Tag Archives: portfolio-strategy

November Update – ETFReplay.com Portfolio

The ETFReplay.com Portfolio holdings have been updated for November 2015. I previously detailed here and here how an investor can use ETFReplay.com to screen for best-performing ETFs based on momentum and volatility. The portfolio begins with a static basket of 14 ETFs. These 14 ETFs are ranked by 6-month total returns (weighted 40%), 3-month total returns (weighted 30%), and 3-month price volatility (weighted 30%). The top 4 are purchased at the beginning of each month. When a holding drops out of the top 5 ETFs, it will be sold and replaced with the next highest ranked ETF. The 14 ETFs are listed below: Symbol Name RWX SPDR DJ International Real Estate PCY PowerShares Emerging Markets Bond WIP SPDR Int’l Govt. Infl.-Protect. Bond EFA iShares MSCI EAFE HYG iShares iBoxx High-Yield Corp. Bond EEM iShares MSCI Emerging Markets LQD iShares iBoxx Invest.-Grade Bond VNQ Vanguard MSCI U.S. REIT TIP iShares Barclays TIPS VTI Vanguard MSCI Total U.S. Stock Market DBC PowerShares DB Commodity Index GLD SPDR Gold Shares TLT iShares Barclays Long-Term Treasury SHY iShares Barclays 1-3 Year Treasury Bond Fund In addition, ETFs must be ranked above the cash-like ETF (NYSEARCA: SHY ) in order to be included in the portfolio, similar to the absolute momentum strategy I profiled here . This modification could help reduce drawdowns during periods of high volatility and/or negative market conditions (see 2008-2009), but it could also reduce total returns by allocating to cash in lieu of an asset class. The cash filter is in effect this month, the same as the previous four months. SHY is the highest rated ETF in the 6/3/3 system. Therefore, it will continue to be the sole holding in the portfolio. The top 5 ranked ETFs based on the 6/3/3 system as of 10/30/15 are below: 6mo/3mo/3mo SHY Barclays Low Duration Treasury (2-year) PCY PowerShares Emerging Markets Bond LQD iShares iBoxx Invest.-Grade Bond VNQ Vanguard MSCI U.S. REIT TLT iShares Barclays Long-Term Treasury In 2014, I introduced a pure momentum system, which ranks the same basket of 14 ETFs based solely on 6-month price momentum. There is no cash filter in the pure momentum system, volatility ranking, or requirement to limit turnover – the top 4 ETFs based on price momentum are purchased each month. The portfolio and rankings are posted on the same spreadsheet as the 6/3/3 strategy. The top 4 six-month momentum ETFs are below: 6-month Momentum VNQ Vanguard MSCI U.S. REIT TLT iShares Barclays Long-Term Treasury SHY Barclays Low Duration Treasury (2-year) PCY PowerShares Emerging Markets Bond TIP, a holding for 2 months, will be sold for a loss of -.56%. LQD, a holding for 1 month, will be sold for a gain of .28%. The proceeds will be used to purchase VNQ and TLT. The updated holdings for the pure momentum portfolio are below: Position Shares Purchase Price Purchase Date PCY 85 27.65 8/31/2015 SHY 29 84.86 7/31/2015 VNQ 30 79.89 10/30/2015 TLT 19 122.74 10/30/2015 Disclosure: None.

The Risks Of Selling The Rally

Summary Investors that were fortunate to buy into the hole in either August or September have now been rewarded with a double digit gain on most broad-based indices. If you had the tenacity or good luck to buy the dip, you may question the risks of overstaying your welcome on the upside. Below are some bullet points that may provide a road map to making this difficult decision a little easier to digest. Investors that were fortunate to buy into the hole in either August or September have now been rewarded with a double digit gain on most broad-based indices. What began with some skepticism as just a short-covering binge has now morphed into the notion of a full blown recovery. There is even quite a bit of debate on whether or not we could take out the prior all-time highs on the S&P 500 Index before the year is out. Of course, if you had the tenacity or good luck to buy the dip, you may question the risks of overstaying your welcome on the upside. Those that took a more active approach in loading up on stocks near the lows are likely just as leery of a blow off top that ends in a swift and pernicious drop. Below are some bullet points that may provide a road map to making this difficult decision a little easier to digest. Evaluate your time horizon and investment goals. If you are short-term trader with defined risk parameters, then taking off some of your long positions into this run higher may be a prudent decision. It will free up cash to evaluate other opportunities and offer the flexibility to deploy capital when needed. Conversely, long-term investors may not be as concerned with these daily machinations and are willing to ride out additional volatility in order to stick with their plan. Here is a short guide to some of the key differences between being an investor and a trader . Consider making changes in small increments. If you took an above-average risk by loading up on stocks at the lows, then you have more flexibility to bank profits on the way higher. That may include breaking trades up into two or three pieces in order to slowly reduce your stock allocation over time. That way you can still participate in additional upside momentum if the market continues on the current course, but don’t have as much to lose if it turns lower. Don’t count on timing the market perfectly. There was a risk of buying on the way down that the market continues falling even further and compounds your losses. Similarly, there is an even greater risk that selling on the way up will leave you underinvested as the market continues to march higher. No one knows exactly where and when inflection points will form. Hanging on to some token long exposure may allow you to avoid the FOMO (fear of missing out) syndrome that leads to poor decision making at inopportune times. Analyze the risk profile of your exposure. If you loaded up on high beta sectors of the market such as technology or consumer discretionary stocks, it may be prudent to switch to a more defensive approach . That could include a low volatility index such as the PowerShares S&P 500 Low Volatility Portfolio (NYSEARCA: SPLV ) or individual sectors exhibiting less relative price sensitivity. That way you are still able to participate in some measure of upside potential with the intent of reducing downside risk. The Bottom Line There is always an opportunity cost when you make a change to your portfolio that your intended actions lead to more harm than good. Nevertheless, with a well-thought out game plan and sound portfolio management principles, you can enhance the odds of a favorable outcome.

Surfing The Market Waves: The Nested Pullback

Patterns are important in trading; you might even say that trading is basically a game of recognizing the right patterns and doing the right thing when they happen. Most of you who have read my blog or my book, or have seen the research I write every day, know that I focus heavily on trading pullbacks in most market environments – pullbacks in trends, after breakouts, before breakouts, at the end of trends, at turning points in trends – even a simple pattern offers many ways to trade the market’s action. One of the more useful variations of the pullback theme is something I have called a “nested pullback.” As always, terminology can be confusing, so it’s important to realize that the “nested” part of the term means that the nested pullback is a smaller structure that is “nested” within the larger pullback’s drive to resolution. It is not nested within the larger pullback itself, but, rather, within the thrust that happens when the bigger pullback begins to turn into another trend leg. Another way to think about it is that it is a pause: the bigger pullback starts to go into another trend leg, and that move stalls into a small consolidation which is the nested pullback. (I wrote a longer post about a year ago here .) Take a look at this recent example in natural gas futures: Nested pullback in natural gas. Identifying the bigger pullback was easy if you were able to let go of preconceptions, concerns about sentiment/COT data, and other nonsense that always encourages us to fade trends. So many times, the right thing to do is to simply align ourselves with the dominant group in the market until the market makes it clear that something has changed. The market is in a downtrend so we want to short bear flags – that sentence is the essence of one pretty successful trading plan. The nested pullback provided additional confirmation. We obviously would prefer if every trade would move immediately and cleanly to its target, but things don’t often work like that. It’s more common for a move to stall or pause, but we can then often find additional information in the character of that pause. In this case, the nested pullback showed that there was a good probability that this market would break lower. (For instance, a pause that had a lot of sharp rallies would be more likely to suggest that factors were beginning to align against the trade.) This is a good pattern to add to your toolkit because it can do at least three things for you: 1) it gives you some insight into how to manage the trade and how to tighten stops, 2) it can provide a secondary entry if you miss the initial spot to get into the trade, and 3) it can be a good spot to add, if you do that within your trading plan. Spend some time looking for this pattern and see if it can enhance the way you view market trends. I’m very suspicious of “after the fact” analysis, and you should be too. Anyone can find any pattern on an old chart, but this is another example that we identified in real time: I signaled the initial short to my research clients and identified the nested pullback as it was developing. We took partial profits into the decline, and are still short for today’s meltdown. Obviously, not every trade works like this, but this is a clean example of the pattern, and a good example to commit to memory.