ETF Country Plus Strategy Insights: Momentum (Part 1)

James Kimball | March 16, 2015

Both the Basic and Stops&Targets model beat their benchmark this week and are holding onto a lead for the year. The Basic model’s performance is still being largely driven by its position in TMF that remains volatile.

We made one position change this week, selling out of China and getting into Japan. We caught a nice ~2% move on that position since our entry on Monday.

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This Week’s Strategy Lesson: Momentum (Part 1)
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When asked one time if making money in the markets was difficult, Jessie Livermore (the semi-biographical protagonist in “Reminiscences of a Stock Operator”) famously responded:

“Not at all! I have found an easy way and I stick to it. I simply cannot help making money. I will tell you my secret if you wish. It is this: I never buy at the bottom and I always sell too soon.”

Everyone has heard that to make money in stocks you have to buy low and sell high. And while technically, at the very least you do have to sell higher than you bought to make a profit, the usual connotation of “buying low” (relative to recent prices or support levels) is not always a home run.

The truth of the matter is we never know if that recent new high in a stock will be the new all-time high or just another step on its way up. And likewise, unless a stock is at zero, you cannot be sure it has bottomed out. Stocks are never too high to buy or too low to sell if you have good reasons.

We all have some innate fear about buying a stock on a fresh new high. Talk to anyone who has been trading long enough and its almost guaranteed they will have a story about the time they sold the all-time low in coffee or bought the all-time high in a tech stock. 

The ETF models can put our fears to the test. At its core, the models are about being in the strongest TSI (Trend Strength Indicator) ETFs. This generally means the ones we get into have had a period of strong performance. They might not always be at new highs, but they will typically already have made a nice move before we get into them.

The models made a number of great trades that fit this description in the last year.

The Sector model bought ERX last April just as it was breaking out to new all-time highs. It didn’t feel great buying it at those levels, but if you had hesitated, you would have missed over a 25%+ move.
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The Country model has a similar looking trade in India. It had already moved over 20% off its consolidation around $18. The move felt quick and overdone. But the model insisted on entering a trade and we have now been in it almost a year approaching a 40% gain from our entry.
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However, these trades don’t always work. TMF is a good example of both a trade working and a trade not working. The Country model entered last April and is still in the trade sitting on a very nice gain. The Sector Model has had less luck. While it did have an earlier trade that worked well last October, the recent entry proved quite untimely.

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The ETF models taken as a whole gives us the opportunity to be in a wide variety of instruments, from leveraged sector ETFs to small emerging markets to the U.S. Dollar. While each of these have different trading characteristics, we are consistently entering these instruments when they are showing strength and making moves. This can open us up to nice quick profits when we are right, and also our share of ETFs that can move off their highs just as quickly sometimes. That is one of the unavoidable aspects of a momentum-based strategy.

We have seen here a few great examples where buying strength, even buying new highs has worked. But why does it work? What forces are working in our favor to help give us our edge? In the next couple of articles, we are going to explore the underlying reasons that causes stocks and ETFs  to trend up or down and how our TSI helps us pick up on which ETF might be the next to sprint away from the pack.

The Current Condition of the Model

There are no position changes on the immediate horizon for the model. Our three holdings are TMF, EWJ, and IFN.

Stay tuned to daily updates for any position changes.

Here is a summary of the weekly performance of all the ETFs that the strategy monitors.

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Best wishes for your trading, 

James Kimball