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 May 30, 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.

Agriculture (DBA) 9.2% weight
Brazil (EWZ) 11.2% weight
Oil Equip/Srvcs (IEZ) 9.2% weight
Ag. Stocks (MOO) 8.9% weight
Oil Services (OIH) 9.0% weight
Silver (SLV) 8.3% weight
Steel (SLX) 10.3% weight
Natural Gas (UNG) 10.9% weight
Oil (USO) 13.0% weight
Materials (XME) 9.5% weight
Cash 0.3% weight.

Returns

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

Equity: $105,856.70
Gain, Past 4 Weeks: 7.62%
Gain, Year to Date: 4.17%
Gain, Since Inception on 11/19/2007: 5.86%

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. In previous posts, the methodology had an element of "forced allocation" to different asset classes, that is, provided that momentum is positive, one issue from each asset class will be held, with the remainder of positions allocated to the issues with the most momentum, regardless of asset class. My backtesting has revealed that the system will perform better, albeit with higher volatility, if this element of "forced allocation" is removed. Therefore, starting with the previous post, the Rotational 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 DBA, MOO, and SLV will be sold, market at open on Monday. The proceeds, plus cash, comprise 26.7% of portfolio weight, and will be used to buy shares of IGE, PXE, and RSX based on the closing prices on May 30. 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, still have some positive momentum, but notably the least momentum since I've been publicly tracking this system. The largest negative change is in intermediate (7-10 years) U.S. Treasuries, followed closely by international Treasuries and longer-duration (20+ years) U.S. Treasuries. The short term (1-3 years) U.S. Treasuries have lost momentum as well. The "flight to quality" is definitely over. Low-grade Corporate and Emerging Market categories are the only bonds I track that are gaining in momentum. One could say that the lowering in price for longer-duration Treasuries is a response to "fear of inflation," but the look at commodities may be instructive there.

The negative change in momentum for Commodities is the largest of any class. There is still a large amount of positive momentum on my timeframe, but the drop over the last eight weeks has been surreal. Agriculturals, Silver, Gold, and Base Metals have all lost lots and lots of momentum, although Oil and Natural Gas are still gaining. If the lowered prices and increased yields on long Treasuries were the result of bubbling "inflation fears," why then would the metals and agriculturals be losing steam? I suggest that a dissipation of fear, rather than a replacement of one fear (economic collapse) with another ("inflation"), is the real meaning of the movement away from Treasuries.

Currencies competing against the dollar are the third class that dropped momentum as a group, losing more than bonds but not nearly as much as commodities. As a whole they still have positive momentum on my timeframe - just not nearly as much. The two biggest losers are the Swiss Franc and the Yen, and the biggest gainer in momentum is the DBV "carry trade" tracker. This shows a clear dissipation of fear, as the search for yield and the embrace of risk-taking has returned to the market in spades. The Euro is the third-biggest momentum loser, perhaps suggestive of a worsening outlook for Europe relative to the U.S., as the EMU (I love that acronym) has been less responsive to the "credit crisis" than the U.S. Fed has been.

Of the asset classes with significant increases in momentum, the foreign stock markets are the second strongest gainers. Call the biggest gainers the BRAAS, Brazil, Russia, Australia, Austria, and South Africa. Canada and China are also big gainers in momentum. Looking at raw momentum, as opposed to four-week change, Brazil and Russia lead, with a full 18 of the 25 foreign countries I track having more momentum than the U.S. market. Only four of the nations I track have negative momentum, and three of those are showing improvement.

The class with the biggest gain in average momentum was the domestic industry stock group, although they just barely beat out the foreign countries. Note I do an equal-weight class calculation, not an index-weight, so the U.S. overall index-trackers didn't do as well. In the month since my last review, every single domestic industry tracked, except for two, has gained in momentum. The two non-gainers? Gold miners (again) and homebuilders. The biggest gainers are telecom, the semiconductors, and almost anything related to energy and raw materials. Semis are in positive momentum territory, as are wireless telecoms, and the energy and materials industries have some shining stars among them. The "safe" industries of health care and consumer staples did have momentum gains, but only barely, nothing compared to the gains of the cyclicals, electronics, or brokers industries. Whether or not a "recession" is actually coming, it is pretty darn clear that the market is betting there isn't going to be any "recession."

REITs gained in momentum again, although not as much as the other domestic industries or the foreign markets. Their total positive momentum is now the highest it has been since I've been publicly tracking this strategy. Residential, Industrial, and Retail REITs all have positive measurements now, as well as the overall U.S. REIT market. The biggest gainer in terms of momentum, although still negative right now, were the Mortgage REITs, which may well have bottomed. This class shows the confidence that "big money" has in the worst being behind us.

It looks like that unwinding of the "recession trade" is continuing apace.

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