The Simple Trading System that

Crushes the Market

By Michael J. Carr, CMT -- December 10, 2011 Print | PDF | Ensure Delivery

I never learned why they invited us, but I've never felt more out of place in my life.

It happened at a trading conference in San Francisco two years ago. Just about every
speaker at the conference was talking about trading in terms of "nanoseconds." In the time
it takes you to blink, their supercomputers could literally execute millions of trades.
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And there I was, telling them about my 6-month "ROC" system. In the world of
nanoseconds, 6-months might as well be an eon.

Luckily, there was one speaker at the conference with an even more "primitive" system
than mine -- Mebane Faber, author of the popular investing book The Ivy Portfolio: How to
Invest Like the Top Endowments and Avoid Bear Markets.

But he was not there to talk about Harvard's or Yale's portfolio. Mebane's presentation was
about his 10-month moving average trading system. His "pen and paper" trading system
was so simple, that I'm surprised they did not laugh him off the stage.

Yet, it's one of the best trading systems in the world. Here's a quick snapshot of Mebane's
timing system vs. just holding the S&P 500:

S&P 500 vs. Mebane's System 1900-2008

S&P 500 (Buy & Hold) Mebane's 10-Month MA System
Annualized
9.2% 10.5%
Returns
Volatility 17.9% 12.0%
Best Year 52.9% 52.4%
Worst Year -43.9% -26.9%
Data from Mebane T. Faber's "A Quantitative Approach to Tactical Asset Allocation.

His system outperformed the S&P 500 while experiencing 33% less volatility. In fact, you're
only in the trade about 70% of the time -- that means less risk.

Even more impressive, it managed to dodge the two worst years in market history, 1931
and 2008:

S&P 500 vs. Mebane's System 1931 & 2008

 Returns S&P 500 (Buy & Hold) Mebane's 10-Month MA System
1931 -43.9% 1.4%
2008 -36.8% 1.3%
Data from Mebane T. Faber's "A Quantitative Approach to Tactical Asset Allocation.

How does his system know to exit the market before major downturns? It follows one
simple rule: Only own the S&P 500 when it's trading above its 10-month average.
When the S&P 500's price falls below its 10-month moving average, you sell. Just about
any asset class or security can be traded using his system.

It may not be the "holy grail" of trading systems, but I'll take it over an algorithm-driven
supercomputer system any day.

My 6-month "ROC" system is a little more complex than Mebane's (you'll need at least a
calculator), but it follows the same principle: Ride bull markets and dodge bear markets.

If you enjoy wild swings in your equity account and staring at your trading screen all day,
my "boring" system is probably not for you -- I usually hold securities months at a time, not
nanoseconds. So far, the results have been outstanding.

My 6-Month "ROC" system had an annualized return of 18.1% from January 1989 to May
2007. That's almost double the S&P 500's 9.4% annualized return over the same time
period. Those were the latest results when my book, Smarter Investing in Any Economy:
The Definitive Guide to Relative Strength Investing, went to press in 2007.

Since then, it's been a difficult market to say the least. But my system still managed a
"small" 6% gain from May 2007 to October 2010 -- the market fell about 22% in the same
time period.

The point is, you don't need a million-dollar supercomputer to be a successful trader. Just
find a system that works, and stick with it.

Michael J. Carr, CMT

TradingAuthority.com

Dr. Melvin Pasternak's Trades & Updates

Trade Buy/Sell Buy/Sell Stop- Current Total
Company (symbol)
Type Date Price Loss Price Return
Tim Horton's (NYSE:
Long 04/25/11 $48.49 $34.57 $49.89 +2.9%
THI)
McDonald's (NYSE:
Long 05/23/11 $81.53 $90.58 Closed +18.2%
MCD)
Chipotle Mexican Grill
Long 07/05/11 $315.98 $249.57 $338.60 +7.2%
(NYSE: CMG)
Bristol-Myers Squibb
Long 08/26/11 $31.15 $27.98 $33.54 +7.7%
(NYSE: BMY)
National Resource
Long 10/10/11 $28.03 $36.56 $26.90 -4.0%
Partners (NYSE: NRP)
Carter's (NYSE: CRI) Long 10/27/11 $36.78 $32.77 Closed +12.5%
Wal-Mart (NYSE: WMT) Long 11/21/11 $56.93 $49.92 $58.32 +2.4%
StarBucks (Nasdaq:
Long 12/05/11 $44.25 $39.49 $43.96 -0.7%
SBUX)
Verizon (NYSE: VZ) Long 12/05/11 $37.93 $35.85 $38.43 +1.3%
View all closed trades here. Stock prices in this issue are as of the close of trading on December 9.

Tim Horton's (NYSE: THI) traded in a narrow range over the week. Shares are currently
testing the 20-day moving average, marked by the middle Bollinger Band. Daily RSI is
clinging to the key 50-juncture. Daily MACD is on a "buy" signal. So far, I'm ahead about
3% on the trade. My stop-loss of $34.57 and target of $64.77 remain.
McDonald's (NYSE: MCD) hit my target of $96.33. On Thursday, the fast-food giant
reported global same-store sales rose 7.4% in November, due to strong demand for its new
Peppermint Mocha and other popular coffee drinks. During the time I held the stock, I made
an 18.2% return. The trade is now closed.

Chipotle Mexican Grill (NYSE: CMG) remained relatively unchanged over the week.
Shares are currently above the slightly upward curling 50-day moving average. Daily RSI is
above the key 50-juncture. Daily MACD is on a strong "buy" signal. I'm currently up 7.2%
on the trade. My stop-loss of $249.57 and target of $377 remain.

Bristol-Myers Squibb (NYSE: BMY) approached, but did not quite touch my target of
$33.77. On Thursday, the company announced positive results from its Phase 3 clinical trial
of dapagliflozin, which helps reduce blood sugar levels of type 2 diabetes patients taking an
existing treatment therapy, glimepiride. Traders seemed unmoved by the news. The stock
is currently trading just below resistance marked by the upper Bollinger band. Daily RSI
remains around 65, which is significantly above the key 50-juncture, but not quite at the
overbought 70 level. Daily MACD is on a "buy" signal. I'm currently ahead almost 8%. My
stop-loss of $27.98 and target of $33.77 hold.

National Resource Partners (NYSE: NRP) was pulled down over a dollar on Thursday.
The stock is now trading below the 50-day moving average, but is holding above support,
marked by the lower Bollinger band. Daily RSI has dropped below the key 50-juncture, but
at around 37, is above oversold levels. My stop-loss of $23.63 and target of $36.56 remain.

Carter's (NYSE: CRI) hit my target of $41.40 on Tuesday. As a result, the position is now
closed. In the time I held the stock, I made a 12.5% return.

Wal-Mart (NYSE: WMT) spiked in intra-day trading on Wednesday before retreating.

Shares closed Friday approximately where they opened the week. The stock is currently
trading between the middle Bollinger band, represented by the 20-week moving average,
and the upper Bollinger band. Daily RSI is above the key 50-juncture. Daily MACD is clinging
on to a "buy" signal. So far, I'm up 2.4% on the trade. My stop-loss of $49.92 and target
of $64.95 hold.

Starbucks (Nasdaq: SBUX) opened trading Monday at $44.25. The stock declined over
the course of the week. Shares are now testing the 20-day moving average, marked by
the middle Bollinger band. Daily RSI is managing to hold just above the key 50-juncture.
Daily MACD remains on a weak "buy" signal. My stop-loss of $39.49 and target of $50.54
hold.

Verizon (NYSE: VZ) hit my buy-on-stop order of $37.93 on Monday. Over the week, the
stock declined slightly. Shares are currently trading between the rising 20-day moving
average, represented by the middle Bollinger band and the upper Bollinger band. Daily RSI is
downward sloping, but remains above the key 50-juncture. Daily MACD is on a "buy" signal.
My stop-loss of $35.85 and target of $41.67 remain.

Thanks for reading the latest update on my open trading positions.

-- Dr. Melvin Pasternak

Co-Editor, Trade of the Week

Disclosure: Melvin Pasternak, Ph.D., does not own shares of any securities mentioned in his analysis above.

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