This week there were no position changes in the strategy. We maintained out positions in TECL, SOXL, and CURE. These three sectors (Technology, Semiconductors, and Healthcare) continue to be the three leading sectors. After several noble but failed attempts, the SPY was finally able to put in a new all-time high this week, though it failed to hold onto the highs, ending the week up +1.2%. Our ETF Sector Plus Strategy holdings were up an average +1.8%.
Voila! Volatility.
I think it is important that we talk a little more about volatility. In many senses, volatility is a fundamental and inescapable element of all markets. Anytime you put people together in a room, there is going to be a range of opinions, beliefs, and actions. This is what markets are—the interaction of people’s actions. Stock charts simply chronicle the history of the collective decisions about whether a particular person should own a stock and when they should start (or stop) owning that stock.
Investors care about the volatility of a stock or ETF for a variety of reasons, probably most importantly because volatility on the downside can shake their profits away and extreme volatility is often associated with quick or severe down moves in markets.
Not all financial instruments have the same volatility. Large cap “boring” stocks, like Proctor & Gamble often have low volatility. The volatility is low for a couple of reasons. First, the company has a large number of investors. Therefore it takes a significantly higher number of waffling investors to move the stock price down than it would in a smaller company with fewer investors.
Secondly, the nature of what the company does is simply less prone to extreme changes. Proctor & Gamble manufactures and sells essential household products that people need regardless of the condition of the economy or whatever the passing trends happen to be. Because people buy these products at a steady rate, the stock (which is really just a play on people buying their products) tends to behave in a steady manner.
The ETF Sector Plus model includes a number of triple leveraged ETFs. Leveraged ETFs attempt to get 2x or 3x the normal performance of whatever instrument they are trying to follow. In very choppy, directionless markets, this often has the effect of creating more of a see-saw pattern on charts—not unlike how a pattern of sine waves with different amplitudes would appear in a geometry textbook.
This last week was a good example of a choppy, somewhat trendless market. We had ups and downs but basically ended the week up only a small amount. It was a similar story in our ETF holdings this week, except that when we were up, we were up more and when we were down, we were down more. Many weeks are going to be like this.
The model, however, works over the long run because it has far more up weeks than down or flat weeks. And it is in those weeks that the leverage doesn’t just create volatility, but truly increases our outperformance over the benchmark.
Below, I have included a percent change chart of our three holdings and the SPY benchmark over the last week. This type of chart normalizes the differences in price between the instruments, showing us the percent ups and downs of the ETFs for the week. As you can see, our holdings were more volatile than the SPY.
Here is a summary of the weekly performance of all the ETFs that the strategy monitors:
Note that we remain in TECL to avoid over concentrating in healthcare (IBB) and TECL is sufficiently close to DRN that it has not triggered a position change yet.