We are now in 8 of 9 potential positions, and 5 of them are in their Buy Zones. Last week was one of the weakest and most volatile weeks of the year, but the ETF Complete Portfolio outperformed the S&P 500 every day and for the week. The ETF Complete Portfolio fell -1.6% for the week while the S&P 500 fell -3%.
The week we saw a flip flop trade in XIV which is not very common and was a result of the extreme volatility, but as frustrating as that can be it proved to be the right move to exit on Friday, and as you’ll read in this week’s article, past flip flops have preceded big trades.
Unfortunately, had we not entered the XIV trade at all, the model would have like been up for the week!
They level of volatility we’ve experienced in the last couple weeks can try a traders nerves, but for the disciplined trader, market corrections like these have provided some of the best opportunities to capitalize on nice gains in the Model Portfolio.
You can view the ETF Complete Portfolio’s current positions and performance at this link:
https://marketgauge.com/recommendations/etf-complete/etf-complete-model-portfolio/
If you have any questions about getting started please drop us an email at: [email protected]
This Week’s Strategy Lesson:Position Flip Flops in the ETF Models
Last week, in the ETF Global Macro model, we entered a trade in JO. For many, this trade may have invoked the feeling of Déjà vu. Earlier in September we were in a JO trade that we ended up rotating out of near our original entry price. After a brief break, the model recently recommended getting back into JO.
We have actually had a few notable position flip-flops this year. On their face, these quick repeated position changes probably don’t feel that great to trade or instill much confidence in the model, but not following them would have kept us out of some great trades this year. Let’s look at a couple examples.
DRN Trade in ETF Sector Plus
On February 24th, we entered DRN. It was less than a month later, when the model recommended to rotate out of DRN on March 20th because it dropped sufficiently out of the top three ranked ETFs. We exited that position for a small loss of 4.58%. A little more than two weeks later, after DRN retook its leadership, the model recommend us to flip back in to DRN, which we did on April 7th.
From this second entry, DRN went on to remain in the top three and one of our core holdings for the next four months, reaching a 25% profit target and we ultimately closed out that trade in August for a total return around 21%.
IFN trade in ETF County Plus
We had a similar flip-flop in IFN this year. The Country Plus model entered a trade in IFN on March 19th. After a nice initial up move in the ETF it retraced back towards our entry and fell out of the top three. The model recommended rotating out of IFN into EWP on May 9th. We closed out of the IFN trade for a small three percent gain.
One week later, after IFN bulleted up (and EWP was sideways), the model recommended switching back into IFN May 14th. No one likes to be whipsawed around but this re-entry into IFN turned out to be a great trade. IFN reached its first 15% profit target and we are still in it.
Flip Flops and Hindsight
We have the value of hindsight to know that these ended up being good times to re-enter those ETFs. This, of course, didn’t have to be the case. DRN and IFN could have very easily failed to follow-thru and eventually the model would have rotated us out of the positions, possibly even for a loss.
We created and tested rules for when to rotate in and out of positions with this in mind. It is not simply that an ETF must fall out of the top three ranked ETFs to cause a switch, but they have to fall out by a certain “fudge factor” amount. The “fudge factor” is calibrated to the average range and volatility of recent TSI scores. We think it’s a good rule. But it’s still a rule and rules don’t fit every situation perfectly.
Broader market dynamics and even the temporary trading characteristics of an ETF can all make our timings or rotations in and out of positions less ideal (in hindsight). And you never know when the market might put in a temporary high or a quick fake-out. The ETF models are not designed to be super agile racecars but reliable long haul trucks. Getting the big moves right gives us the leeway to not have to worry about getting every entry perfect.
The recent JO flip-flop may turn out to be the start of another major run in coffee or it could be a temporary new high before slumping back down. Only time will tell the fate of this trade, but the models have proved out well enough in the past that we think it’s a good idea to give them a little leeway and see what happens.
The Current Condition of the Model
We are now in eight out of the potential nine maximum portfolio positions.
Both the Sector and Global Macro models now have exposure to the long Treasury Bonds with TLT or TMF which has provided positive returns to balance the weak performance in stocks. Additionally the JO (Coffee) position in Global Macro model is not correlated to stocks and therefore also provides good potential regardless of the direction of stocks.
Each of the 3 component models has some interesting developments their rankings. In the Sector Model, IBB has moved into the top 3 but it has not become strong enough to change our positions.
In the Country Model, EFZ has moved into the top 3, but the difference in TSI between THD in fourth place and EFZ in third place is not great enough to make a change. However, EFZ rises in a falling market so if global markets continue their decline there is a good chance the Model will rotate into it.
In the Global Macro Model QQQ has dropped to 5 place, but its distance for 3rd place is not great enough to make a change yet.
Last week was an active week for the ETF Complete Model and if markets continue to decline we’ll likely see more changes this week. Keep in mind that the model is designed to profit from down trends as well as uptrends, and what we’re experiencing is a rotation into more positions that stand to profit during a weak market in equities. This is not a prediction of a weak stock market to come, but it is a process of preparing for it.
Of course, we’ll email (and text you if you requested it) when the Model makes any changes to the portfolio.
Best wishes for your trading,
James Kimball
Trader & Analyst
MarketGauge
