ETF Sector Plus Strategy Insights
This week there were no position changes in the Sector Plus model. Our current three positions are SOXL, ERX, and DRN. To open next week, we will remain in those three ETFs.
The SPY closed the week up +1.40%. The ETF Sector Plus model had a blowout seek ending up +6.49%. The ETF Sector Plus Strategy is up +33.18% year-to-date compared to its benchmark, the SPY, which is now up +6.01% year-to-date.
This Week’s Strategy Lesson: Stops and Targets!!!
This last week we quietly rolled out a new way to trade our ETF strategies. It involves the use of stops and targets. The sector model is live, while we plan to roll out the country version next week. I will be introducing some of the concepts and thoughts behind it here, but it will be covered in greater detail during next week’s live coaching webinar.
A New Way to Trade the ETF Models
For many traders, the method of trading and managing positions in the ETF models was a foreign concept. I can’t tell you how many times people asked us about stops and targets. Most traders are just that, traders, not portfolio managers. The ETF strategies were designed to take advantage of long term trends and the power of compounding, not to perfectly time the market and quickly take small profits. The default position is to be invested in market, not in cash.
To accommodate these goals, we designed a system that would give our positions time and space to catch the big trends without getting blipped out by tight stops.
The original model has a form of stops. If an ETF moves out of the top of our rankings or if the trend strength went negative, it would be replaced, effectively acting as a stop—but it was a relative stop based on the performance of its peers, not a fixed price stop.
One of our goals for continually improving our models was to add a way to trade the ETF models with traditional stops and targets that would still accommodate our original objectives. We feel that we have accomplished this with the latest release.
Why Trade with Stops and Targets?
As you can see from the equity curves above, using the stops and targets actually lowers your overall performance (though it is still very much in the same range as the “Basic” model). But it does provide a few key benefits.
First, it tended to smooth out the yearly performance. In years where the basic model had low returns, due to choppy markets, taking profits early tended to increase your return, sometimes by a wide margin. While in blowout years, like 2013, taking profits early meant reducing your overall exposure and lowering your top line returns.
Secondly, trading with stops and targets tends to reduce the overall volatility. You can see from the red line above, that it follows the contours of the “Basic” curve, while reducing the volatile up and down swings and the max peak-to-trough drawdowns. For many traders, this will make the system easier to follow.
Some Differences
In this section, I will cover some of the specifics of the rollout (country-funders will have to wait till next week). In the ETF Sector pages of the website, you may notice new links in the navigation panel. We now track two separate portfolios. The “Basic” is the same model we have been using. The “Stops & Targets” is the new model.
Both models enter trades based on the exact same signals. The only key difference between the two is money management. For the “Stops and Targets” version of the Sector model, you now have the option of using hard stops and targets.
We recommend a 15% stop from the entry which is never adjusted or trailed. And then we employ three profit targets, taking 1/3rd of a position off at 25%, 1/3rd at 60% and the final 1/3rd off at 100%. The specific targets are based on the performance profile of typical trades in this strategy.
The profile of the average trade in the country fund is different. It will require different sized stops and targets than the sector model, but the risk reward ratio will likely be very similar.
The stop price and the target prices are shown in “Stops & Targets” page of the Model Portfolio. These are intraday stops and targets that can be placed using good-til-canceled orders.
Some Similarities
While trading the model with stops and targets might feel different, it’s actually surprising how similar the two methods are. One reason for this is that the stops and targets are liberal. This allows the trades in both strategies to have similar freedom to catch the trends.
Another reason is that the stops and targets preserve the ratio of risk and reward found in the basic system. The trade statistics from both systems end up with a very similar 2.4-2.7 profit factor. The largest losing trades are similar. The spacing of the stops and targets are consistent with the profile of the basic system trades.
Live Webinar
Next Thursday we will be having an extended monthly webinar explaining in greater detail how to trade the new stops and targets model. I highly recommend that you attend. A recording of it will be made available if you are unable to attend the live event.
The Current Condition of the Model
For the Sector model, we remain in SOXL, ERX, and DRN. All three have been performing outstandingly, sitting on huge gains. TECL has moved into fourth plave but is still lagging our top three positions in “Av Ret.” No position changes are imminent in the sector model but stay tuned to the daily updates should there be any changes.
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