This week we didn’t make any changes in the portfolio. Our current three positions are THD, TMF, and IFN. The stops and targets model was stopped out of TMF on 9/17 and will remain in cash until the model generates a fresh entry.
The MSCI World Index closed the week down -3.14%. The ETF Country Plus Basic model ended the week up +1.17%. This is the second week in a row that the benchmark has fallen while our Portfolio has climbed. The ETF Country Plus Strategy is up +18.08% year-to-date compared to its benchmark, the MSCI World Index, which is now down -0.65% year-to-date.
The Stops & Targets model declined -1% because it does not hold the TMF position like the basic model. It is now up +11.5% for the year.
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
For the country model, we are in THD, IFN, and TMF. TMF was stopped out 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.
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.
Of course, we’ll email (and text you if you requested it) when the Model makes any changes to the portfolio.
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