third etf rotation in action edition! · day of trade based on decision from the previous day’s...

ETF Rotation in Action

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Jackie Ann Patterson

[email protected]

© Own Mountain Trading Company 2012-2017

Third

Edition!

© Own Mountain Trading Company 2012 - 2018

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2


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


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


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


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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Agenda

Rotation Overview


Back-Testing Lessons Learned


How to Forward-Test

How to Back-Test

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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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Minimal Overhead

Limited time / effort

Limited / no commissions

Limited / no taxes

(in IRA, see your accountant)

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“Manage” Risk

Historical drawdowns

Stop losses?

Move to cash at times

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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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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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My Chosen Funds for Simple

Model Portfolio in My IRA

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High MomentumType of Rotation

Select ETFs with highest percentage gains

Best performance historically15


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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What is Rebalancing?

Periodically resize holdings

Return to original allocations

Buy Low and Sell High

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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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Agenda

Rotation Overview


Back-Testing Lessons Learned


How to Forward-Test

How to Back-Test

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Rotation Hypothetical Performance

Beats Buy and Hold (BnH)

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Corrected

Data


Live Trading Profitable Except 2015

Compares Well to VTI Lately

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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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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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Agenda

Rotation Overview




How to Forward-Test

How to Back-Test

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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.


Rotation Hypothetical Performance

1998 – 2011 on Mutual Funds

2007 – 2011 on ETFs Similar

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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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Dividends Matter

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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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2016 Runs Favor 115- or 120-

Trading Day Lookback Period

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2017 Runs Favor 75- or 114-

Trading Day Lookback Period

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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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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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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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Agenda

Rotation Overview




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


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




Whipsaws

Ex-Div days




Improvements38




Whipsaws

Ex-Div days




Improvements39




Whipsaws

Ex-Div days




Improvements40


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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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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Whipsaws

Ex-Div days




Improvements43




Whipsaws

Ex-Div days


Pilot errors: late trades and jumping the gun


Improvements44


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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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

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Whipsaws

Ex-Div days




Improvements47




Whipsaws

Ex-Div days




Improvements48


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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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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Agenda

Rotation Overview




How to Forward-Test

How to Back-Test

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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


Agenda

Rotation Overview




How to Forward-Test

How to Back-Test

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How to Backtest

Portfolio Simulation Required

Solutions Tried

Wealth Lab

ETF Replay

Excel with my own macros

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My Rotation Back-Testing Tools Sold at

TruthAboutETFRotation.com

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Please Fill Out Surveys

Drawing for Jackie Ann Patterson’s Books

Free Delta Wealth Accelerator newsletter

Slides from today’s presentation

Legible email address for delivery

No spam, privacy respected

57


Books by Jackie Ann Patterson

Available on Amazon.com

58


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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Appendix

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third etf rotation in action edition! · day of trade based on decision from the previous day’s...

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