This week there were no position changes in the Sector Plus model. DRN hit a profit target in the “Stops & Targets” 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 +0.52%. The ETF Sector Plus model was up +1.75%. The ETF Sector Plus Strategy is up +44.48% year-to-date compared to its benchmark, the SPY, which is now up +7.01% year-to-date.
This Week’s Strategy Lesson: The Best of Times, The Worst of Times.
This week has been a volatile week, both in the markets and in the world. We have a big contrast between a robust start to corporate earnings season and the market hitting new highs while passenger planes are being shot down over Ukraine, rockets are being fired into Israel, and Iraq continues in disarray.
Barron Rothschild famously said in the 18th century that “The time to buy is when there’s blood in the streets,” a common mantra for the contrarian investor. Advice usually taken to mean that when things are at the worst, it can be a great time to get in on bargain basement prices.
But we have a very unusual situation presently. Three (or more) very potent geopolitical conflicts that could threaten to drag the major superpowers and regional economies into escalated tensions and potentially war, though that is not imminent. Yet the markets act like it’s the best of times as it puts in new all-time highs on low volatility.
We finally got a spike in that volatility yesterday (biggest one day move in 15 months) as it looked like the markets might finally take the potential conflicts seriously, but apparently taking two Tylenol PM and sleeping on it cured that as markets surged back up on Friday as if nothing happened.
One of the benefits of being 100% systematic in your trading decisions, (using our ETF models) is that you can remain invested when human emotion could easily “scare” even the best traders out of good positions. The current markets are a good example of this.
Of course holding positions in the face on seemingly dangerous news is only prudent if you are very cognizant of potential volatility and risk.
We have talked many times about the volatility in the ETF strategies. The sector fund is a little more prone to large swings because it is more likely to be in leveraged positions, but the country fund is not immune either, as it is in two leveraged positions currently (one 2x and one 3x) and some of the smaller country funds can move a lot overnight.
Some of this volatility is unavoidable. The broader markets will always move in fits and starts. Our trend finding and following system has to be given a wide-berth to stay in these trades. That means volatility that you wouldn’t find with many trading systems that focus on precise entries and tight risk.
One innovation we have made to help reduce the volatility is the addition of the stops and targets models. At times these will be just as volatile as the basic model, but they when they hit a profit target, you take money off the table, reducing risk and volatility.
On Friday, we just hit a profit target in one position in the Sector Plus model and we are only a couple percent away from hitting a target in a Country Plus model holding. If you have not taken the time to review those trading systems, we highly recommend that you check them out.
The Current Condition of the Model
For the Sector model, we remain in SOXL, ERX, and DRN. DRN hit its first profit target on 7/18. SOXL put in a new all-time high this week before retreating. DRN also made a new 2014 high. 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