, the portfolio has relied heavily on fertilizer stalwart Mosaic Company (MOS) for capital appreciation, but even with MOS’s 24.4% one month gain, this one-legged portfolio does not have enough forward momentum at the moment to credibly threaten break even soon. Still, with the FOMC about to make a highly anticipated rate cut decision on Tuesday, anything can happen, even a sustainable surge.

There are no changes to the portfolio this week.

A snapshot of the portfolio is as follows:

Portfolio A1 Continues to Close the Gap on SPX

From the department of small victories comes the news that for the third week in a row Portfolio A1 has taken a small bite out of the gaping performance hole between the portfolio and the benchmark S&P 500. That performance gap, which peaked at 17.5% three weeks ago, has now been sliced to 9.9%.

The Mosaic Company (MOS), a fertilizer producer, has been leading the charge back to respectability, with a 19.3% gain in three weeks. New addition DryShips (DRYS) was up 7.8% in its first week in the portfolio.

Two companies have been dropped from the list of holdings: CNH Global (CNH), despite a 10% return during its holding period; and Western Refining (WNR), which departs with a 7.3% aggregate loss. These companies are replaced by two higher ranking stocks: Sanderson Farms (SFM), a poultry producer; and Navistar International (NAVZ), a returnee to the portfolio after a one month hiatus. Navistar has been in the news lately for its diesel-hybrid technology as well as its armored vehicles.

There are no other changes to the portfolio this week.

A snapshot of the portfolio is as follows:

Portfolio A1 Slowly Closing Gap on SPX

For the second week in a row, Portfolio A1 has taken a small bite out of the gaping performance hole between the portfolio and the benchmark S&P 500. What was a 17.5% gap two weeks ago is now down to a slightly more manageable 11%.

The two agriculture-based holdings, Mosaic (MOS) and CNH Global (CNH), continue to lead the resurgence, up 16.8% and 9.5% respectively in the two weeks they have been in the portfolio.

Speaking of bright lights, I was more than a little surprised to see the portfolio drop PepsiAmerican (PAS) this week. The Minneapolis-based bottler was added to the portfolio three weeks ago on the strength of very solid fundamental numbers across the board and has been very strong technically, making a new 52 week high on Friday (and again this morning)…but apparently an 8.8% gain in three weeks is not good enough to keep it from yielding its slot in the portfolio to shipping juggernaut DryShips (DRYS), a company that is up almost 500% in the past year and yet still manages to sport a P/E under 13.

From my vantage point, it appears that adding DRYS is an implicit endorsement of continued global economic growth and a move away from a more conservative food and beverage play. Even though the mechanical system behind Portfolio A1 doesn’t use this type of market logic in its decision-making, this does not stop me from putting my interpretive spin on what comes out of the black box.

There are no other changes to the portfolio this week.

A snapshot of the portfolio is as follows:

Portfolio A1 Appears to Find a Bottom

After four weeks of performance that you wouldn’t want to be downwind of, it seems appropriate that it took a new addition to the portfolio – and a fertilizer company at that – to turn around Portfolio A1. The fertilizer company, Mosaic (MOS), surged 14% last week, while the other portfolio newcomer, agricultural equipment maker CNH Global (CNH) posted a weekly return of 5.7%. For now at least, the agricultural theme is working.

The aggregate portfolio statistics are still on the ugly side, with the portfolio down 12% since the February 16^th inception, well behind the benchmark S&P 500’s 1.6% gain during the same period. With a Sharpe ratio of -0.72, a winning percentage of 36%, and a maximum drawdown of 29.9%, one has to look long and hard to find a silver lining in the portfolio’s performance. Still, I will ride this portfolio out through the end of the year, at which time I will introduce a new portfolio with a strong discretionary component, as I outlined last week.

This week Portfolio A1 swaps BRIC telecoms by saying goodbye to Moscow-based Mobile TeleSystems OJSC (MBT) and replacing it with Brasil Telecom Participacoes (BRP), an ADR that the discretionary trader in me likes a great deal. There are no other changes to the portfolio this week.

A snapshot of the portfolio is as follows: