In the Basic model, our three positions are TMF, TECL, and CURE. In one of the most volatile weeks we’ve had in the markets this year, this week’s rotation out of SOXL and into TMF proved to be a very timely move as SOXL was hit hard. Additionally, TMF provided a +2.5% and +4% return in the Basic and Stops & Targets Models respectively in a very weak market.
The SPY closed the week down -3% which leaves it up only 3% for the year. The ETF Sector Plus model was down -4.6% (the Stops & Targets was also down -4.6%). The ETF Sector Plus Strategy is up +31% year-to-date compared to its benchmark, the SPY, which is now up +3% year-to-date.
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 Sector model, we are in TMF, TECL, and CURE. The model’s move into TMF provided a good hedge against the falling market last week. But with the increased volatility, and a very HIGH RISK of a significant move down in the markets, it is important that you be aware of where the model’s stops are and have them in place.
IBB has moved into the top 3 but it has not become strong enough to change our positions. With the increased market volatility stay tuned to the daily updates. Market corrections have often provided some of the best opportunities to capitalize on nice gains in the Model Portfolio.
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