I promised the stats on my *Blue Plate Specials* Fund and although I’m a bit tardy in the posting, I want you to know that my ancient but trusty abacus has been working overtime. Slogging through sixty days worth of data takes a bit of time–besides making my fingers numb.

Enough back-pedaling. On to the numbers. But first, a recap of what I’m writing about.

Fund-amentals
This fund was based on a larger fund that I constructed to accommodate $30M-$50M with the stipulation that only equities trading on the US exchanges were to be used. High return was the principal mandate to be achieved at minimal risk. (I know, duh.)

The *Blue Plate Specials* fund is the result, stripped down to the basics so that the serious investor with sizable investment monies or the smaller fund manager might be able to follow the blueprint. But even the average home investor can modify the results of this very illustrative exercise and mold it to her or his own use.

The original fund was always hedged—in up markets as well as down. Due to budget concerns, I did not hedge this fund but I it appears that I should have. We’ll discuss this later.

The fund’s basic structure is still the same: Eleven running portfolios composed of ten stocks (in bull markets) and five stocks (in bear markets). Each portfolio is held for eleven days. Why exactly eleven days? Because, via extensive back and forward testing, it was found to be the optimal number of days to achieve maximum profit. (For complete details, please see 4/21/10 blog.)

Okay, on to the results show. Drum-roll, please!

Fund set-up
Sixty portfolios were evaluated. The first portfolio was initiated on 7/26/10 and the last one on 10/29/10. (No portfolios were initiated between 8/13 and 8/20 due to a death in the immediate family.)

Only stocks trading on the major US exchanges were included. No closed-end funds, ETFs, or ETNs were considered as this was designed to be a stocks only fund. We’ll see if better results could have been achieved using these other vehicles.

No dividends or commissions were included in the analysis.

Fund stats
Portfolio stats are shown in the table below. Fund performance is compared with the S&P 500, the usual benchmark for a variety of mid to large cap stocks.

In considering the stats, there are a few important things to note:

There were no portfolios generated 8/12-8/20 due to personal issues (death in the immediate family). This will skew the comparison of the fund with the SPX, for better or worse.

The risk of this type of equity fund is defined by the standard deviation of the returns. The table value shows the result of the fund period only. Because each portfolio is compounded according to the returns of the previous day’s closed out portfolio, trying to annualize the risk would be meaningless.

The same measure applies to the Sharpe ratio, a typical (though controversial) measure of portfolio performance. At least a year’s worth of data (in my opinion) is needed to deduce even a roughly accurate value.

However, the return can be annualized (though I would take the calculated value with a big grain of salt) by looking at the average daily return. By doing it this way, we’re comparing apples to apples using the initial value of each portfolio and comparing it with that portfolio’s final value. Performing this type of calculation leads to an average daily return (over all 60 days) of 0.13% giving an average annual return (assuming 250 trading days) of 32%.

A note on commissions: As I mentioned previously, this fund was designed for large investment amounts where commissions wouldn’t make a big dent into profit. That said, it’s not geared towards smaller amounts (less than several million) as the sheer amount of trading will eat into profits—that is, unless you have a really, really low-priced broker. (This was meant as an institutional vehicle, anyway, but I’m presenting here as a learning tool for everyone.)

Summary
There’s more analysis to follow but I don’t want to bog my readers down with too much head-spinning information. In an upcoming blog (to follow soon, I promise!) we’ll look at the timeline of the fund via the evolution of the S&P500 as well as what I would do differently had I to do it again. We’ll also look at the what-if scenario: ETF’s or stocks? Or both? Or other vehicles?

I guarantee this will all be stuff you can use and I promise it won’t be too academic.

Okay. Maybe a little, just to make ol’ Dr. Kris happy.

Key market reversal yesterday
I had mentioned on Monday that the market was under consolidation and yesterday it finally decided to take a much needed breather. The action was so negative—what with topping tails galore, a rising Trin, and all sectors and asset classes (outside of the US dollar) dipping into the red—that I thought the market would spend at least a few more days in negative territory. Since I only had a few *Blue Plate Specials* portfolios remaining, I made the executive decision to end the fund on a high note and closed them all out while they still were in the green.

Hindsight will tell me if that was the correct choice but there’s no turning back now. To tell the truth, there are other things I’m chomping at the bit to get to including the launch of a totally refurbished website (I like this layout but apparently I’m the only one), another completely new website geared towards long-term investors and investment professionals, and an exciting new app that will provide oodles of investment ideas and strategies. I’m so excited!

I also want to get back to the business of writing articles and searching for more investment recipes. How I’ve missed pure research! Not to worry, though, as I’ll still be putting out my daily *Blue Plate Specials.*

Today’s market action
Much to my amazement the market bounced off its early morning low and jogged right back up, closing the day in positive territory. The VIX and the Trin both settled back down and bullish VWAPs suggest that perhaps this short-lived correction is over. But I wouldn’t get too excited because this fickle market could easily change its mind and stumble head over heels at any time. Remember what I’ve been saying about buying protection!

Portfolio close-outs
The 10/25 though 10/29 portfolios were closed out on Tuesday for some very nice gains. Special thanks to the gold and silver mining stocks Novagold (NG) and Silver Wheaton (SLW) which turned in stellar two week performances.

Full fund stats are being computed and will be presented in tomorrow’s blog along with commentary about what went right and what could be improved upon. See ‘ya manana!

More consolidation ahead?
The general chart pattern of the current rally is that of an upward movement for a couple of days followed by a longer period of consolidation. We had a nice move last week after what seemed an interminable period of consolidation (but which really was only eight days) and now it looks like we’re back in the consolidation phase.

How long we’ll stay here is anyone’s guess and as I mentioned in the previous blog, there’s not a lot of market-moving news left to fuel this rally. Now would be a good time to buy some put protection, just in case. Options on the index tracking stocks such as the QQQQ, SPY, and DIA are cheap and liquid.

Today’s portfolio close-out
The 10/22 portfolio was closed out for a decent 4.5% gain. This IT-heavy portfolio’s return was right in line with the 4.8% return on the Information Technology ETF, the VGT, during the same period.

The 10/25 portfolio will be exited Monday. Only five portfolios remain.

[See 4/21/10 blog for further details on how these portfolios were constructed.]

Market Notes
I’m doing my weekend chart surfing and noting that several market-leading indicators (TQQQ, SQQQ, DTX) stalled on Friday. This could indicate one of two things: the market is taking a catnap before advancing, or it’s ready to take dive. Let’s hope it’s the former and not the latter but we won’t know for sure until the market opens tomorrow.

I’m tending to think that the market could be in for a breather as there’s really no significant market-moving news on the horizon. Sure, the Michigan Consumer Sentiment number may have some effect but that won’t be until Friday. Of minor importance will be the earnings reports of agribully Monsanto (MON) due out Monday, wireless provider Sprint (S) and casino game-maker Int’l Game Tech (IGT) on Tuesday, retailer Macy’s (M) and apparel maker Ralph Lauren (RL) on Wednesday, and big pharma Merck (MRK),  entertainment conglomerate Disney (DIS), and major health-insurer Aetna (AET) on Thursday. In light of these considerations, bulls might want to add a little protection to their portfolios.

Friday’s portfolio close-out
The 10/21 portfolio was closed out on Friday. An excellent 8.8% gain was achieved by a very industrial-heavy portfolio led by the auto parts makers and the aero & defense suppliers. And it sure didn’t hurt that there weren’t any offsetting losses, either!

The 10/22 portfolio will be exited Monday. Only six portfolios remain.

[See 4/21/10 blog for further details on how these portfolios were constructed.]

Market Notes
The best chicken soup for the investment soul is for the major averages to hit a new yearly high on a solid advance. Today’s move left nary a sector behind. The financials, represented by the XLF, finally broke $15 strong resistance. The last 45 minutes of the trading session it powered ahead leaving former market leader, the XLK (tech ETF), eating its dust.

Joining the joyride was the XLF’s brethren: the banks (KBE, KRE) and the homebuilders (XHB, ITB). Now that these crucial components have swung over to the bull;s camp, we can get on with this rally. Full steam ahead!

And looking ahead, I’m estimating the next resistance levels to be the following: SPX 1235, DTX 500, DJIA 11575, and Nasdaq 2600. Only the OEX needs to clear its 554 high set last April before entering new territory unseen for the past couple of years. We’ll see if tomorrow’s jobs number can throw a wrench into the gears of this steamrolling machine, but I doubt it.

Today’s portfolio close-out
The 10/20 portfolio was closed out another great gain thanks mostly to our two Argentinian banking stocks Grupo Financiero (GGAL) and BBVA Banco Frances (BFR). The banks in that country certainly have caught on fire!

The 10/21 portfolio will be exited tomorrow.

[See 4/21/10 blog for further details on how these portfolios were constructed.]

Market Notes
What with the elections being so five minutes ago, the market began the day flat, drifting lower while, in contrast, the VIX rose all the way up to the 22 mark, reflecting investors’ fears at what the Fed would do. The spell was broken at 2:15 ET by the Fed announcing their plan for QE2 along with their decision not to raise interest rates any time soon.

Following the usual schizophrenic post-Fed action, the market eventually swung to the upside with the major averages closing at near-term highs. The really interesting movement, though, was in the VIX. It was as if someone had sucked all of the air out of it because it promptly shed 2 ½ points, closing under the 20 bull/bear Maginot line. Now that traders know what the Fed has in store, they’re more certain of what they’ll be facing.

Does this mean that we can expect the market to rally further? Considering that the VIX has moved under 20 (for now) and bellweather indicators such as the XLK (tech ETF) and the Dow Transports (DTX) are breaking to new highs, it sure looks as if that might be the case. On the downside, a negative jobs report on Friday could derail the rally but unless it’s a really bad number, I don’t think it will have much effect.

The other concern is that this market has been fueled by economic events, and the lack of any really good news could send it into the doldrums. A choppy or sideways market is always worse than one that is directional. Just ask the Turtles.

Today’s portfolio close-out
The 10/19 portfolio was closed out today for a truly spectacular 11 day gain. Thank one-day wonder China Chen Zhou Mining (SHZ) and my good luck that I sold it on the day it popped.

[FYI, if you experience a terrific one-day pop in a speculative stock that you own, I strongly suggest taking a profit. The reason is that there is generally not enough buying interest (yet) to sustain a further rally.]

The 10/20 portfolio will be exited tomorrow.

[See 4/21/10 blog for further details on how these portfolios were constructed.]

Market Notes
Apparently just the thought of a Republican victory cheered Wall Street as the major averages finally blew off their recent doldrums and staged a very nice rally. Although today’s move was convincing, we’re not out of the woods yet as the indices still can’t move past their recent highs (we’re close, though). Also, that darned VIX is being stubborn, refusing to dip its toe below the 20 line. What’s it gonna take?

Maybe encouraging words from the Fed tomorrow will be the nudge needed to break the market barriers. Let’s hope Bernanke doesn’t hint at deflation or we can kiss the rally goodnight.

Correction: Dr. Kris may need a new glasses prescription as she said in yesterday’s blog that the Fed’s decision was today. It’s tomorrow, at 2:15pm ET.

Today’s portfolio close-out
The 10/18 portfolio was closed out for a tiny gain. If commission costs were included, we definitely be in the hole on this one. I’m glad I sold Netsol (NTWK) when it tanked on 10/21. Although it did recover a bit, it went on to post a 25% loss for the period had I held it. Tomorrow, the 10/19 portfolio will be closed out.

[See 4/21/10 blog for further details on how these portfolios were constructed.]

Market Notes
The market has been in a holding pattern for the past week waiting on the outcome of several noteworthy events. The first is tomorrow’s FOMC meeting where the primary focus will be on what the Fed says (in the way of future guidance) instead of what it does (like adjust the interest rate which it won’t but if it does they’ll be catching eveyone off-guard and all heck will break loose). The second are tomorrow’s mid-term elections where any deviation from the expected results won’t be reflected until Wednesday’s trading session.

Options insurance
With this event uncertainty combined with the fact that market is beginning to quaver, buying some put protection would be prudent. I prefer bear put debit spreads (buy a higher strike put and sell a lower strike put) over straight puts for two reasons: 1. the cost of insurance is reduced (by the income generated by the sold put) but the amount of protection is also reduced, and 2. the effects of volatility are mitigated which is especially important in highly volatile markets.

A speculative options play
Those of you high-risk options players might want to consider at-the-money straddles (buy an at-the-money call and a put at the same strike) on one of the major indexes or their tracking stocks (options on the Q’s and the SPY are cheap and liquid). This strategy works well if you expect a big move in the market but aren’t sure of the direction. I think this isn’t a bad bet at all considering that the market has been under consolidation for a while and when this happens it tends to make a significant move, one way or another.

Today’s portfolio close-out
The 10/15 portfolio was closed out for a slight loss. The 10/18 portfolio will be closed out tomorrow.

[See 4/21/10 blog for further details on how these portfolios were constructed.]