SOUTH Trading System Performance (May 2011): +85.39%

SOUTH – Short Only

Direction: Long Only

Leverage Used: 2:1

Max Drawdown: -9.24%

Starting Capital: $10,000

Ending Capital: $58,127

Net Profit (Month May): $26,772

Net Profit % (Month May): 85.39% 

Net Profit (Since Inception): $48,127

Net Profit % (Since Inception): 481.27% 

In March report we said that profit of 53.16% was incredible, but we didn’t expected that thinks can be even better! In May we made more than in March, as South trading system posted a gain of 85.39%, after making 28.82% in April!

This month’s result is the best months considering all trading systems that we offer! As you can imagine, almost all trading days were profitable, finishing a month with only one down day, a day when we lost -1.06%, and this month system's drawdown is based on lhat one loosing trade.

At the end of May, South trading system made 85.39% before commissions, and a compounded gains of 481.27% (since inception in January 2011). This month’s drawdown was -1.06%, which is lower then a historical drawdown of -9.24%. It is important to understand that reported drawdown was based on loosing trades only, which means that if a trade was profitable when closed, but had a loss while it was opened (because of natural contractions of the market), that loss would not be reported by our drawdown calculations! Real drawdown is allways higher by 3-5%, so readers should know this.

Largest daily loss during the month was -1.06%, and a largerst daily gain of 11.42%.

At the end of reporting month and since inception, South trading system made a profit of $48,127 and finished a month with a balance of $58,127.

To see South's last month report click here, and other trading systems offered click here. If You would like to subscribe to this system and start reciving daily Trade Alerts,  click on the link below and fill out the form:

EAST Trading System Performance (May 2011): +37.30%

EAST – Short Only

Direction: Short Only

Leverage Used: 2:1

Max Drawdawn: -4.25%

Starting Capital: $10,000

Ending Capital: $28,400

Net Profit (Month May): $7,715

Net Profit % (Month May): 37.30% 

Net Profit (Since Inception): $18,400

Net Profit % (Since Inception): 184.00%

Excellent month! The system made 37.30% before commisions, and now it’s at all time high with a compounded profits of 184.00% since January 2011. Drawdown is still at -4.25%, which in reality is even higher because not all trade are included in calculation of a drawdown. In May 2011 system made a profit of 37.30% with a -4.25% drawdown. 

The chart below shows daily profit and loss made during this month. As it can be seen from the chart, largest daily loss was -0.37% and largest daily gain was 5.43%.

To see East's last month report click here, and other trading systems offered click here. If You would like to subscribe to this system and start reciving daily Trade Alerts,  click on the link below and fill out the form:

Short Interest and Other Ratios

Because investors sell short so they can profit by expected price declines in the shorted securities, or they want to hedge their positions because they at least think a price decline is a good possibility, many investors look at the total short interest as a good indicator of market sentiments.

Short interest is the total number of shares that have been sold short, but not repurchased yet, to cover the short positions on an exchange. The New York Stock Exchange (NYSE), American Stock Exchange (AMEX), and the NASDAQ release the short interest volume for their exchanges by the middle of the month, and is reported in The Wall Street Journal about a week after that.

The short-sale ratio (also, short ratio), is the total number of shares shorted, but not covered, divided by the average daily volume of all shares traded on the exchange.



                        Number of Shares Shorted, but Not Covered
Short Ratio =  ────────────────────────────────
                        Av. Daily Volume of All Shares Traded on Exchange

Note that while the numerator of the short ratio increases with short interest, the denominator, the average daily volume for that month, is not related to the short interest, and, therefore, the short ratio may actually decline when the short interest increases, which would occur when the average daily volume increases more than the short interest—and vice versa. Note, also, that, for the same reason, the short ratio does not quantify the short interest.

Real World Example—Divergence of Short Interest and the Short-Sale Ratio

On August 22, 2006, The Wall Street Journal reported that, for the month ending August 15, 2006, the short interest on the NYSE increased from the mid-July total of 9,298,283,040 shares to 9,638,209,066 shares—an increase of about 3.7%—but the short ratio actually decreased from 6.1% to 5.9% for the same month.

Some investors, however, consider a large short interest to be a bullish sign, because the short sellers will have to purchase the shorted security at some point, which will tend to increase its price. This is sometimes called the short interest theory, or the cushion theory. Technical analysts consider a short position that is twice the average daily trading volume to be a very bullish sign, and a good possibility for a short squeeze, which results when short sellers buy to cover their position, raising the stock price, which, in turn, causes more short sellers to cover their positions, thereby raising the stock price even more.

There are more specialized short-interest ratios that some investors consider. The odd-lot short-sale ratio (also, odd-lot selling indicator) is the total of odd-lot short sales divided by the total odd-lot sales.

                                                     Total Odd-Lot Short Sales
Odd-Lot Short-Sale Ratio = ─────────────────────
                                                          Total Odd-Lot Sales

This supposed prognosticator is based on the odd-lot theory, which is based on the supposition that people who buy and sell odd lots (less than 100 shares or a round lot) are novice investors, and are acting in direct opposition to true market conditions. Thus, when odd-lot selling is high, then the market has bottomed out, and it's time to buy, and vice versa. There is no real evidence that the odd-lot theory is true, but even if it is, it may be because investors believe that it is true, and act accordingly.

The member short-sale ratio, using similar, specious reasoning, is supposed to be the true market indicator, and there may be a grain of truth to this. After all, if anyone would know the market, it would be the members of the NYSE who—specialists, floor traders, and off-the-floor traders—specialize in the particular securities that they sell short. The member short-sale ratio is the total shares sold short in the accounts of the NYSE members in 1 week divided by the total short sales outstanding in the same week.



                                             Total Shares Shorted by NYSE Members in 1 Week
Member Short-Sale Ratio = ───────────────────────────────
                                                  Total Short Sales Outstanding in Same Week


The member short-sale ratio is published weekly in The Wall Street Journal and Barron's.

The specialist's short-sale ratio is computed in the same way as the member short-sale ratio, but only includes the accounts of the specialists on the NYSE.


                                               Total Shares Shorted by NYSE Specialists in 1 Week
Specialist Short-Sale Ratio = ────────────────────────────────
                                                     Total Short Sales Outstanding in Same Week

Some short sales are made to provide an orderly market in the securities assigned to the specialist—one of their duties—but many investors, especially technical investors, use this as a prognosticator of the markets.

NORTH Trading System Performance (May 2011): 21.07%

NORTH – Long Only

Direction: Long Only

Leverage Used: 2:1

Max Drawdown: -10.75%

Starting Capital: $10,000

Ending Capital: $14,928

Net Profit (Month May): $2,598

Net Profit % (Month May): 21.07% 

Net Profit (Since Inception): $4,928

Net Profit % (Since Inception): 49.29% 

May was an excellent month posting an overall gain of 21.07%, after loosing 4.35% in April. From the first day in May, system started to make money, and after making small drawdown, it continued to make money until the end of a month.

At the end of May, North trading system made 21.07%, before commissions and increased the compounded gains up to 49.29% (since inception in January 2011). This month’s drawdown was less then -10.75%, which is a maximum drawdown since inception of the system.

Largest daily loss during the month was -2.70%, and a largest daily gain was 7.37%.

At the end of this month, since inception North trading system made $4,928 and finished a month with a balance of $14,928.

To see North's last month report click here, and other trading systems offered click here. If You would like to subscribe to this system and start reciving daily Trade Alerts,  click on the link below and fill out the form:

Determining the Value of Shorted Securities That Will Elicit a Margin Call

The formula for calculating the value of securities that will elicit a margin call for shorted stock can be derived from the formula for calculating margin:

1. Margin = (Account Value - Value of Shorted Securities) / Value of Shorted Securities
2. Let m = margin ratio; a = account value; and v = value of shorted securities.
3. m = (a - v) / v
4. m * v = a - v Multiply both sides by v.
5. v + m * v = a Add v to both sides.
6. v (1 + m) = a Factor out v from the left side.
7. v = a / (1 + m) Divide both sides by 1 + m.
8. Value of Shorted Securities = Account Value / (1 + Margin)

Thus, the short account value that will trigger a margin call can be calculated with the following formula:

Calculating the Margin Call Account Value of a Shorted Security

Margin Call Account Value =	Account Value ───────────  1 + MMR	MMR = Margin Maintenance Requirement (usually 30%). Price per Share = Margin Call Account Value/Number of Shares

Example — Calculating the Margin Call Price of a Shorted Security

Using the above example, what market price of the shorted security will trigger a margin call?

The total amount on deposit in the account is $15,000 and the margin maintenance requirement is 30%. 

Therefore, the margin call value = 15,000/(1 + .3) = 15,000/1.3 = $11,538.46. This is equal to a price per share of $11,538/1,000 = $11.54 (rounded) per share. So a margin call will be triggered when the price of the shorted security rises to $11.54.

To verify, we substitute $11,538.46 into the margin formula above, and find that (15,000 - 11,538.46)/11,538.46 = 0.30 = 30%, the margin maintenance requirement. Note that if any dividends were paid out, this would have to be subtracted from the amount on deposit.

Margin In Selling Short With Examples

Short sales can only be made from a margin account. Typically, a margin account allows the account holder to borrow up to 50% of the equity in the account for the purchase of new securities. There is also a maintenance requirement that is typically 30% of the equity. If the value of the equity drops below 30% of the total amount, then the broker issues a margin call. The investor either has to send more cash or other equity, or the broker will sell enough of the securities, to increase the total equity back to 50%. Thus, if the investor initially deposits $5,000 into a new margin account, he can buy up to $10,000 worth of stocks. If the value of those stocks subsequently declines to below $7,000, then the investor will be subject to a margin call, because $2,000 is what remains of the investor's equity, which is less than 30% of the total amount in the account. He will have to deposit another $1,500 to bring the equity to back to 50%.

The margin and the margin maintenance requirement are specified by Regulation T, enacted by the Federal Reserve Board. Currently Regulation T requires an initial deposit of $2,000 or more for a margin account, and, initially, 50% or more in cash or eligible securities as security for any borrowing to buy securities. As applied to a short sale, the investor must have at least 50% of the short-sale proceeds in equity. Brokers may establish more stringent requirements.

In a short sale, money is deposited into the short seller's account, but this money is borrowed, because they are the proceeds of borrowed shares that were sold, and therefore, this money earns no interest for the account holder. Thus, instead of securities, the short seller has borrowed money in his account, which is subject to the same margin restrictions as buying stock. The amount of short sales proceeds doesn't change after the sale, but the price of the borrowed security does, and margin requirements are tied to the price of the shorted security, not the money in the account, because, eventually, the shorted securities will have to be bought to replace the borrowed shares. Therefore, the current margin of the account is dependent on the current market price of the shorted security because the short seller has a legal obligation to buy back and return the securities that were borrowed.

The equity of a short account is equal to the amount on deposit minus the current value of the shorted security:

Equity = Account Value - Market Value of Shorted Security

The short seller also has an obligation to pay any dividends to the shareholder of the borrowed stocks. The broker pays this automatically from the short seller's account, which will decrease the amount on deposit, and therefore, the short seller's equity and margin.

Example — Calculating the Equity of a Short Account

If you deposit $5,000 and sell 1,000 shares of XYZ stock short for $10 per share, then there is $15,000 on deposit in your account, but your equity is still $15,000 - $10,000 = $5,000, which is, of course, what you initially deposited.

If XYZ price rises to $12 per share, then your equity = $15,000 - $12,000 = $3,000.

If XYZ price drops to $8 per share, then your equity = $15,000 - $8,000 = $7,000.

To calculate margin, just divide equity by the market value of the shorted security:
Calculating the Current Margin of a Short Account
Margin = Equity
─────
CMV

CMV = Current Market Value of Shorted Security

Math Note: Multiply fraction by 100 to get a percentage.


Example—Calculating the current margin and current equity of a short sale.

You open a margin account and deposit $5,000. You sell short 1,000 shares XYZ stock for $10 per share. The proceeds of the sale, $10,000, is deposited in your account. There is now $15,000 in your account. However, you still only have $5,000 of equity in your account, because the $10,000 of short-sale proceeds is from borrowed securities.

Scenario 1 — The stock price declines to $6 per share, so the 1,000 shares that you sold short is currently worth $6,000. Thus:
your equity = $15,000 - $6,000 = $9,000
your margin = $9,000/$6,000 = 1.5 = 150%

Thus, this short sale would be profitable if you bought back the shares now to cover your short, for a net profit of $4,000 minus brokerage commissions and any dividends that had to be paid while the stock was borrowed.

Scenario 2 — The stock price rises to $12.00 per share, thus it will cost you $12,000 to buy back the shares now.
your equity = $15,000 - $12,000 = $3,000
your margin = $3,000/$12,000 = .25 = 25%

Because your current margin is now less than 30%, you will be subjected to a margin call. If you decide to buy back the shares now to cover your short, your net loss will be $2,000 plus brokerage commissions and any dividends that had to be paid while the stock was borrowed.