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Portfolio Builder Update
- 2. Jay A. Leavitt, PhD
- 4. ETF Machine Market Timer
- 5. S&P 500 Daily Prices S&P 500 Weekly Prices Market Sentiment The timer tells if the market will be Bullish, Bearish or indecisive.
- 7. ETF Machine The ETFs machine has 3 inputs, the timer [Bull, Bear or ?], the ETF’s data and market sentiment. It decides if an entry is recommended, whether profits should be skimmed or if the position should be closed.
- 11. Note: These ETFs introduced in 2009. Data for prior years derived from their indices. SYMBOL DESC. LEVER-AGE % WINS PROFIT FACTOR LARGEST LOSING TRADE FIRST TRADE LAST TRADE YEARS NET PROFIT ANNUAL RATE OF RETURN Bullish ETFs BGU Big Caps 3X 83.33 5.76 4.38% 5/1/09 12/13/11 2.62 $55,084 21.05% ERX Energy 3X 74.07 3.20 14.75% 4/4/08 12/2/11 3.66 $92,091 25.16% TNA Small Caps 3X 68.75 4.18 6.60% 12/18/08 12/7/11 2.97 $67,055 22.59% EDC Emerging Markets 3X 80.00 7.98 18.20% 1/6/09 10/14/11 2.77 $213,191 77.02% MWJ Mid Caps 3X 80.00 36.58 1.34% 4/4/08 10/26/11 3.56 $76,981 21.63% Bearish ETFs BGZ Big Caps -3X 76.92 6.91 7.98% 1/4/08 11/29/11 3.90 $149,410 38.30% ERY Energy -3X 69.23 3.78 17.87% 1/7/08 11/29/11 3.89 $419,433 107.73% TZA Small Caps -3X 65.22 2.38 10.92% 1/3/08 11/29/11 3.90 $287,773 73.71% EDZ Emerging Markets -3X 60.00 3.35 7.32% 2/27/09 8/29/11 2.50 $36,660 14.67% MWN Mid Caps -3X 55.56 2.49 12.36% 1/3/08 11/29/11 3.90 $98,094 25.13%
- 13. ETF Pair Trades Time in Market Average # Days in Trade BGU / BGZ 25 12.16% 6.20 EDC / EDZ 25 13.17% 5.88 ERX / ERY 40 13.14% 5.93 TNA / TZA 39 17.30% 5.97 MWJ /MWN 33 9.80% 6.23
- 20. Annual returns > 200%, 100%, 50% Are Unrealistic
- 22. Especially the Grab the Cash and Dash Money Management
Notas del editor
- This Power Point presents a unique triad investment strategy that combines an unusual market timer with a select group of market indices and sound money management. The presentation will show that this strategy can generate robust returns with low draw-down and small market exposure. It does not take a sophisticated trader to implement the strategy. All of its components are permitted in IRAs.
- I call this strategy Portfolio Builder. Its market timer integrates long and short term technical data with market sentiment. It marries the timer with a strategy that trades ETFs of selected major indices. I use Leverage to generate exceptional returns. The Money management, timer and ETF strategy collectively minimize the draw-downs.
- Previously, as an analyst, I had developed a market timers and trading systems. Portfolio Builder is an advancement over those earlier systems. This timer reports one of 3 market states, bull, bear or neutral. The core of this system’s money management is a Grab the cash and dash philosophy. Portfolio Builder normally trades with the market direction. Under the right conditions Portfolio Builder will also trade in neutral markets.
- It takes both Market Timing and ETF strategies to produce this powerful Portfolio Builder trading system. Neither, alone, is sufficient. Both, together, provide the needed balance. It’s a Yin and Yang partnership.
- There are 3 inputs to the timer: daily and weekly S&P 500 data plus a measure of market sentiment. Volatility serves as an indicator of sentiment. The timer has 3 output states: bull, bear and also a neutral state when the direction is flat or uncertain.
- The incorporation of weekly market data leads to conservative entries. The other parts of the system lead to quick exits. Our grab the cash and dash money management strategy adheres to a wise investment homily: enter slow and exit fast.
- The ETF strategy is like a machine that digests its 3 inputs and generates 3 types of output. Its criteria for opening a position is different for directional and neutral timer states. This machine directs skimming of profits and equity at risk as the position value grows. I will demonstrate on later slides that you are safely in cash most of the time.
- Each of the ETF pairs I trade is comprised of a leveraged ETF and its inverse. One moves in the same direction of its index and the other moves in the opposite. The Bullish ETF goes up in value as the index moves up. The inverse ETF goes up in value as the index moves down. For example, TNA/TZA is the three times leveraged ETF pair for the Russell 2000 small cap index. Each 1% change in the Russell corresponds to a 3% change in TNA and a -3% change in TZA. Inverse ETFs were introduced a few years ago to get around the IRS’s prohibition against shorting in IRAs. Portfolio Builder uses inverse ETFs to trade bear markets. A common strategy was developed for these 10 ETFs. At any time either the bull or bear ETF is not traded – the machine determines which one of the pair. It also indicates whether a trade can be entered in a Neutral market. A portion of profits is skimmed as equity grows. Full exits are executed with a timer change or a pull-back in equity.
- Experience reveals a repeating pattern: After each big run-up in profit, it seems there is a comparably big pull back. Many investment managers recommend adding to a position as it’s rising in value. In contrast, the Portfolio Builder strategy subtracts from the position size as profit rises. If timed properly, this reduces the amount of profit given back. Plus, it minimizes risk by adding profit and returning invested equity to cash. However, we do not want to have closed our position while the market is still rising. At the same time, we need to recognize the possibility of a dramatic pull-back after a bubble.
- Here’s a summary of my Grab the Cash and Dash money management philosophy. I never add to a position as profit grows. Not only are profits skimmed, but the equity at risk is also reduced. Equity is simultaneously taken off the table as the profit grows. I don’t think twice about an exit. Given a signal, I exit, I don’t hesitate hoping for a reversal. The next few slides will exhibit the back-testing results.
- The bull trades are at the top of this table; the bears are on the bottom. These are called inverse ETFs. Column 4 shows that the % of winning trades is consistently high. From a trader’s point of view the next column, profit factor, is the most important. It is the ratio of profits to losses; the bigger the better. The last column shows the annual rate of return. These returns are excellent by themselves, but you will see these numbers become much more significant when the bear trades are combined with the bull. Don’t be surprised that the ETFs with the largest losing trde are also the ETFs with the best Annual Rates of Return, EDC & ERY.
- The next slide will show the power of trading in both bull and bear markets. You will see that profits will grow exponentially.
- This table shows Portfolio Builder keeps you safely in cash over 75% of the time. High probability Entries are generated only when conditions are ideal. Profits are captured over very short periods. On average, your equity is at risk fewer than 8 days.
- It is easy to see in these charts how trading in both Bull and Bear markets amplifies returns. What appeared as a modest ARR for BGU alone turns out to be an impressive result for the big caps when including BGZ. These Annual Rates of Return are unmatched by any other ETF trading system.
- You can see from these graphs that the losing trades are sparse, small are rarely consecutive. The winners substantially out number the losers and are much bigger in magnitude.
- These equity graphs demonstrate that draw-down is minimal.
- Clearly, there is an ideal marriage of the timer with the strategy for these ETFs.
- When we diversify by investing in each of these families we find the investment strategy we are looking for. Each time one of these 5 ETF strategies generates a signal, only20% of the available equity is used. The rise is fairly smooth and persistent. Losses have been diminished by a factor of 5. Draw-down is comfortably below 10%. The annual rate of return is hot.
- You need answers to some critical questions.
- It’s un-realistic to expect these types of returns. Commissions and slippage always affect the results. Our timing may not be the same. And, don’t forget how our emotion s often interfere with our trading.
- Collectively, you have seen impressive returns for 10 ETFs using a common timer and investment strategy. These are not anecdotal results.
- Money management plays a key role in this system.
- Portfolio builder provides diversification across 5 sectors with ETFs of indices representing thousands of stocks. This is the system you should consider to help build your wealth.
- Through my newsletter, you will be trading when I do, not after. You will have plenty of time to plan your trades.
- Contact me if you have any questions. No question is ever trivial, and I am here to help. Subscribe to my electronic newsletter and profit from my trades. As a bonus I am offering you an opportunity to evaluate my newsletter of a similar system for trading gold and silver ETFs. Thank you for watching this presentation.