Trend Status

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  • on June 1st, 2010

I’ve decided to start sharing part of my weekly prep in the form of an ETF review.  This is a very basic part of the puzzle, but a starting point for me each week.  The results in the graphic are based on a total of 10 “systems” running simultaneously, totaling an allocation % for each.  In reality, these are 3 models built on the following:

1) Meb Faber’s Quantitative Approach to Tactical Asset Allocation

2) Ned Davis 4% Reversal System popularized in Martin Zweig’s Winning on Wall St.

3) Don Hays’ Smart Money Indicator now tracked by Jason Goepfert

I’ve personalized these in too many ways to mention, but want to give credit for the original inspiration.  From these 3 models, I apply them over 3-4 similar but different time frames to ensure that I haven’t built a system on the whims of a few traders who decide to close a week below the 200 day MA, for example.  From there, I focus only on the ones with the strongest(in both up and down directions) measures of trend strength.  75% or higher is a buy, -75% or lower is a short.  I exit when time or gravity pulls the ETF back inside the range of 45% to -45%.  For example, IYR is still owned but no new money goes there…it is in danger of losing its status as a buy.

I also track 13 week correlation with SPX…if I get buy signals on a bunch of highly correlated ETFs, that just tells me the risk trade is ON.  I can’t think I’m diversified just because I own 5 asset classes when they are just versions of the same trade.  I also see high negative correlation as an opposing version of the same trade, so there’s no comfort in being “market neutral” if all my positions are based on the same global money flow.  Ideally, buy and sell signals are given in those instruments tracking independently of most other classes.  I do track cross correlations with each other as well to ensure diversification, but I’ll save that for a future post.

As mentioned above, this is a starting point for my weekly prep.  As Brian Shannon says in his book, “Anyone can recognize an existing trend, but finding the low-risk areas to enter the trend and knowing when to exit is what separates the sheep from the wolves.”  Constructing positions based on the results is another discussion I’ll have to save for future posts, but at least a quick glance at the graphic tells you areas in danger of runaway downside.  Combining the steps of selection, risk/reward, and independence points to the shiny metal as the apple of my eye as we head into this week.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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