This is the third time we have followed a contrarian trading portfolio here at TheStreet and the third time's a charm. This was by far the most successful of the three. The objective in publishing these was to show how short-term trading can be done within the following parameters:

  • Select exchange-traded funds that will profit if recent trends change. (Be contrarian.)
  • From that list of ETFs select those that show signs of trend change possibly being near at hand by using simple technical analysis methods.
  • Market and limit orders can be used to enter both long and short positions.
  • Limit risk by using stop loss orders on both short and long positions.
  • Manage risk using options.

All of the objectives have been met except for the last one. We didn't have an occasion to use options.

The closeout articles for the first two portfolios were published TheStreet in December 2009 and September 2009.

We started with eight portfolio positions for the winter portfolio, but one of them never hit the specified limit price for entry. Thus the portfolio actually only had seven positions. Because of market swings there were several trades in six positions.

Position 1 -- Buy Brazil

The vehicle used was iShares MCSI Brazilian Index ( EWZ). The position was stopped out with a small gain on Jan. 15 and the limit price for repurchase was never reached.

Position 2 -- Buy China

The ETF that represents stocks traded on the Shanghai stock market is iShares FTSE/Xinhua China 25 Index ( FXI). The strategy here was to buy ProShares UltraShort FTSE/Xinhua China 25 Index ( FXP) if stopped out of FXI. If FXP was sold on a stop loss trigger we then switched back to FXI. In the three months we switched once to FXP (for three weeks) and then back to FXI. The three weeks in FXP actually produced almost as much gain as all the time in FXI.

Position 3 -- Buy Gold

The ETF used was SPDR Gold Shares ( GLD). As with the China trade, we also reversed into ProShares UltraShort Gold ( GLL) when stopped out of GLD. If GLL was stopped out we then went back to GLD. The gold trading position was the second poorest performer in the portfolio. After starting in GLD, reversing to GLL, and then back to GLD, the total gain was 5.5%.

Position 4 -- Buy Silver

The ETF here was iShares Silver Trust ( SLV). When stopped out of SLV, the proceeds were put into GLL. When stopped out of GLL, we moved back to SLV. The three positions here did much better than the gold-only trades, with a return over 17%.

Position 5 -- Sell Oil

We used Proshares UltraShort Oil and Gas ( DUG) for this trade with reversal into ProShares Ultra Oil and Gas ( DIG) when stopped out of DUG. As with previous positions, stopping out of DIG triggered a repurchase of DUG. This was the third-poorest position with a return less than 7%.

Position 6 -- Sell U.S. Treasuries

The limit price for purchase of ProShares UltraShort 20+ Year Treasury ( TBT) was never reached so this position was never opened.

Position 7 -- Sell the S&P 500

We bought ProShares UltraShort S&P 500 ( SDS) to open this position but were stopped out in 2 ½ weeks with a 4.6% loss, switching to ProShares Ultra S&P 500 ( SSO). After two more trades, triggered by stop loss order executions, we spent the last six weeks in SSO for a 16.6% gain. For the four trades, the gain was more than 24%.

Position 8 -- Buy the Nasdaq-100

This was the big winner using ProShares Ultra QQQ ( QLD). The short companion ETF was ProShares UltraShort QQQ ( QID). Less than three weeks was spent holding QID for a gain of almost 11%. The rest of the time in QLD produced a return over 27%. The total return for the position was over 40%.

The following table summarizes all the trades:

This portfolio was much more successful than the first two because market swings were larger. Risk management using stop loss orders can give poor results in markets with swings that are just large enough to trigger stop loss orders but not large enough to realize significant gains.

The term used for the lack of return, and the creation of losses, is "whipsaw." Traders can really get cut up in whipsaw action and that was the outcome in the first two portfolios, although both managed to produce small gains.

The following table summarizes the results for the three portfolios:

At the time of publication, Lounsbury was long ProShares Ultra S&P 500 and ProShares Ultra QQQ.

John B. Lounsbury is a financial planner and investment adviser, providing comprehensive financial planning and investment advisory services to a select group of families on a fee-only basis. He worked for 34 years with IBM, and spent 25 years in R&D management and corporate staff positions. He also was a Series 6, 7, 63 licensed representative with a major insurance company brokerage for nine years.

Specific interests include political and economic history and investment strategy analysis. He holds degrees from the University of Vermont, Columbia University and the Illinois Institute of Technology, where he studied chemistry, physics and mathematics. He is a contributor to Seeking Alpha and his own blog, PiedmontHudson.

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