third etf rotation in action edition! · day of trade based on decision from the previous day’s...
TRANSCRIPT
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ETF Rotation in Action
1
Jackie Ann Patterson
© Own Mountain Trading Company 2012-2017
Third
Edition!
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© Own Mountain Trading Company 2012 - 2018
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© Own Mountain Trading Company 2012 - 2018
Required Disclaimers
Investing and trading involve risk of loss and may not be suitable for everyone.
The author actively trades stocks and ETFs. She may or may not hold a position
in any instrument discussed.
This presentation is for educational purposes and is not a recommendation to buy
or sell securities.
HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE
AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL
TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE
UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH
AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO
THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS
BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR
TO THOSE SHOWN.
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What I Do
Strategy Research
Historical
Simulations of the
Stock Market
Write Books
Publish newsletter
Trade own money
Investment Advice Apply research to
strategy development
Specialties:
○ ETF Rotation
○ IRAs
○ Estate Management
Recommend Delta Investment Management: professionals to manage money
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© Own Mountain Trading Company 2012 - 2016
Role of BackTesting
Simulate a set of rules on historical price data
What backtesting can tell you
Passing rule-sets need more analysis
Failing rule-sets FAIL
Beware:
Over-optimization
Differences from live trading
Only one history to check
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© Own Mountain Trading Company 2012 - 2016
Role of Forward-Testing
Live trading (or paper-trading) on current
market prices
Try back-tested strategies on new data
Uncover real-world issues
Scale up working strategies
Never 100% conclusive
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© Own Mountain Trading Company 2012 - 2018
Agenda
Rotation Overview
When Rotation Beats Buy and Hold
ETF Rotation Back-Testing Lessons Learned
Forward-Testing Lessons Learned
How to Forward-Test
How to Back-Test
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© Own Mountain Trading Company 2012 - 2018
Agenda
Rotation Overview
When Rotation Beats Buy and Hold
Back-Testing Lessons Learned
Forward-Testing Lessons Learned
How to Forward-Test
How to Back-Test
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© Own Mountain Trading Company 2012 - 2018
ETF Rotation Definitions
GOAL: Get in areas of market poised to
deliver best performance
NOT: intra-day trading
NOT: Buy and Hold
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© Own Mountain Trading Company 2012 - 2018
Minimal Overhead
Limited time / effort
Limited / no commissions
Limited / no taxes
(in IRA, see your accountant)
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© Own Mountain Trading Company 2012 - 2018
“Manage” Risk
Historical drawdowns
Stop losses?
Move to cash at times
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© Own Mountain Trading Company 2012 - 2018
Why ETFs
Ease of trading
Low fees
Diversification
Retains value better than single company
Index manager periodically replaces “fallen soldiers” with
stronger companies
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© Own Mountain Trading Company 2012 - 2018
Practical Steps to Design an
ETF Rotation System
Think objective, repeatable, consistent
Choose a criteria for buy / sell decisions
What ETFs are candidates?
What is metric?
What is look-back window?
How often do you look?
Back-test to see if it worked historically
Forward-test to try it out in real world
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© Own Mountain Trading Company 2012 - 2018
My Chosen Funds for Simple
Model Portfolio in My IRA
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© Own Mountain Trading Company 2012 - 2018
High MomentumType of Rotation
Select ETFs with highest percentage gains
Best performance historically15
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© Own Mountain Trading Company 2012 - 2018
My Current Rotation Rules
From 3rd Edition Book
Each week assess the portfolio
Measure 114-day total percentage gain
Hold top 2 of 7 ETFs with positive gain
Go to cash if no positive 114-day performance
Keep a fund while it’s gains are in the top half
Rebalance yearly
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© Own Mountain Trading Company 2012 - 2018
What is Rebalancing?
Periodically resize holdings
Return to original allocations
Buy Low and Sell High
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© Own Mountain Trading Company 2012 - 2018
News Not Considered
Not Even Brexit or the Election
Its not clear to me how news moves the
markets
“Buy the rumor, sell the news.”
Often markets start moving ahead of the news
It is the big players’ opinions of the news that
move the markets most significantly
Price action reflects the sum of all market
participants opinions
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© Own Mountain Trading Company 2012 - 2018
Agenda
Rotation Overview
When Rotation Beats Buy and Hold
Back-Testing Lessons Learned
Forward-Testing Lessons Learned
How to Forward-Test
How to Back-Test
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© Own Mountain Trading Company 2012 - 2018
Rotation Hypothetical Performance
Beats Buy and Hold (BnH)
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Corrected
Data
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© Own Mountain Trading Company 2012 - 2018
Live Trading Profitable Except 2015
Compares Well to VTI Lately
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© Own Mountain Trading Company 2012 - 2018
When Rotation Loses to BnH
High tax bracket for taxable accounts
Account rules prohibit active rotation
When S&P500 leads market
But how to know when that’s happening?
If you don’t follow the signals
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© Own Mountain Trading Company 2012 - 2018
Give Rotation the Best Chance
Use self-directed IRA
Re-invest dividends automatically
Stay alert for changes to ranking
Take action promptly, following rules
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© Own Mountain Trading Company 2012 - 2018
Agenda
Rotation Overview
When Rotation Beats Buy and Hold
ETF Rotation Back-Testing Lessons Learned
Forward-Testing Lessons Learned
How to Forward-Test
How to Back-Test
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© Own Mountain Trading Company 2012 - 2018
Lessons From Back-tests onWealth-Lab Pro® for Fidelity Investments
S&P Sectors lagged iShares Styles
Momentum beat Bargain-Hunting
30-day look-back too volatile
Long/Short didn’t help
65 iShares ETFs commission-free at Fidelity
S&P500 easy to beat for a decade after 2000
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Wealth Lab Pro is a registered trademark of FMC, LLC.
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© Own Mountain Trading Company 2012 - 2018
Rotation Hypothetical Performance
1998 – 2011 on Mutual Funds
2007 – 2011 on ETFs Similar
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© Own Mountain Trading Company 2012 - 2018
Lessons from Recent Simulations
2007 – 2017
Shorter look-back window indicated
Moved to 114-day lookback window
SH reverse split created slight round-off error
IVV performed better than SPY
Slight difference visible on chart
Back-tests 1% variation because that slight
difference led the simulation to trade SPY for SH at
a very unfortunate time
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© Own Mountain Trading Company 2012 - 2018
Dividends Matter
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© Own Mountain Trading Company 2012 - 2018
Significance of Dividends
Backtest without dividends: CAGR drops 3%
Dividends amounted to more than payments
With dividends rotation moved to bonds faster
which limited losses in downturns
Or whipsawed more in 2015
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© Own Mountain Trading Company 2012 - 2018
2016 Runs Favor 115- or 120-
Trading Day Lookback Period
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© Own Mountain Trading Company 2012 - 2018
2017 Runs Favor 75- or 114-
Trading Day Lookback Period
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© Own Mountain Trading Company 2012 - 2018
Backtest Days of Week
Day of trade based on decision from the
previous day’s close, executed at the current
day’s close.
Fri looks at Thurs close to decide if trade
Trades at the close on Fri for simulation
Trades Friday morning in real life
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© Own Mountain Trading Company 2012 - 2018
Significance of the Different
Days of the Week
Monday gets trades from amateurs’
weekend analysis
Friday gets trades from pros’ work-week
analysis plus positioning ahead of public
Monday trades
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© Own Mountain Trading Company 2012 - 2018
Industrial-Strength Rotation
Consider other behavior beyond relative strength when choosing funds
Multiple sleeves
Expand and contract number of holdings based on conditions
Professional trading skills
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© Own Mountain Trading Company 2012 - 2018
Agenda
Rotation Overview
When Rotation Beats Buy and Hold
ETF Rotation Back-Testing Lessons Learned
Forward-Testing Lessons Learned
How to Forward-Test
How to Back-Test
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ETF Rotation Model Portfolio at
divergence-alerts.com
Bronze Level
ETF Rotation only
Silver Level
ETF Rotation
Weekly Market Status
Gold and Platinum
MACD Divergences
Stocks, too
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Take 25% off Silver,
Gold, and Platinum
membership
through Monday
2/19/18
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© Own Mountain Trading Company 2012 - 2018
Real-World ETF Rotation DiaryFrom Live Trading in My IRA
Dividend Re-Investment
Whipsaws
Ex-Div days
Trading price: limit orders vs market orders
Pilot errors: late re-balancing and jumping the gun
Garbage In, Garbage Out: dealing with bad data
Improvements37
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© Own Mountain Trading Company 2012 - 2018
Real-World ETF Rotation DiaryFrom Live Trading in My IRA
Dividend Re-Investment
Whipsaws
Ex-Div days
Trading price: limit orders vs market orders
Pilot errors: late re-balancing and jumping the gun
Garbage In, Garbage Out: dealing with bad data
Improvements38
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© Own Mountain Trading Company 2012 - 2018
Real-World ETF Rotation DiaryFrom Live Trading in My IRA
Dividend Re-Investment
Whipsaws
Ex-Div days
Trading price: limit orders vs market orders
Pilot errors: late re-balancing and jumping the gun
Garbage In, Garbage Out: dealing with bad data
Improvements39
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© Own Mountain Trading Company 2012 - 2018
Real-World ETF Rotation DiaryFrom Live Trading in My IRA
Dividend Re-Investment
Whipsaws
Ex-Div days
Trading price: limit orders vs market orders
Pilot errors: late re-balancing and jumping the gun
Garbage In, Garbage Out: dealing with bad data
Improvements40
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© Own Mountain Trading Company 2012 - 2018
Ex-Dividend Day Reality Bonus
On ex-div, stock price drops but owners get dividend later
Rotation sees stock price drop and may rotate out but still collects cash dividend
In back-test with dividend-adjusted data, if it rotates out on ex-div, it’s not smart enough to add the dividend later
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© Own Mountain Trading Company 2012 - 2018
Late Div Data Caused EEM Glitch
Mid-2017 shifted to semi-auto dividend entry
Posted dividends on payment date
On ex-div date for EEM, price fell to match dividend
But dividend didn’t post to my data that day
Result: EEM traded out when it should not have
Bought back a smaller number of shares = missed 1% profit
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© Own Mountain Trading Company 2012 - 2018
Real-World ETF Rotation DiaryFrom Live Trading in My IRA
Dividend Re-Investment
Whipsaws
Ex-Div days
Trading price: limit orders vs market orders
Pilot errors: late re-balancing and jumping the gun
Garbage In, Garbage Out: dealing with bad data
Improvements43
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© Own Mountain Trading Company 2012 - 2018
Real-World ETF Rotation DiaryFrom Live Trading in My IRA
Dividend Re-Investment
Whipsaws
Ex-Div days
Trading price: limit orders vs market orders
Pilot errors: late trades and jumping the gun
Garbage In, Garbage Out: dealing with bad data
Improvements44
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© Own Mountain Trading Company 2012 - 2018
Pilot Error: Re-Balancing
Rule: re-balance on first trading day of the year
Reality: skiing
Re-balanced late to mixed results
Re-balance date not critical – just don’t do it too often
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© Own Mountain Trading Company 2012 - 2018
Pilot Error: Missed Whipsaw SignalDue to Bear Raiding the Neighbor’s Trash
and my too-quick look at the rankings
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Executed rotation trade ASAP afterwards
Photo
by F
lorida F
ish a
nd W
ildlif
e
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© Own Mountain Trading Company 2012 - 2018
Real-World ETF Rotation DiaryFrom Live Trading in My IRA
Dividend Re-Investment
Whipsaws
Ex-Div days
Trading price: limit orders vs market orders
Pilot errors: late re-balancing and jumping the gun
Garbage In, Garbage Out: dealing with bad data
Improvements47
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© Own Mountain Trading Company 2012 - 2018
Real-World ETF Rotation DiaryFrom Live Trading in My IRA
Dividend Re-Investment
Whipsaws
Ex-Div days
Trading price: limit orders vs market orders
Pilot errors: late re-balancing and jumping the gun
Garbage In, Garbage Out: dealing with bad data
Improvements48
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© Own Mountain Trading Company 2012 - 2018
On-Going Improvements
Continue to follow system (follow market)
Error check on dividend calendar
More reliable data vendor - TradeStation
Mark calendar for re-balancing promptly
114-day look-back
Removed SH and added MDY
Use IJR for IWM and IJH for MDY, lower fees
Upcoming: Consider “Double-clicking” into sector ETFs of Top-Ranked Funds
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© Own Mountain Trading Company 2012 - 2018
Simple Portfolio Rotation
Can Meet Goals
Decent performance – better than holding a diversified portfolio (in tax-free account)
Low Overhead
Few trades
Little time / effort analyzing
Confidence of Side-SteppingHuge Drawdowns
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© Own Mountain Trading Company 2012 - 2018
Agenda
Rotation Overview
When Rotation Beats Buy and Hold
ETF Rotation Back-Testing Lessons Learned
Forward-Testing Lessons Learned
How to Forward-Test
How to Back-Test
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© Own Mountain Trading Company 2012 - 2018
My Forward-Testing Rotation Tools
at TruthaboutETFrotation.com
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ETF Rotation Model Portfolio at
divergence-alerts.com
Bronze Level
ETF Rotation only
Silver Level
ETF Rotation
Weekly Market Status
Gold and Platinum
MACD Divergences
Stocks, too
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Take 25% off Silver,
Gold, and Platinum
membership
through Monday
2/19/18
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© Own Mountain Trading Company 2012 - 2018
Agenda
Rotation Overview
When Rotation Beats Buy and Hold
ETF Rotation Back-Testing Lessons Learned
Forward-Testing Lessons Learned
How to Forward-Test
How to Back-Test
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© Own Mountain Trading Company 2012 - 2018
How to Backtest
Portfolio Simulation Required
Solutions Tried
Wealth Lab
ETF Replay
Excel with my own macros
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© Own Mountain Trading Company 2012 - 2018
My Rotation Back-Testing Tools Sold at
TruthAboutETFRotation.com
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© Own Mountain Trading Company 2012 - 2018
Please Fill Out Surveys
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© Own Mountain Trading Company 2012 - 2016
Books by Jackie Ann Patterson
Available on Amazon.com
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© Own Mountain Trading Company 2012 - 2018
For More Information, visit…
TruthAboutETFRotation.com for Do-It-Yourself
Newsletter (divergence-alerts.com Bronze level)
Book
Tools
Deltaim.com for managed accounts
Industrial strength
Professional traders
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© Own Mountain Trading Company 2012 - 2016
Appendix
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