All three of the ETF Sector models were up this week, two beat the index while the Moderate lagged a little behind (due in part to the partial position in CURE). Year-to-date, the performance of the various models remain spread out with the Conservative model ahead by a small margin and the Aggressive model remains the weakest of the three.
The whole market catapulted higher this week, in-part, bolstered by positive geopolitical news in Europe (and potentially the Middle East) and strong earnings leadership from the technology space. The SPY is back to a bullish phase and the top of the 2015 trading range, meanwhile the QQQ were able to break out to new highs.
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Summary of the Sector Models' Performance
This Week’s Strategy Lesson: Crossing the Zero Divide (Part 2)
With the major markets largely trending sideways over the last six-months (albeit in a decently wide range), we started to see the average TSI score of all the potential ETFs cross below zero.
Since we only hold the top three ranked ETFs, as long as they are positive, this doesn’t necessarily always affect the models, however, we had situations last week where we were rotating out of an ETF that went negative or there were fewer than three ETFs with positive TSI.
After the big correction in markets over the last several days, this is not as much of an issue (there are now between six and ten ETFs with positive TSI in each of the models). Still, it remains an important topic and we are going to continue this series looking more closely at some historical periods when this occurred.
The Summer of 2011
The summer of 2011 proved quite tumultuous for the markets. The U.S. saw its credit rating downgraded, meanwhile, over in Europe the debt crisis was finally coming to a boiling point. Greece was in ruins and Italy and Spain were on the precipice.
August began with the market tumbling over 15% and it would take the market almost a year to climb back to the May 2011 high. This dip caused a lot of turnover in our ETF models as we rotated out of our “long” holdings and into more short and alternative holdings. We will specifically look at the Sector Moderate holdings for this illustration. (The Sector Moderate has stops and targets and is also part of the ETF Complete Portfolio).
As you can see in the chart above, over this six month period, the SPY pulled back and then chopped around, recovering some of its losses. The Sector Moderate model was tracking with the market until the beginning of August when several short and alternative ETFs made it to the top of our rankings.
In the chart above, we have zoomed into the three portfolio slots of the Sector Moderate model during this period. So, for instance, the first portfolio slot (orange line) was in XLU (not shown) at the start of July and then rotated into “SDS” (leveraged short SPY), quickly reached a target, and was stopped out at break-even in early September where it remained in cash until it rotated into XRT in late October.
Similarly, the green portfolio line had a great rotation out of XLU in July (not shown) into TMF (leveraged U.S. treasuries) and went on to reach three profit targets and remained in cash for a couple months after that.
The third portfolio slot (blue line) was not as lucky, taking losses in XRT (not shown) in July, briefly going to cash before entering GDX. That position, after making a small profit ended up giving it all back and we rotated into XLU mid-September and then into XHB in December.
This inside view of the model gives us a better a better idea about how the model tends to react to market corrections. The overall condition of the market when the correction begins, can play a big role in how quickly the models react and whether it will get short.
The August correction discussed here occurred after 3-4 month period of largely sideways action in the indexes. This means the models were “primed” and ready to get short because the overall TSI scores were already trending lower or negative (See chart above). So when the market corrected, we had some timely rotations into short exposure ETFs, and when the markets showed some follow-thru on the downside, we were able to take profits and come out ahead during this period. This is a “textbook” example of how the models are supposed to work.
However, it will not always be this clean. Quick and deep corrections occurring near market highs can cause us to hit our stops without actually triggering shorts. Or they can be just enough to trigger shorts without any of the follow-thru needed to reach profits.
Next week we will continue this analysis looking at another sample period where the market was set up a little differently and see how the models reacted and what we can learn from it.
The Current Condition of the Model
Please visit the Model Portfolio section of the member area to see the ETF ranking for each of the three Sector models.
Stay tuned to the daily emails for any position changes and updates.
Best wishes for your trading,
James Kimball
