Russell 2000 Small Caps -Volatility - Buying the Dip and Robots

I have added a new folio to some of the GWM Model Portfolios. This folio is labeled "Long/Short". The distinguishing characteristic of this folio is that it can play both uptrends in the market (long = owning assets that benefit from the market going up) and downtrends in the market (short = owning assets that benefit from the market going down).

Another important aspect of this folio is its reliance on an algorithmic based trading system sometimes referred to as a robot. It has been reported that as much as 70% of trading volume is now generated by such computerized systems. The robots I use were designed to focus specifically on one market sector alone. Currently I have access to two such robots developed by Pascal Willain, author of Value in Time, published by John Wiley and Sons, Inc. The first is the GDX robot and the second is the IWM robot.

The biggest enemy to investors is their own emotions. The fact that robots have no emotions gives them an edge.

On Friday I took a small position in IWM (Russell 2000 small-cap index ETF) based on a strong buy signal from the IWM robot. The following is an analysis of the trade:

• Strong buy signals are given a 1:3 risk/reward ratio. The robot recommended stop is just 2% below the recommend entry price.  This means that for every dollar at risk you have the potential to gain three. For example: $10,000 invested - amount at risk (potential loss at stop) = - $200 -- target gain = $600.
• Technical analysis - Increase in volatility (Wall Street double talk for prices declining)  -  IWM has declined by 9.71% since its April 29th high.
• IWM is extremely oversold - stocks tend to rebound from an oversold condition (bounce up)

(Click on chart for easier viewing)

The robots I am using have shown very good results in all market conditions based on actual trades and backtest studies. The key is to maintain discipline in following the signals. The results show a greater than 70% success rate.

Previously I was going to add the Long/Short robot folio to aggressive accounts only.  I more recently determined that most GWM investors could benefit by having it due to the up and down nature of the markets. Position sizing and risk is still overwhelmingly determined by GWM Model Portfolio selection; the Golden Years Model has the least risk exposure; the Go Getter Model has the most exposure.

This blog post does not constitute an offer of investment advice. This blog is only provided for educational purposes. Please read the Important Blog Disclosure posted in the right channel bar.