A Basic ETF Portfolio for August

previously detailed some basic portfolios as well as trading ideas. In an effort to be more user friendly, I track the portfolios monthly on my blog using Google Docs. One portfolio consists of 5 basic ETFs: BND (Vanguard Total Bond Market ETF), DBC (Powershares Commodity Index), VEU (Vanguard FTSE All-World ex-US ETF), VNQ (Vanguard REIT Index ETF), VTI (Vanguard Total Stock Market ETF). 
Despite only being 5 ETFs, one could take multiple approaches to the portfolio, from buying and holding to actively managing it; or an investor could use a combination of different approaches or trading strategies. Listed below are the month end results for July of the 5 ETFs listed above. One could purchase the top 1,2, or 3 performing ETFs based on momentum as judged by the 3-6-12 returns or just the 6 month returns. In this case, that would indicate a purchase of BND, VNQ, and VTI (3-6-12 strategy and 6 month strategy).  This combination of ETFs is the same as last months list.
Another twist an investor could add would be to purchase the underlying securities based on momentum only if they are also trading above their 200 day moving average (or another moving average of your choice). At the end of July, VEU, VNQ and BND were above their 200 day simply moving average.  VTI is within pennies of its 200 day moving average.  Thus, an investor could take an alternative approach to the previous paragraph and purchase BND and VNQ.

Many of the strategies listed here were inspired in part by Mebane Faber, author of The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets. For an even better explanation of some of the strategies, I recommend the book. Also, he has a new project which allows users to replicate the best performing hedge funds, AlphaClone.

The data source for the information below is Finviz, which has some of the best free financial data on the web (as well as a new elite service) and Google Finance.

In addition, I have also added an exciting new ranking feature.  Using ETF Replay, I am ranking the ETFs in various portfolios based on their 3-factor statistical model that combines relative strength and volatility.  The current ranking of the 5 ETFs are below.  I ranked the ETFs over different time periods – the first column is the rank of each ETF based on a combination of 6 month and 3 month return and 3 month volatility.  The rankings are identical for both different tests I ran this month. For previous discussions on this system please read the articles here andhere.  An investor could use the ETF Replay ranking system similar to the momentum and moving average system detailed above. 

No Positions

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Ticker Company Free Analysis 3 Mo. 6 Mo. Year 3-6-12 Sum 200-Day SMA
BND Vanguard Total Bond Market ETF Here 3.48% 4.69% 8.42% 16.59% 3.88%
DBC PowerShares DB Commodity Index Tracking Here -6.34% 0.88% 1.33% -4.13% -2.20%
VEU Vanguard FTSE All-World ex-US ETF Here -2.63% 3.43% 10.53% 11.33% 0.12%
VNQ Vanguard REIT Index ETF Here -1.66% 22.59% 54.16% 75.09% 11.73%
VTI Vanguard Total Stock Market ETF Here -7.18% 4.40% 15.27% 12.49% -0.04%

ETF Replay Ranking

(6 mo return/3 mo return/3 mo volatility) 3 month return/20 day return/20 day volatility
1 1
2 3
3 5
4 2
5 4

Weekend Reads

Understanding the S&P 500 VEQTOR Index – Surly Trader

Not the Great Depression, But an Interesting Facsimile – Tom McClellan

The Best Banks to Invest In – Jim Jubak

Game On: Number Nonsense Continues – Bill Fleckenstein

Cheap? No. 100% Free. Trade stocks for free on Zecco.com. The Free Trading Community. www.zecco.com

What Makes a Frustrating Market

A new free video is available from Adam Hewison, his summary below. I will be providing my insight on the S&P 500 this weekend, something I have started doing recently:

“The S&P 500 is turning out to be a conundrum for many professionals
and home traders alike. The conflicting information on good earnings,
high unemployment, and other factors continue to batter the market.
One moment the SP500 is heading for the stars and the next, it’s
heading to the cellar.
So what’s a trader to do?
In my new video, I share with you some steps you can use to help
improve your trading in the S&P 500 and other markets. The new video
is approximately 3 minutes long and it will show you several key
areas and levels that I am looking at.
As always our videos are free to watch and you do not have to register.”

Cheap? No. 100% Free. Trade stocks for free on Zecco.com. The Free Trading Community. www.zecco.com

Trend Option Strategy

I had previously detailed a trend option strategy here.  I had setup a Google Doc sheet to track the hypothetical returns but I am a bit maxed out on time and spreadsheets, so I will be dropping this one, after just a month.  Nothing against the strategy, I think it is unique and holds promise, but I just don’t have the time right now to track an option strategy. I may revisit it again soon.  For now, I will add a link to the article under “Other ETF and Timing Portfolios” to my article for those who wish to track it on their own.

Cheap? No. 100% Free. Trade stocks for free on Zecco.com. The Free Trading Community. www.zecco.com

Commodities, Equities, Bonds, or Cash?

At the end of May I reviewed a very simple ETF rotation system using the free tools available at ETF Replay involving GLD, SPY, and SHY (low duration Bond ETF, used as a proxy for cash).   Using the average of the 3 month return (weighted 40%), 20 day return (weighted 30%), and 20 day volatility (30%), SHY is currently ranked highest among the three.  If we lengthen the time frame to average the 6 month return (weighted 40%), 3 month return (weighted 30%), and 3 month volatility (weighted 30%), GLD is surprisingly still ranked highest.

Given that SPY has been caught in a range of late, I thought it would be helpful to test a similar system using DBC (PowerShares Commodity ETF), SPY, EFA (MSCI EAFE), SHY, and TLT (long-term treasuries).  The shorter term system (3-20-20) ranks the fives ETFs as SHY, TLT, EFA, SPY, DBC. The longer term system (6-3-3) ranks long term treasuries (TLT) as the top ranked, SHY second, and PowerShares Commodity ETF the lowest.

What can this information tell us?  With equities hovering near the 200 day moving average–an indicator I look at frequently–a simple exercise like this can give us perspective as to where there strength lies among various asset classes (using ETFs as a proxy).

For those interested in following a larger pool of assets classes, I now track a portfolio of 21 (soon to be 24) ETFs using the same strategy discussed above updated around the 1st of the month. Please look for the “ETF Replay Top ETF” portfolio on the right hand-side of my site. As of today, PCY (emerging markets bonds) would be ranked first on my list of 24 ETFs.

Cheap? No. 100% Free. Trade stocks for free on Zecco.com. The Free Trading Community. www.zecco.com

No Positions

A Bit Off Topic, But…

I found this post from Barry Ritholtz interesting and a bit amusing.  This will most likely be the only time Glenn Beck is ever cited on this blog…Buyer beware!

Fools Gold: Inside the Glenn Beck Goldline Scheme

Infographic by The Big Picture

Cheap? No. 100% Free. Trade stocks for free on Zecco.com. The Free Trading Community. www.zecco.com

Mid-Week Reads

Some good mid-week reads, all worth the time:

Who Owns US Treasury Debt?

Bubble, Bubble….China’s Trouble – Jim Jubak

Some Thoughts on Deflation – John Mauldin

Betting on a Bubble, Bracing for a Fall – John Hussman

The Death Cross, or, Questioning What You Read – Mebane Faber/World Beta

Cheap? No. 100% Free. Trade stocks for free on Zecco.com. The Free Trading Community. www.zecco.com

Top Stocks Based on PEG and Momentum

I have begun conducting the following screen on a monthly basis. Early out-of-sample results have been mixed, performing well during bullish environments and poorly during bearish/choppy markets.  June’s list is here, May’s list is here, Aprils’ list is here, March’s list is here, February’s list is here and January’s here. The screen looks for the following:

  • earnings growers still reasonably priced as judged by the PEG ratio
  • low debt
  • a history of high return on equity and investment, and
  • price momentum as gauged by the percentage the stock is trading to its 250 day high.
January’s list returned 1.39% vs .57% for SPY. February’s list returned a solid 11.78% vs. 6.77% for SPY. March returned 7.91% vs. 4.23% for SPY, April was a tough month returning -11.57% vs -11.52% for SPY, May’s list returned -6.55% vs -.56% for SPY, and June’s list returned -1.74% vs. 3.27% for SPY.  One note on May’s list is that due to the pullback in the market there were very few stocks that qualified for the list, four in total. 

When the screen results in more than 5-10 stocks I have also started tracking returns of the top  5 or 10 stocks at the beginning of each list.  The top stocks are selected based on fundamental factors.   For the full list of stocks and results, please see the right hand side of Scott’s Investments.

The screen has tested well historically in bullish periods so strategies an investor could use to avoid drawdowns would be to either a) abandon this type of strategy entirely when the S&P 500 or another major index is below a long term moving average, or b) hedge positions with a position in SH or write a short option strategy on an equity index or ETF like SPY.

A reader recently asked why I didn’t invest in many of the strategies I track.  Part of the reason is that backtesting strategies which have historically performed well is different that putting money to work out-of-sample.  Thus, part of the goal of my site is to track (for free) some strategies which I find intriguing so that readers can follow along to see how they perform as markets ebb and flow and when-or if-comfortable make an informed invest decision. 

Two possible tools an investor could use to conduct this screen on his/her own are stockscreen123 or Finviz. This screen was conducted using stockscreen123.

No positions in stocks mentioned

Ticker Name Trend Analysis Rank MktCap Industry
MDF Metropolitan Health Networks, Here 98.56 155.67 Healthcare Facilities
FOSL Fossil, Inc. Here 98.48 2706.06 Jewelry & Silverware
JOSB Jos. A. Bank Clothiers, Inc. Here 97.28 1113.73 Retail (Apparel)
ARO Aeropostale, Inc. Here 96.98 2888.01 Retail (Apparel)
TXN Texas Instruments Incorporate Here 96.38 30334.06 Semiconductors
FCFS First Cash Financial Services Here 92.81 738.66 Retail (Specialty)
TSM Taiwan Semiconductor Mfg. Co. Here 87.83 54185.16 Semiconductors
CPLA Capella Education Company Here 83.44 1504.14 Schools
CTCM CTC Media, Inc. Here 80.16 2772.92 Broadcasting & Cable TV
LRCX Lam Research Corporation Here 71.31 5352.38 Semiconductors
CRR CARBO Ceramics Inc. Here 68.81 1849.53 Constr. – Supplies & Fixtures

Cheap? No. 100% Free. Trade stocks for free on Zecco.com. The Free Trading Community. www.zecco.com

A Couple Weekend Reads

Before I take off for some R&R, here a few articles:

Investors Relying More on Technical Analysis, Charts – Minyanville

Goldman’s Top Economist Sees Second Half Slowdown – Investment Postcards

Golf Balls, Geese, and the VIX – Tom McClellan

Cheap? No. 100% Free. Trade stocks for free on Zecco.com. The Free Trading Community. www.zecco.com

Taking a Look At SPY and the S&P 500

SPY finished up 3.52% for the week closing at 110.41, offering some additional relief for bulls who had a rough May and June.  I’ve been highlighting key points in recent weeks on my site and what to look for on a weekly basis in SPY.

Reviewing this past week, SPY broke strongly through the 50 day moving average, which had previously served as a resistance level two weeks ago as well as on Wednesday. Also, in breaking through the 50 day moving average it also broke above a downward sloping trend line.  These both serve as positive signs for bulls.  What I am watching this week will be whether SPY can break above its 200 day moving average on the upside.  If so, then we could see some indecision/resistance at the 112-113.12 range.  On the downside, watch whether the 50 day moving average will serve as support and if not, then last weeks low of 105.82 could be the next stop.

For now, the fact remains that we have seen lower highs and lower lows since April.  In order to break this intermediate bearish trend, $113.12 will need to be broken and in the longer term the year’s high of $122.12.  There appears to be no strong trend at this point, especially with SPY wedged between two key long-term moving averages.

Adam Hewison of MarketClub offers some additional long-term insight on SPY in this video and his ultimate conclusion is that the market will likely continue down.

The second chart courtesy of Finviz.

No current position.

Cheap? No. 100% Free. Trade stocks for free on Zecco.com. The Free Trading Community. www.zecco.com