All three of the ETF Sector models were doing well this week until the late week sell-off and specifically declines in TAN and SOXL hurt out performance. The SPY closed marginally down on the week.
The U.S. markets, after gapping up to open out the week, sold off every day thereafter. Greece remains a hot subject with news and rumors of news causing quick intraday rallies and selloffs. There are a number of important deadlines in the coming days and weeks that should help determine if a compromise can be reached with its creditors or if the country will decide to default and/or depart from the European Union.
We have one position change in the Sector Aggressive model only:
Sell SOXL at the market on the open 6/29/15
Buy FAS at the market on the open 6/29/15
TAN, another one of our holdings, was not immune from the chip sector selloff on Friday. We do not have a signal yet, but depending on the market action, we may see a rotation out of this ETF next week.
We recently made a number of significant changes to the Sector models, including adding two new models and renaming an old one. Please see the recent strategy articles and live coaching for more information.
Summary of the Sector Models' Performance
This Week’s Strategy Lesson: Time to Regain Our Balance
This upcoming Wednesday is July 1st. All of our ETF models currently use a calendar-based rebalancing. On the first trading day of January and July, we trim or add to our existing positions until we have an equal amount of capital in each portfolio slot. Let’s go through the reasons behind why we do this and a little about how you can rebalance your own portfolio if you decide that is necessary.
Consistent Money Management Rules
The ETF portfolios are designed for the long-term. That is one reason we carefully back-tested both the concepts and the actual portfolios going back to the beginning of 2007. The model achieves its results through steady growth and compounding combined with consistent application of the money management rules
One of these rules, designed around accommodating the rotational nature of the models, is that when we rotate out of a position and into a new one, the new position uses the same amount of capital as the old position we sold.
This allows us to keep as much of the portfolio invested as possible while minimizing transactions and commissions. But it also means that over-time, the portfolio slots will grow out of balance. This can be especially noticeable if we have one position that does really well while another position is struggling.
Small imbalances are not a big deal and probably help performance as we let the winning positions “run.” But larger imbalances reduce the effectiveness of diversification and can cause one position to have an outsized effect on our performance.
Current Balance of the Models
The models have now been running just about six full months since their last rebalance. Let’s take a look at how they currently stand:
The above pie graphs show how much, in percentage terms, each portfolio position represents of the total of that portfolio.
The Sector Aggressive model is the most out of balance, with almost 20% separating the largest position (CURE) from the smallest position (IBB). The difference in the other portfolios have a much smaller range from about 4% to 10%.
In the Sector Aggressive model, this imbalance was driven both by an incredible run in CURE (up from $31.69 to over $42 now in the last six months) and a series of trades earlier in the year in DRN and TMF that didn’t work well in the portfolio slots that currently houses IBB and SOXL.
Basic Steps to Rebalance
Depending on when you started trading the models, what positions you were in, and how consistently you maintain your position sizing, you may or may not need to worry about rebalancing your own portfolio. You can tally up your positions and their relative sizes and make that determination on your own.
If you do decide to rebalance, here are the basic steps.
Again, if the relative position size differences are small in your portfolio, it may not be worth the effort and commissions to rebalance your portfolio. But larger portfolios or ones that are significantly out of balance can definitely benefit from performing this analysis.
Our models will be performing this rebalance across the board on July 1st.
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
