The Composite Breadth Model turned bullish on Friday and this means the Market Regime is bullish. This also means the Trend Composite strategy outlined in part five can now choose trend-momentum signals in stock-related ETFs. Please review part five for details on this strategy.
Trend Composite Strategy Series
- Introduction to the Trend Composite and its Indicators (1-Feb)
- Trend Composite Signal and StochClose Ranking Table (2-Feb)
- All Signals Tests and Indicator Comparison (8-Feb)
- Trend Portfolio: TrendComp Crosses, StochClose Rank, Mkt Regime (15-Feb)
- Momentum Portfolio: Trend Status, StochClose Rank, Bear Mkt ETFs (22-Feb)
- The All Weather Portfolio, Bull-Bear Market ETFs, Market Regime (17-Mar)
- Adding an ATR Trailing Stop and Testing Time Exits (24-Mar)
- Live Example when Market Regime Turns Bullish (28-Mar).
- Adding a Profit Target (31-Mar)
The Trend-Momo All Weather 50 BB ETF Strategy
This Trend-Momo AllW50 BB Strategy is a mouthful, but it captures the essence of the strategy in part 5. The All Weather ETF Universe of 50 ETFs is divided into bull market ETFs (stock-related) and bear market ETFs (non-stock ETFs). The strategy takes trend-momentum signals in any ETF during bull markets, but only takes trend-momentum signals in bear market ETFs during bear markets. A trend-momentum signal is selecting the ETF with an uptrend (positive Trend Composite) and the highest StochClose value. Note the strategy does not sell all stock-related ETFs when the market regime turns bearish. Instead, it sells when the Trend Composite turns negative for the individual ETFs.
Note that the Trend Composite is part of the TIP Indicator Edge Plugin for StockCharts ACP. I use Amibroker because this is where I can build the indicators, test the indicators and fully customize the chart views.
The charts are linked to a SharpChart with corresponding indicators or the SharpChart alternatives. Note that CCI is used instead of CCI Close, Full Stochastic (125,5,1) is used instead of StochClose (125,5) and the thick black line is the 125-day SMA.
The Nature of Trend-Following
Trend-followers assume no predictive powers and do not second guess signals. Instead, we devise a strategy, take the signals and let the chips fall. Some signals (40-45 percent) will last and capture extended trends. Most (55-60 percent) will fizzle and result in losses or insignificant gains. The strategy is successful over time because it catches a few good trends. Note that we have no idea which signals will result in losses and which will lead to big trends.
The table above shows the monthly-yearly performance breakdown for my simulation of the strategy in part 5. There was a 6.9% drawdown in January 2022 and this is the fourth biggest monthly loss since 2007. May 2010 witnessed a 7.2% drawdown due to the flash crash. There was a 10.3% drawdown in August 2015 and an 8.8% drawdown in October 2018. The table above highlights some of the bigger down months and the three month stretches with negative returns. 2016, 2019, 2020 and 2021 were exceptional years on the positive side.
Strategy Simulation
I use Amibroker to backtest and run my simulations. The table below shows some of the recent trades and the current portfolio in red. The strategy rebounded in February and March 2022 because it went long XLE, PBJ, XLP, DBB, GLD and XES between January 21st and 26th, which is when the Market Regime was bullish. Even though the Market Regime turned bearish from January 27th to February 1st and again from February 16th to March 25th, the strategy did not exit these stock related ETFs (red arrows) because the Trend Composite remained positive. Also note that the strategy was long the DB Energy ETF (DBE) for over a year and the Oil & Gas Exploration & Production ETF (XOP) for six months. These two outsized gains are paying for the losing trades.
The strategy had twelve positions before the Market Regime turned bullish on Friday. The last two lines show the Metals & Mining SPDR (XME) and Aerospace & Defense ETF (ITA) with new buy signals on March 28th because they are in uptrends and have the highest StochClose values. And guess what? XME is way overbought after a 50% advance from late January to late March. ITA is short-term overbought after a 7% surge in nine days. This is the nature of trend-following.
Your Comfort Zone, Trading Style and Personal Preferences
Trading decisions are very personalized. Sure, we all want profitable trades and strategies. However, I do not know your risk tolerance, your investing goals, your net worth, your experience, your retirement plans, the make up of your current portfolio or your beverage preference. Everyone is different and we have to find out what fits for us.
Trend Signal and Ranking Table
Now let’s walk through the ETF Trend Signal and Ranking Table to see how the current signals were derived for XME and ITA. The first step is to enter Allw in the search box to single out the All Weather ETFs. Skip this step if you want to see the full list (276 ETFs).
The next step is to sort by two columns: Trend and StochClose. Press and hold the shift key, click the Trend column and then the StochClose column. You may have to click twice on each column to get the sort direction right. This shows all the UPtrends at the top and these uptrends are sorted by their StochClose values. Notice that XME and ITA have the highest StochClose values of the ETFs that are not already in the portfolio. This is why they will be added.
Notice that the strategy is not considering SPY, QQQ, IWM or any of the tech-related ETFs because the Trend Composite is negative. The Cybersecurity ETF (CIBR) has a positive Trend Composite, but its StochClose value is 66.26, which does not put it near the top. This strategy buys the momentum leaders.
The information above covers the Trend-Momo All Weather 50 BB ETF Strategy. There are other ways to approach the new signal in the Composite Breadth Model. One would be to sort the table by the recent signal column to see the recent Trend Composite signals. Here we see the Insurance ETF (KIE) and Materials SPDR (XLB) triggering bullish within the last five days.
There is also the Tuesday report covering the trends, patterns and setups for the ETFs. This report is more subjective because I am analyzing the price charts with my eyes and brain. Here I am looking for uptrends, tradable patterns within uptrends and the occasional bottom pick (like the Clean Energy ETF (PBW) recently). There is really no way to quantify this type of analysis. It always looks and sounds good at the time, but has its fair share of failures (and a few big trends as well). The XLB example below comes from the report on March 22nd.
Top Traders Unplugged
For those interested in trend-following and systematic trading, I cannot recommend Top Traders Unplugged enough. The podcasts may not be the most exciting in the world, but the hosts and guests are true professionals and the episodes are packed with useful information on the true nature of trend-following. Everybody loves trend-following when times are good and trends are big, but it is not easy to stick with the system, it is hard to buy when price is already up substantially and drawdowns suck. The two episodes below were of particular interest.
Conclusions
The usual disclaimers apply for trend-following and the analysis on TrendInvestorPro. Past performance does not guarantee future performance. You and you alone are responsible for your investment and trading decisions so do your own due diligence.
This article is designed to show the Trend-Momo AllW50 BB ETF Strategy in action. This is a trend-following type strategy that also adds a momentum component by selecting the ETF with the highest StochClose value. As with any trend-momentum strategy, new longs will be initiated when price is already uptrend, and sometime up big. Such strategies may not be in everyone’s comfort zone. As alternatives, you can consider looking for recent Trend Composite signals or scrolling through the charts for setups that suit your trading style.
Next Thursday we will look at profit targets, which hold more promise than trailing stops.