The Market Adaptive Process
The first element of our process is a review of the current markets and their trends. Are they bullish, bearish or trending sideways? Are they strongly trending or weakly trending?
This market classification helps us determine the appropriate approach for the current environment. As an example, our market scans, technical triggers and the way we approach our positions will be significantly different for a strongly trending market than a market that is consolidating or moving sideways.
We use a combination of trend following, technical analysis of stocks and price momentum in our MAPS portfolios. About 40-60% of each portfolio is trend following in nature. We watch our proprietary trend following signals for clues as to the short-term, intermediate and long-term direction of the markets and apply that information to each portfolio’s core and style components. The balance is technical analysis of stocks and stock trends based with a price momentum overlay for the entire portfolio.
Portfolio security selection begins with a review the entire universe of Exchange Traded Funds or ETF securities. An ETF security is nothing more than a fund that tracks a stock index, but can be traded like a stock. They are diversified in their holdings, but can be traded long or short just like any stock.
In our process, we eliminate all ETF securities with less than a one year track record. Next, we break down the remaining universe into manageable sub-sectors, such as style, U.S. sector, country, international/global regions, fixed income, commodities and currencies.
We then perform a quantitative price momentum review of each sub-sector. This review looks at relative price momentum of positions over various weighted average historical trading periods versus each other. Those ETFs that rank highest are candidates for purchase. Those ETFs that do not rank highly are avoided.
Just like anything in life, it’s not enough to know what to buy, but the trick is to know when to buy. These same quantitative price momentum models generate specific technical triggers for recommended purchase points and help us further narrow our universe of ETF securities.
In addition to our quantitative price momentum models, we perform a number of daily scans to uncover candidates for purchase that are exhibiting certain bullish or bearish stock price or pattern characteristics.
Finally, we augment both the models and scans with a thorough review of historical stock charts for each potential portfolio position.
The Purchase Decision
A candidate for purchase in our strategies is an ETF security that is highly ranked or moving up in rank that can be purchased at value such as on a pull-back or bullish pattern breakout on high volume. We are typically looking for an asymmetric reward to risk ratio of at least 3 to 1 before we initiate any new portfolio position.
We establish target prices for each new position and monitor all positions daily. As a risk management tool, we utilize stop losses on all short-term trading positions. We hold our positions as long as they continue to trend and rank highly in our models.
We enforce strict diversification rules of holdings within the portfolio an each sub-sector of the portfolio. Finally, we are not afraid to hold or accumulate cash as a cushion against adverse market moves should circumstances dictate. Each portfolio is also diversified in its holdings, but also each ETF is fully diversified in its holdings.