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Tahoe Market Pulse: A super simple trading model

David Vomund
Special to the Bonanza

This year, growth is outperforming value and small-company stocks are outperforming large-company stocks. It’s a great environment for relative strength investing and there is one mechanical trading strategy that is super easy to follow.

In fact, this sector fund rotation strategy only requires an hour a month to implement. Here’s how it works:

At the start of each month, rank sector ETFs based on their one-year performance (we use 240-business days). Then, buy the two best performers to fully invest the portfolio and hold them for the remainder of the month.

On the first day of the following month, run the calculations again. If a holding is not one of the two best performers, then sell it and place the proceeds in the best performer. The strategy is always fully invested in two sector ETFs.

How do you find one-year performance rankings? You can get free performance rankings, updated each weekend, on the Analysis page of http://www.ETFtradingstrategies.com. Other websites such as ETFscreen.com also give performance rankings.

The number of sector ETFs have grown over time. When we began the test in 2002 we used 19 iShares sector ETFs. In 2003 we followed 24 ETFs and in 2007 we followed 35.

We could easily add many more ETF choices today, but for simplicity we’ve kept the 35 ETF list.

I’ve tracked the performance of this simple system in a paper portfolio (not a real account) for over ten years. In the first quarter of 2015, the strategy grew 8.6 percent and it currently holds Healthcare Providers (IHF) and Biotechnology (IBB).

In 2014 it rose 16.7 percent, in 2013 it rose 43.6 percent, and since 2002 its average annual return is 8.7 percent. The average holding period is 102 days. There were bad years, too. In 2008 it fell 41.2 percent.

This strategy is covered in both of my ETF trading books, which are at the Washoe County Library.

By simply doing a monthly rotation to the best-performing ETFs over the prior year, the strategy nearly doubles the buy-and-hold return on the S&P 500.

Since it only holds two sector ETFs, it is much more volatile than the S&P 500 as well. Nevertheless, a growth strategy like this one may be appropriate for a small portion of your portfolio.

David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.


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