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July 27, 2008

Rotational Portfolio Hates This Market
by Bill Rempel

Rotational combines component rotation and asset class rotation to hold a small basket of ETFs or ETNs, selecting the handful with the most momentum from a representative sampling of classes and components. Throughout this article, when I refer to momentum, I am referring to an exponentially smoothed measure based solely on price movement.

Information is as of the close on July 25, 2008.

Model Allocation

Based on beginning with a $100,000 portfolio at inception, these are the current weights and holdings. The initial target was a buy of 10% weights per position. See my previous post on this system. Sort is alpha order by ticker and weights are rounded to the tenth of a percent.

Brazil (EWZ) 10.2% weight
Oil Equip/Srvcs (IEZ) 10% weight
Natural Resources (IGE) 9% weight
Agricultural (MOO) 8.6% weight
Oil Services (OIH) 9.7% weight
Energy Exploration (PXE) 8.9% weight
Steel (SLX) 9.4% weight
Natural Gas (UNG) 9.8% weight
Oil (USO) 14.8% weight
Materials (XME) 9.7% weight
Cash -0.1% weight

Returns

Based on beginning with a $100,000 portfolio at inception.

Equity: $89,942.44
Gain, Past 4 Weeks: -17.09%
Gain, Year to Date: -11.49%
Gain, Since Inception on 11/19/2007: -10.06%

None of the ETFs in the Rotational portfolio paid dividends or distributions in the past four weeks.

Total dividends = $0.00 on the tracking portfolio. This amount is included in the returns shown above, and will remain in cash until needed for a new purchase. Note, commissions are expensed at $10.00 per trade when accounting for returns.

Changes To Model Allocation

Rotational screens for momentum inside a list of ETFs and ETNs by asset class category. The system is holding the top 10 issues, ranked by momentum, regardless of which asset class they are in or how much momentum they have.

If this system were to be initiated today, the target allocation would be a buy for 10% weight holdings of the ten issues highlighted in gold or green in the table below. Items highlighted in gray are "sells" from the existing model portfolio.

If the table is truncated in your browser, click on it to view it in its own pane. Depending on your browser, you may have to click again to view it in full size.

Tracking

Shares of EWZ, MOO, and SLX will be sold, market at open on Monday. The proceeds, plus cash, comprise 28.1% of portfolio weight, and will be used to buy shares of DBA, GLD, and SLV based on the closing prices on July 25, at 9.4% weight each. I will round down any fractions in the share calculation.

Commentary

Below, I present the change in rotational momentum from the last evaluation to the current one. It can be quite instructive.

Here is a table that shows the average momentum for the different issues in each asset class, at different evaluation dates from the inception of the program.

Bonds, as an asset class on average, are still in negative momentum. They've actually fallen a bit further since the last update. no longer have some positive momentum. The biggest droppers in momentum are the emerging market bonds, followed by the junk. The short end of the Treasuries (1-3 years) haven't really changed in momentum over the last four weeks, and are still sitting at close to zero in my measurement timeframe. This after darn near a year of positive momentum from the short end.

Commodities as a class still have the most momentum, but are still losing momentum rapidly. This story hasn't changed in about 16 weeks - which points out why I only update once every four weeks, because the markets just don't change that quickly. Or do they? It's been a stupendous implosion in Natural Gas, which unfortunately the portfolio has been long. While precious metals have been gainers, they haven't been able to overcome the "great sucking sound" coming from energy. This represents a possible resurgence of "inflation fear."

Currencies competing against the dollar stabilized in momentum, actually generating a small increase in momentum, so small I would consider it practically "no change." The British Pound and the "carry trade" tracker DBV lead the gainers in momentum over the past four weeks, while the Yen and Swedish Krona are falling in momentum. It's interesting that, in the midst of a strong move down in equities and risk-taking, the "carry trade" is still steady.

The foreign stock markets fell out of the turnip truck last month, and THIS month, the turnip truck shifted into reverse and just frickin' ran over the foreign stock markets. As an equal-weighted group, this is the worst momentum the foreign markets have had since I've been tracking this system. ALL of the foreign markets lost momentum over the last four weeks. Russia and Brazil are the strongest foreign markets.

The domestic industry groups fell off of the turnip truck this month, with negative momentum pretty darn close to that they had at the March lows. The only gainers were gold miners, biotech, pharma, and health care equipment stocks. The big industry losers were the high-momentum gainers of the last several months, groups like steel, basic materials, and the oil/energy complex. The technology winners from the previous update have fallen by the wayside.

REITs were punished just as badly as the domestic industry groups were, and if not for the incredibly poor momentum held by foreign markets, REITs would be the worst-looking class right now. All classes of REITs fell, although residential and industrial/office REITs continue to hang around, falling the least over the last month and still having the best momentum outlook.

This has remained a tough market to call, and while it hadn't seemed to bother Rotational before last month, it's bothering the portfolio NOW. The portfolio has been heavy in materials and energy, which have taken a terrific pounding over the last four weeks. Rotational is a trend-following system that believes there's always a bull market somewhere, and in previous downturns this year, the portfolio has been able to ride it out OK because it was in "what was working." Not this time. The system doesn't change, however. It just executes, regardless of circumstance, and while it does tend to to suck wind at turning points, it makes up for it in the straightaways - because there's almost always something trending.

If you'd like to become of member of The Rempel Report, you can register here. Members receive email notification of new posts and can contribute to the site through comments. Registration is still free!

Bill Rempel
The Rempel Report

Disclaimer: Nothing at The Rempel Report, or any communication from The Rempel Report or its author, should be construed as personal advice, on investing or anything else, and at all times you are responsible for your own actions and you should perform your own due diligence. I'm not an investment professional, and you should probably consult with one, in addition to doing your own due diligence, before making any investment decisions.

I may have a beneficial position in any potential investment I mention. My positions in, and opinions of, those potential investments may change over time. I have no obligation to reveal those positions, and if I should reveal those positions, I am under no obligation to notify you, though this site or through any other means, if I change those positions.

While I do try to verify much of the data presented, I can make mistakes. I rely on third party vendors for data, and sometimes that data could be incorrect. Therefore, I cannot and will not be held liable for incorrect or erroneous data presented in text, table, chart, or other format. This is one more reason why you should consult with an investment professional, in addition to doing your own due diligence, before making any investment decisions.

Modeling is prone to error, and no statistical model is perfect. The output from statistical or predictive modeling should be viewed with skepticism.

Fundamental analysis is based on examinations of company filings such as income and cash flow statements, balance sheets, quarterly and annual filings, proxies, and other such items. Even though a company appears fundamentally sound today, that doesn't imply they actually are, or will remain, fundamentally sound. Fundamentals can change over time, and there is always the possibility that the company filed information that was either fraudulent or incorrect. I might make an oversight or error when examining company filings. In many cases, I will rely on a third party's presentation of filing data, such as a stock screening program's output, without actually reviewing the filings personally.

Technical analysis is based on the study of historical price, volume, and sentiment data over time. Past performance is no guarantee, and there are no certainties hidden in patterns, charts, indicators, or formulae.

FundaTechnical analysis involves those items which mix elements of Fundamental and Technical analysis, including valuation metrics such as the Price/Book or Price/Earnings ratios. Therefore all the warnings for both Fundamental and Technical analysis apply.

Take responsibility for your own actions. You should consult with an investment professional, in addition to doing your own due diligence, before making any investment decisions.

Copyright © 2005-2008 Bill Rempel

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