Signal Change for Monday, Frebruary 1st

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For those of you who follow GGT, you know that I periodically update the "optimum EMAs" for the database, and what this means is that a change in coefficients could cause the signal to change abruptly.  This is the situation that we are faced with right now.

I updated the optimum EMAs for our ETFs, specifically AGG, EFA, SPY and VXF.  Prior to Friday's close, we were showing all of these EMAs, and subsequently their corresponding ETFs, all sitting in CASH.

After running the updates, we have a signal change on AGG and VXF.  AGG represents the F-Fund, and with the new numbers, signaled a change to LONG the evening of January 25th, which is where we still are sitting.  The close on 1/25 was $104.45, and the close as of Friday 1/29 was $104.65, a change of less than 0.2%.  As a bond fund, we've averaged only 0.5% gain over the last year every time this signal has moved long so we're not going to retire using just the AGG.  Nevertheless, the trend is upward for bonds, so this could be a good play, missing the 0.2% move notwithstanding.  Allocation levels are listed below.

VXF is throwing us an unrealistic curve, and with the new update in EMAs, is indicating that we should have been long in VXF since 3/26/09.  For those of you who have been following this signal you know that this is not the case, simply because all the "bad" data of last year is scrolling off the optimizer "window", leaving on the performance over the last year.  Hence the LONG signal.

So what to do now with VXF?  It's been long FOREVER....

We can use HGSI to get some insight into VXF from here (click on the image for a larger view):

 

The top two "ribbons" across the top indicate weekly and daily "Bongo" readings, which use three sequences in the Wilder RSI to give us a view on whether we should be in a particular equity.  When these both are "red" we need extreme caution -- and they are both red.

The next ribbon is accumulation / distribution, and it's been falling.  Falling accumulation will continue to result in lower equity prices, so we need to watch this.

The next ribbons deal with the 2-day and 13d Elder Force Index, and both are red.  Entering when the 13-day is red is risky, but as many of you know, entering when the 2d FI is negative can get us some good entries.  In this particular case the "red" 13d Elder signal gives me tremendous pause.

%b and the Bollinger are resetting to attracive levels.  Enough said .....

The 65d EMA graph is the one that makee me pause.  All of these signals are pointing down so we need to be extra careful here, at least until the curves move horizontal.  These effectively stop my entry, but we need to be vigilatn.

Finally, a support line drawn at the lows of 7/13, 11/2, and 11/27 gives us a problem with history over the next few weeks.  We've been below this imaginary support line over the past week, which means we need to move back upwards to be above this line to feel comfortable.

Since we have a number of parameters indicating that we are long in the tooth on VXF, we need to see how things will move with all of these parameters.  I intend to stay in cash in VXF unless I see something compelling.

Summary:  You can change your allocations to include VXF / S-Fund, but I strongly urge caution.  I intend to only play the AGG signal, and will NOT play the VXF signal.

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Allocations

Here are the 1-month performances of the aforementioned ETFs:

• AGG: +1.54%
• EFA: -6.12%
• SPY: -4.59%
• VXF: -4.58%

If you are playing the 3-ETF/equity portfolio (higher gain, lower Calmar Ratio, does not invest in AGG / F-Fund), then your allocations for the funds are:

• EFA / I-Fund: 16% (presently in cash --> G-Fund)
• SPY / C-Fund: 42% (presently in cash --> G-Fund)
• VXF / S-Fund: 42%

If you are playing the 4-ETF/equity portfolio (lower gain than 3-ETF/equity portfolio, higher Calmar Ratio), then your allocations for the funds are:

• AGG / G-Fund: 59%
• EFA / I-Fund: 7% (presently in cash --> G-Fund)
• SPY / C-Fund: 17% (presently in cash --> G-Fund)
• VXF / S-Fund: 17%

Again, remember that CASH *is* a position, and it's a good one when we're getting hit this hard.  AGG is moving up, which means we should give it some of our attention.  EFA / I-Fund and SPY / C-Fund are both in cash, so stay in cash until they signal otherwise.  the VXF is saying we should be long -- this is a riskier trade.  See my commentary above.

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Remember, you are responsible for your own investment decisions, not me.

If you have questions or comments please leave me a note.

Regards,

pgd

Signal Change! Move to Cash!

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Summary:  It is strongly suggested to move all monies to cash.  F-Fund / AGG has been strong, but I am waiting for this to signal "New Long" before allocating any monies into AGG.  The 3-fund portfolio is performing better in gain than the 4-fund (as expected, since it does not allocate to a bond fund), but the drawdown is unproportionally higher, resulting in a greater risk/reward ratio.  If you are of lower risk the 4-fund approach has better metrics, although the gain is lower.  We bank gain, not risk, so you have to align your objectives accordingly

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GGT has signaled an intermediate-term move to cash across the board.  You should have already been in cash in AGG / F-Fund and EFA / I-Fund, and now you should consider a complete move to cash / G-Fund with the balance of your holdings.

F-Fund / AGG is very strong, with a GGT Strength of +3.  The only thing required to move this to a "New Long" signal is more volume, approximately above 475K shares (it varies daily so do not take this as gospel).  The question is whether we should move to the F-Fund /AGG at the same time we liquidate the other funds; if we do not do this we will remove both of our 2x / month trades available to us with the TSP.  Given that we are so late in the month, burning these 2 trades is not a big risk, so I'm inclined to state WAIT for AGG / F-Fund to signal a hard move long.

Both SPY / C-Fund and VXF / S-Fund were purchased as of the signal of 11/17; since that time (through the close of 1/22) SPY / C-Fund has fallen -1.55% and VXF / S-Fund has increased +2.19%.  If you dollar-cost-average your allocations from your pay on a bi-weekly basis you will have done a bit better, as the period up to 12/22 was relatively flat in price performance for both SPY / C-Fund and VXF / S-Fund, with the VXF slightly outperforming the SPY during this time.

IF you enter your trade this weekend at the TSP site, there is a very high probability that your trade will occur on Monday.  Given that the markets are down three days straight, I anticipate a dead-cat bounce on Monday, meaning there is a higher probability than not that you will be selling on higher prices, which is what you want to do.

As I cannot post fully-accurate statistics until I close SPY / C-Fund and VXF / S-Fund, I'll hold off on the complete dashboard of metrics until Monday or Tuesday.  Until then, here are the stats through Friday, January 22nd, 2010:

3-Portfolio ETF / Fund
Strategy:  Invests only in the C-Fund / SPY, I-Fund / EFA, and S-Fund / VXF.  Moves to G-Fund / Cash when necessary.

• Total gain since 8/08:  22.13%
• Mathematical Expectation (ME):  1.274 (very, very good)
• Average Win per Trade:  $1,340 on $122,300 basis.
  
• Compounded Rate of Return (CRR): 15.36% (very good)
• Comparative Board Market Performance during Same Period:  -8.53%
• Maximum Drawdown (MDD):  9.05%
• Calmar Ratio (Reward/Risk Ratio, CR):  15.36 / 9.05 = 1.697 (good, but desire > 2.0)

4-Portfolio ETF / Fund
Strategy:  Invests in the C-Fund / SPY, F-Fund / AGG, I-Fund / EFA, and S-Fund / VXF.  Moves to G-Fund / Cash when necessary.

• Total gain since 8/08:  19.35%
• Mathematical Expectation (ME):  1.009 (very good)
• Average Win per Trade:  $804 on $119,356 basis.
  
• Compounded Rate of Return (CRR): 13.45% (good)
• Comparative Board Market Performance during Same Period:  -9.02%
• Maximum Drawdown (MDD):  7.10%
• Calmar Ratio (Reward/Risk Ratio, CR):  13.45 / 7.1 = 1.894 (good, but desire > 2.0)

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Remember, you are responsible for your own investment decisions, not me.  Check in early next week to see the graphs/charts/etc. of this portfolio after I close the various funds and move to cash on Monday.

Regards,

pgd

Friday Morning, January 22nd 2010 Update

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No signal changes, so no issues for today.  You should still be long SPY / C-Fund and VXF / S-Fund.

The SPY / C-Fund is holding up well overall, and although it has been beaten up with the down draft the last two days, it's strength index is a +1.  We need a -3 for a move-to-cash indication, and while it certainly is possible to move from +1 to -3 in one day, we'd need one heck of a down day today, and the futures are not indicating tremendous downward pressure (they're nearly even as of 6:45 a.m.).

The VXF / S-Fund is weaker at -1, and this will most likely to be the next domino to fall if the market reverses.  Volume does not play into the movement to -3, only price, so if we do not get a solid up day it is very likely we could see this one move to cash.  DO NOT ANTICIPATE the move, wait for it.  Many gains in a bull market are made off of sell-offs, so it will be important to be in this position if the market reverses and continues to the upside.

I'll post performance numbers and allocations this weekend.

Remember, you are responsible for your own trading decisions, not me.

Regards,

pgd

New Year's Weekend 2010 Update

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Overall, this has been a good year for the TSP funds, as managed by GGT.  We operate two portfolios, one that is a 3-ETF/Fund portfolio, which omits AGG/F-Fund, and a 4-ETF/Fund portfolio, which includes everything.  The 3-ETF/Fund portfolio is a bit more volatile than the 4-ETF/Fund portfolio, but the gains are a bit higher too, as you would expect.  I do not anticipate any changes to strategy enactment in either portfolio going forward in 2010.

I suggest that if you want timely signals to follow that you add this blog to your Google Reader, iGoogle Reader, or other RSS feed so that you can receive timely updates.  The easiest way is to "Follow" this blog using the link in the sidebar.  Missing the signals could be detrimental to your longer-term financial health!

GGT TSP 3-ETF/Fund Portfolio

This portfolio invests in the following ETFs/funds, and the new calculations for allocation for January:

1. EFA / I-Fund (9%)
   
2. SPY / C-Fund (24%)
   
3. VXF / S-Fund (67%)

If you're interested in how I allocate these percentages, they are based on the previous month's performance -- simply leave a comment below and I'll fill in the details.  Hence, from the above, you can tell that VXF is doing well, and EFA is doing not-so-well over the last month.  This method has been proven to be better than allocating 33%/33%/33% to each fund.

Not sure if you have followed along, but EFA/I-Fund is presently in CASH, with SPY/C-Fund and VXF/S-Fund are fully invested, at least to the percentage amounts shown.  For EFA/I-Fund, hold these values in the G-Fund.

In terms of strategy for January, DO NOT realign your portfolios until we get another signal.  TSP only allows two transfers per month, so we need to keep our powder dry.  Presently, keep your allocations at 46% for SPY / C-Fund and 30% for VXF / S-Fund, with the balance in cash / G-Fund.  If a signal to move funds occurs, we'll re-balance at that time.


Here are the performance stats to date.  As with all my images, click on the following images to enlarge:

The flat portions in the equity curve above are where the strategy is 100% in cash.  It happens, so be prepared for it.  Furthermore, also realize that the goal of this strategy it to keep you out of large drawdowns, so do not second-guess the calls.  If you think that you have the "killer" strategy to further reduce drawdowns yet improve gain, then contact me, as I can test your ideas far easier than you.

Refer to the figure above.  For the 3-Portfolio fund, we've been successful at just over 50% of the trades.  GGT works using moving averages, and since we sell when the MA is less than optimum, we are limiting our down-side risk.  Hence, on our trades to date, we typically gain $4032 per winning trade, and lose $1052 each losing trade.

Of particular relevance is that the Mathematical Expectation (ME) of this 3-Portfolio system is 1.274 -- values over 1.0 are considered very good.  Please note that the Compounded Rate of Return (CRR) of this system is 17.02%; we'll use that number in a bit.

The figure above shows us that over the same time the buy-and-hold approach to the market, using the VectorVest Composite (VVC), is a loss of (7.87%), whereas this system is returning an Annual Rate of Return (ARR) of 17.49%.  Our total gain from August 2008 has been just over 23.42%.

Of specific importance here is the Max DrawDown (MDD) value of 9.05%.  This is used, in conjunction with the CRR value of 17.02%, to provide a Reward:Risk ratio known as the Calmar Ratio.  Calmar Ratio (CR) is defined by CRR / MDD, so we have CR = 17.02 / 9.05 = 1.88.  Ideally, we want values in excess of 2.0, but this is not a bad number, and simply states that we are risking only $0.53 for every dollar that we invest.  This is a winning system, and it will pay to stay the course.

GGT TSP 4-ETF/Fund Portfolio

This portfolio invests in the following ETFs/funds, and the new calculations for allocation for January:

1. AGG / F-Fund (5%)
   
2. EFA / I-Fund (18%)
   
3. SPY / C-Fund (26%)
   
4. VXF / S-Fund (51%)

Not sure if you have followed along, but AGG/F-Fund and EFA/I-Fund are presently in CASH, with SPY/C-Fund and VXF/S-Fund fully invested, at least to the percentage amounts shown.  For AGG/F-Fund and EFA/I-Fund, hold these values in the G-Fund.

In terms of strategy for January, DO NOT realign your portfolios until we get another signal.  TSP only allows two transfers per month, so we need to keep our powder dry.  Presently, keep your allocations at 42% for SPY / C-Fund and 27% for VXF / S-Fund, with the balance in cash / G-Fund.  If a signal to move funds occurs, we'll re-balance at that time.  Note that these allocations are different than the 3-ETF/Fund portfolio, so take your time to understand why.

Here are the performance stats to date.  As with all my images, click on the following images to enlarge:

Above is the equity curve for the 4-ETF / Fund portfolio.  It closely mirrors the 3-ETF / Fund portfolio, but because of the introduction of AGG / F-Fund, this portfolio is a bit more conservative.  Nevertheless, the performance is solid.

The graphic above shows that the 4-ETF/Fund portfolio wins about 57% of the trades, providing a 14.73% CRR since inception and a ME of 1.099.  Each win in the portfolio typically returns $2103, or about 2.1% of the basis, and each losing trade loses $731, or about -0.7% of the basis.  These are solid numbers.  Not stellar, but not bad.

The figure above shows that although the gain is a bit lower than than 3-ETF/Fund portfolio, the corresponding MDD is lower at 7.1%.  Our reward:risk ratio is determined by Calmar Ratio = CRR/MDD = 14.73% / 7.1% = 2.07, which is higher than the 3-ETF/Fund portfolio, which had a CR of 1.88.  The value here of 2.07 tells us that we're risking $0.48 for every dollar gained, which is a nice metric.

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So the challenge becomes subjective:  should you invest in the 3-ETF/Fund portfolio, which has a higher CRR (17.5%) but a slightly higher MDD, or should you invest in the 4-ETF/Fund portfolio, which has a lower CRR but an even lower MDD, resulting in a better reward:risk ratio?  The answer is individual -- you bank gain, not reward:risk ratios, so if you can live with a higher MDD, then the 3-ETF portfolio is wise.  If you're older, fewer years to regain losses, etc., then I would stick with the 4-ETF/Fund portfolio.

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Remember, you are responsible for your own investment decisions, not me.

Regards,

pgd