Our current three positions are EFZ, TMF, and IFN. The stops and targets model is in 2/3rds a position of IFN, full position of EFZ, and a cash position (formerly TMF).
The MSCI World Index closed the week down -0.16%. The ETF Country Plus basic model ended the week up +1.08% while the Stops & Targets model ended the week up +0.16%. The ETF Country Plus basic strategy is up +19.35% year-to-date and the Stops & Targets strategy is up +11.67%. The benchmark, MSCI World Index, is down -0.81% year-to-date.
This Week’s Strategy Lesson: Market Triage
The markets have looked a little like a disaster area in the last few weeks with the SPY falling nearly 10%, erasing (for the moment) all its gains for the year and decisively breaking its 200 day moving average for the first time in almost two years. We saw a big spike in volatility as fears about stagnating global growth, possible deflation, and even pandemic became infectious.
Our own ETF models were not immune to some drawdown in this market cycle, though we have outperformed the SPY in the last month. All momentum models are subject to some volatility and negative swings when the market makes corrections, especially quick or violent corrections.
Some of this is unavoidable. To give us the ability to catch the major trends, you have to have wide stops that prevent you from being shaken out of positions during minor market blips. However, you do want a model that will make adjustments and be positioned to profit from whichever direction the markets eventually head.
This is where our models have an advantage over buy and hold or simple momentum strategies. Our selection of ETFs have a variety of long, short, and low correlation instruments.
The short ETFs allow us to profit from larger down turns in the markets while the low correlation ETFs allow us to find opportunities when markets might be trendless or choppy.
Because each model has different ETF component lists and the various trade maturity stages of the holdings, each of the ETF models responded a little differently to the recent down turn.
The Sector model, with its higher representation of leveraged holdings was hit the hardest with losses in TECL and CURE. However it rotated into TMF which quickly hit a profit target and was stopped out for a quick total return around 14%. This model is now in 2/3rd cash and 1/3rd in DRN (real estate) giving us some positive exposure while being mostly in cash.
The Country model had the least volatility as it rotated into treasuries much earlier this year and had already moved to partial cash. Currently the model is in 1/3rd cash, 1/3rd India, and 1/3rd in EFZ giving it some long and short exposure.
The Global Macro fund tends to be the least correlated to the overall market. Unfortunately, the violent swings in volatility have pushed us around with a quick tough trade in XIV (short volatility) and now we are being whipped around in VXX (long volatility). Overall, the fund has some long, short, and low correlation holdings.
This leaves us with the overall disposition of the model. We are currently in about 1/3rd cash, 1/3rd alternative ETFs (EFZ, VXX, TLT), and 1/3rd in long exposure ETFs (DRN, IFN, JO). The models are potentially positioned well for whatever the markets may bring to us next. We have some short exposure if they take another leg down, and we have some long exposure and “dry powder” in the form of cash positions should the market regain its footing here.
Overall, we are still performing well for the year and up significantly more than the indexes and respective benchmarks. It will be interesting to see how the markets and our models perform from here to close out 2014.
The Current Condition of the Model
For the country model, we are in EFZ, IFN, and TMF. THD was closed for a small 3% loss and we rotated into EFZ, which gives us short exposure to developed international markets. TMF remains a stopped out positions (CASH) in the stop & targets model but it remains a position in the basic model and is currently the number one ranked ETF in the Country ETF list.
Stay tuned to daily updates for any position changes.
Here is a summary of the weekly performance of all the ETFs that the strategy monitors:
Best wishes for your trading,
James Kimball
Trader & Analyst
MarketGauge