Both the Basic and Stops & Targets model were positive on the week with the Basic coming close to matching the benchmark and the Stops & Targets closer to flat on the week.
We finally have a position change, getting rid of IFN next Monday (4/6/15). We have held this position for just about a year up over 23%. We will be replacing it with China (FXI) on Monday.
China has broken out to new recent highs and looks strong. We have been here before on China. This ETF tends to gap a lot and can be difficult to trade, however the long term trend looks very interesting. We will see how this plays out.
This Week’s Strategy Lesson: Momentum (Part 4)
This week we continue our look at momentum, specifically price momentum, and how the ETF models use it to find trends that are likely to persist. Often times, this persistence is driven by real world factors, as we saw last week. A positive development, anything from a new technological development or an improvement in business conditions (political reforms, etc…) can start the ball rolling and the natural positive feedback loops kick-in. Let’s look closer at a couple of examples from last year.
Healthcare
The Sector model has been in and out (mostly in) of the healthcare sector for the majority of the last two years. In early 2013, this sector started to pull away from the broader market. We all know some of the forces at work here.
The Affordable Care Act was passed in 2010. Long-term, this legislation is designed to get health insurance and coverage to a higher percentage of Americans while also reducing costs. Leaving the second issue aside, effectively, this law has put more money into the insurance and healthcare industry and this can be seen in the strong growth in this industry (and reflected in the rising value of the healthcare sector ETFs).
In 2012, with President Obama’s re-election and a test in the Supreme Court, the law survived its biggest short-term political hurdles and in the 2013 many of its provisions began to go into effect.
We, however, don’t have to be an expert analyst on this industry. Because the ETF momentum models will pick up on this outperformance without needing to do the background and fundamental analysis.
In this percent change chart, you can see in the first few months of 2013 that the healthcare sector begins to outperform and this trend continues to this day. We have been trading CURE which is the 3x leveraged version of XLV, so the gains or outperformance is further amplified.
Real Estate
Real estate was one of the stronger sectors to pull away from the pack in 2014. There were a variety of fundamental reasons for this. Interest rates made a large and unexpected move lower throughout most of the year, making both financing real estate easier while also making the relative yields in the real estate more attractive compared to bonds.
We also have a global liquidity glut where a lot of money (especially foreign investment) have been searching the world over for yield. In 2014, Chinese investors poured in nearly double the amount of investments in U.S. real estate than in 2012.
At its peak, in January 2015, IYR was up over 30% in last trailing 12.5 months compared to the SPY up around 10%. We however, were typically trading DRN (3x Real Estate) and had a few great trades in that instrument in the last year and you can see in the chart below how that leverage can amplify the gains (and of course losses when they occur).
Price momentum is not the only game in town. Each investment style has its merits and when done correctly can yield great results, whether it is technical chart analysis and pattern trading or fundamental and value investing. Though the simplicity and power of using pure price momentum continues to be impressive.
Next week we will wrap up this series reviewing all that we have learned from looking at momentum from several different angles.
The Current Condition of the Model
There is one position change for next Monday 4/6/15:
Sell IFN and buy FXI.
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
