FRED GOODMAN'S KEY INDICATORS FOR INVESTMENT SUCCESS
GPS FAQ
Last updated Friday, January 21, 2005
Fred Goodman
Fred answers readers' questions about the Goodman Price/Volume Stock Selection System.

Basic information about GPS -- the Goodman Price/Volume Stock Selection System -- can be found by clicking here.

1. "Fred, how do you trade GPS?"

I am using GPS to pick stocks for my personal account, as well as for my investment management clients. If you are thinking about trading with GPS yourself, first make sure that GPS meets your own investment objectives and your own ability to bear risk.

What I'm doing to trade GPS myself is pretty simple. I've mentally allocated a particular amount of money that I want to use for GPS. I invest 1% of the money in new buys that the program selects (and then I sell each stock when the system says to sell). This permits me to hold up to 100 stocks at any one time. Based on my backtests and my preliminary real-money trading experience with GPS over the last year, it seems that there are generally less than 70 outstanding buys in each portfolio -- and usually even fewer than that. Just in case I want to hold more than 100 positions at once, I hold my GPS trades a margin account. This will also permit me to short SPY and QQQQ when it is appropriate due to a Summary Index sell signal, rather than to go the expense of liquidating all trades that are in place. Also, note that the way I trade GPS generally leaves some cash in my account, any time I'm invested in fewer than 100 stocks. Depending on how much cash there is at a given point in time relative to the general technical condition of the market, I am free to invest some or all of it in SPY and QQQQ if I feel I need more equity exposure.

Adapted from Fred's January 5, 2005 report.

2. "Should someone trading GPS buy all the stocks?"

In my GPS trading, I don't buy every single stock that GPS comes up with. I filter them with an eye to adverse special events that might be driving individual situations. For example, last year I did not buy Chiron even though GPS had it as a buy right after its flu vaccine crisis was reported.

You may wish to take this even further. Perhaps you are skilled in fundamental analysis, or you have a market letter or service that provides you with stocks selected based on earnings, earnings growth, changes in business models or any of a myriad of factors. Then you can us GPS as a technical analysis "second opinion" to screen stocks that you already like on a fundamental basis.

But remember, if you don't buy all the stocks picked by the system your results could differ quite substantially from the results that I report. In the last half of 2004, about two thirds of the GPS buys were winners, and the average profit was about twice as large as the average loss. That means that your results could have varied significantly depending on which of the stocks you happened to choose to buy, and which you chose to ignore.

Adapted from Fred's January 6, 2005 report.

3. "What could may my trading results differ from the GPS results you report?"

As I discussed just above, a substantial difference would likely arise if you didn't buy all the stocks that GPS picks. Or if you did buy all the stocks, there could still be major differences depending on the size of the position you take (I assume that all positions are about equally weighted). There are other factors to consider, too.  Another is that you might buy is the portfolios trade at the close on the day each buy is selected by GPS, but anyone trading based on GPS could get a different price the next day -- maybe better, maybe worse. And don't forget that you pay commissions, which we ignore in our model portfolios. But on the plus side, you will receive dividends from the stocks you hold, which are ignored in the model portfolios.

Adapted from Fred's January 6, 2005 report.

4. "Can you explain how the GPS online model portfolios work?"

As presented online, the GPS S&P 100 Portfolio and GPS NASDAQ 100 Portfolio.  hold no cash -- that is, they are always fully invested. So does the money come from when it's time to buy a new stock? The answer is simply that we treat these portfolios like mutual funds that receive new money from shareholders whenever there is a new stock to buy -- and the new money is used entirely to buy the new stock, in approximately equal weight to all the positions already in the portfolio. Similarly, whenever a stock is sold, the portfolios act like a mutual fund that returns the sales proceeds to shareholders.

If you wanted to, you could easily trade the same way. If you were to think of your own GPS trading as happening in a mentally separate account in which you can constantly inject and withdraw money, then your actual trading could generally follow what I'm doing in the two portfolios.

Adapted from Fred's January 6, 2005 report.

5. "When GPS says 'sell,' does that mean 'sell short'?"

No, GPS is a long only system. It does not identify stocks to be sold short -- so all sells are for stocks already held in one of the portfolios. Under GPS, a stock to be sold is simply no longer technically strong -- that's very different than saying it is technically weak. Short-selling will be a subject for future research and enhancement of the strategy.

Adapted from Fred's January 7, 2005 report.

6. "How do you trade GPS in a down market?"

GPS is a long-only strategy. It simply finds stocks that are technically strong, based on their price/volume patterns, compared to other stocks in the S&P 100 and the NASDAQ 100. This means that if the market declines, these stocks will probably decline too, though hopefully less than others in their indices.

In my own account and in those of my managed clients, I either short SPY and/or QQQQ to protect my GPS long positions when my market timing indicators say sell. Conversely, I also use those index ETFs to amplify my GPS  long positions when my timing indicators say buy. You can get a general idea of what I'm doing by tracking the equity exposures I use in the Discretionary GSP Portfolio and the Discretionary Technical Portfolio.

But that is only one way to do it. Another way would be to invest according to the equity exposures used in the Technical Trading Model Portfolio and Portfolio "Q". Those are driven mechanistically -- without my personal judgment -- based on whether there is a buy or sell signal from the Summary Index, and on what state the Trend Indicator is in. For more details on how those work, be sure to review our Technical Trading Model.

Adapted from Fred's January 21, 2005 report.

Fred Goodman, CFP, is a fee-only Certified Financial Planner based in Los Angeles. You can send him your questions and comments via email at Fred@MarketMonograph.com. The charts and commentary represent what Fred is thinking about the market and thinking of doing for his own account and for accounts he manages. There is no guarantee that you will profit from trading as discussed herein. You may lose money and Fred assumes no responsibility for what you do or do not do with this information.