Both ETF Sector models beat out the benchmark for the third week in a row, with the Sector Basic model putting in the highest gain of the three. While both models continue to lag the benchmark on the year, they have made back a tremendous amount of that deficit in recent weeks.
The SPY spent most of the week going sideways, though it managed to put in a new closing high on Thursday before slumping back in the middle of the trading range for the week.
There were no position changes this week. Many of the levered ETFs (SOXL, CURE, TECL, etc…) had a 4-for-1 stock split this week. Entry, stop, and profit target prices have been adjusted to reflect the changes.
We have a live coaching scheduled for next Friday. Be sure to sign-up or catch the recording once that is available.
This Week’s Strategy Lesson: Global Capital Movement (Part 3)
This week we will wrap up this series on international markets and global capital flows. The U.S. markets, after a strong and lengthy recovery, have played second fiddle to international markets this year. The ~4% the U.S. markets are up on the year lags behind the ~11% and ~13% returns in European and Asian equities, respectively.
The chart above is the performance of the SPY and three regional ETFs since the first of the year. The green line above is the SPY. The blue line is ILF (Latin America). The purple line is VGK (Europe). And the yellow line is VPL (Asia).
As we have talked about in this series, capital tends to flow to where it can get the best return. This happens between sectors and industries as well as between regions and countries.
The Indian equity markets were a big story in 2014. After many years of economic stagnation, in April of last year, Narendra Modi was elected as Prime Minister on the promise of broad economic reforms. Almost immediately we saw a surge in India equities as foreign capital flowed into the market.
Even small economic and business reforms can start a virtuous cycle as economic activity leads to more economic activity. And surging profits lead to increase tax receipts which tend to flow back into infrastructure and education. Finding these virtuous growth cycles can lead to some great returns. The India Fund (IFN) was up around 40% in 2014.
Foreign investment into emerging markets can be a fickle animal though. Foreign investors in India have begun to grow weary of the sluggish progress on reforms. And then in April of this year, the Indian Finance Minister announced plans to include foreign investments under the Indian minimum alternate tax, a move that caught the ire of foreign portfolio investors and caused the first net monthly capital outflow in India is nearly two years.
We can find similar cycles of investment and divestment in sectors or industries. A new product or technology can cause people to reevaluate the profitability of a company and can spur new large scale investments and start multi-year growth cycles. But the trends don’t last forever as some projects may fail to pan out or valuations get sufficiently rich that each incremental investment above a certain level has diminishing returns.
Finding the right place to invest is only part of the equation. Having an exit plan is just as important. This is where the trading rules and rotation methodology come into play. In our ETF strategies, we rotate out of an ETF when another has a stronger positive trend or when the trend of the current ETF goes neutral or negative.
Our three primary models, Sector, Country, and Global Macro (part of the ETF Complete portfolio) are designed to give us maximum flexibility to search the world over for opportunities and trends, allowing us to “follow the money” and when conditions are right, turn a nice profit from the movement of capital.
The Current Condition of the Model
Our three positions are CURE, IBB, and SOXL. The Stops & Targets is in IBB and SOXL.
Stay tuned to the daily emails for any position changes and updates.
Here is a summary of the weekly performance of all the ETFs that the strategy monitors:
Best wishes for your trading,
James Kimball
