Weekend Strategy Review February 17, 2019

Posted by OMS  at February 17th, 2019

Good Morning.  I have a lot to cover this morning so let’s get started.

On Friday, President Trump held a press conference where he talked about several issues including immigration, trade with China, North Korea, and the mid-east.  He also said he was declaring a national emergency to unlock money for a wall on our southern border with Mexico, something he believes is needed to solve problems associated with drugs and illegal immigration.  Immediately after his presser, the markets exploded higher. The Dow finished 444 points higher at 25,883.  It was up 777 points for the week. The Dow has now retraced about 68 percent the losses it had from the October decline.

The NASDAQ was only up 45 points on Friday, mostly because of Amazon’s (AMZN) continued poor performance. Amazon was down 15 points on Friday and generated another VTI-volume Sell Signal.  BTW, AMZN closed at 1607.95, where it continues to threaten its right shoulder low of 1588.  A break of this low would be very negative for AMZN and retail stocks in general.  Remember, we’re watching Amazon because consumer spending represents about 70 percent of the American economy. So, IF Amazon starts to break down, it would not be a good sign for the overall economy.

Anyhow, Friday’s rally caused the volume portion of my VTI-volume indicator on the Dow to turn positive again, so all my major market timing indicators are back on Buy Signals.  The Dow is still on its buy from early January because the signal never turned negative.  So far, it’s given two warnings by turning Neutral.  As long as the timing indicators remain on Buy Signals, the markets can continue to push higher.

The Tide and Dean’s List remain on Buy Signals.

The Sector Ratio increased to 22-2 positive after Friday’s session.  The two weak sectors were Foods and Autos.  The Strong Sector List was led by Household Products, Semiconductors, Computers, Technology and Transportation.

Gold and Crude Oil moved higher after generating their recent re-Buy signals.

OK, now that I’ve given you my take on the markets, I want to discuss something new with you.  It’s something that I have been thinking about doing for a long time, but never saw a way of implementing it. Then while watching the market rally on Friday, with all my timing signals supporting the rally, I finally realized that what I have been thinking about implementing for years was right before my eyes.  I just didn’t see it.  

I’m talking about a Model Portfolio.

Ever since I started this web-site, I always wondered what would happen if I posted a Model Portfolio. The Model could be used to help students structure their own individual portfolios. Anyhow, yesterday when I was looking at my market timing indicators on the cockpit, it occurred to me that these indicators could be used as the triggers for ETF in a Model Portfolio. But before I go any further, I must say that any model I design might not be suitable for most of my students. That’s because the risk level associated with my Model might not be suitable for you. Different investors have different levels of risk. Students in their 20 and 30 might want to take on more risk than someone in their 70s or 80. On the other hand, a student in their 70s, who has satisfied all his or her financial needs, might want to structure a very aggressive portfolio, just to see how it performs. Like I said, different people have different needs and risk levels.

Anyhow, while I was looking at the cockpit lights, I wondered how a moderately aggressive portfolio, based on the Dow, NASDAQ, Gold, and Crude Oil would have performed during the past few months. One of the things that got me thinking was what happened back in October when the market timing indicators for Crude Oil generated a Sell Signal. UCO fell from 36.6 to 12.89 at its low. So right away, I knew that Crude Oil had to be in my model portfolio, both as a long and a short.  I need to insert an important caveat here, because the past six weeks have been very positive for the markets, so the results shown below must be considered purely hypothetical and will likely NOT reflect future performance.  The results are offered to promote thinking, discussion, and are to be used for educational purposes only.   

I started with the assumption that my portfolio would consist of $100,000, divided up into four pots of $25K each. I would then use each pot to buy ETFs that track the Dow, NASDAQ, Gold, and Crude Oil, whenever the market timing signals for these ETFs turned positive. For the study I used DDM, QLD, GLD and UCO as the tracking ETFs.  I assumed each ETF was purchased when the market timing signals turned positive and held until the signal turned negative.  BTW, if the signal changed from Positive to Neutral, it was NOT considered a signal change. The signal would have to turn Negative for me to Sell the ETF and move into an inverse ETF.  For this model portfolio, I did not include Bonds or the Dollar. However, they could have been easily added if the student wanted additional diversification, depending on the amount of risk one decided to take.  

Also, I did not use a leveraged inverse ETF for gold or crude oil, as the market timing signals were positive during the period of the study.  If I were to construct a real life Model Portfolio, I would likely incorporate inverse ETFs for gold and crude oil, as my intent is that the Model would always be fully invested.

The Model could be used to baseline your portfolio.  For example, if you wanted to include leveraged ETFs for gold in your portfolio, instead of GLD, you could. This would add more volatility (and risk) to your portfolio.  You could also add a few stocks to your portfolio in sectors from the strong list.  For example, when the timing indicator for the Dow turned positive, you could buy DDM, and buy a few shares of the top stock from the Strongest Sector.  The possibilities are endless.  But at least you’d have a Model Portfolio to assess your decisions against. You would also be able to see when the Model changes which might help you manage your own portfolio.

Anyhow, I did some quick calculations. Now don’t hold me to these numbers, because I DID NOT do a detailed review of the numbers. It was a very quick study. I also did not include commissions. Like I said, I just took a quick look at the numbers to get a gross feeling for how this ‘theoretical’ portfolio would perform.

Here’s what I found: Since the day the Dow and NASDAQ generated their Buy Signals in early January, DDM is up about 20.8 percent, QLD is up about 18 percent.  Since generating its Buy Signal on 27 December, GLD is up about 3.5 percent. Crude Oil (UCO) is up 36 percent since generating its initial Buy on 3 January. It had a recent re-Buy signal a few days ago. So overall, since late December–early January, the ‘theoretical’ model portfolio has been invested in four positive ETFs for the Dow, NASDAQ, Gold and Crude Oil. The average for these four ETFs is a gain of about 19.5 percent. Like I said, don’t hold me to these numbers as they were the result of quick calculations.

To be conservative, let’s say that the portfolio was only up 15 percent for the 6 + weeks it would have been active. That’s a return of about 129 percent on a yearly basis. Pretty interesting. Hmmm?

But the more interesting part was that the Model required very little effort to manage. Once established, the only time the Model changes is when the market timing signals change.  And to do this, you only need to look at the Model once a day.

Last week, while I was teaching my PT Class, one of my students told me that he was having a lot of success trading the one minute bars with my methodology. I told him he might want to re-think what he was doing! Trading the one minute bars is a lot of work. You’re basically sitting in front of a computer all day just to make a few bucks. No, that’s NOT what life’s all about. Life is about enjoying your free time, your spouse, your friends, and your grand kids. Especially your grand kids! It’s NOT about sitting in front of a computer all day watching a few squiggly lines.

Anyhow, because of the results I’m seeing with the ‘theoretical’ Model Portfolio, which again only requires one decision a day, I’m proposing that we investigate a far less stressful method of trading. Because of the ‘theoretical’ Model’s performance, I’m suggesting that we construct a real life model on the web-site and see how it performs in the future. I simply can’t ignore the fact that my ‘theoretical’ portfolio would have produced a gain of over 129 percent in one year. Heck, I’d be extremely happy with a low maintenance Model if it gained 1/3 of the 129 percent in a year!

So, I’m asking for your feedback on this idea.  This would require a lot more work on my part, but if you’re interested, I’m willing to consider taking on the additional effort. Maybe later, it will be a way for me to reduce the amount of time I spend on writing and posting my daily Comments, especially when I’m on travel. Getting up at 3am on the West Coast or while cruising is no fun. I’m thinking that IF I went on my vacation schedule where I post Comments 2 days a week, with a WSR on the weekend, and post changes to the indicators and Lists daily and the Model Portfolio as necessary, it could work.

Again, I would appreciate receiving any thoughts or suggestions you might have on my idea for a new Model Portfolio(s).

Have a great weekend. 

That’s what I’m doing,

h

The markets will be closed on Monday 18 February, for the President’s Day Holiday.

Market Signals for

02-19-2019

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All of the commentary expressed in this site and any attachments are opinions of the author, subject to change, and provided for educational purposes only. Nothing in this commentary or any attachments should be considered as trading advice. Trading any financial instrument is RISKY and may result in loss of capital including loss of principal. Past performance is not indicative of future results. Always understand the RISK before you trade.