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This article discusses Momentum modeling among many sector funds. Sector Momentum trading will
produce more return, often with less risk, when compared to the index funds. There is a related article which deals with Managing Money using the FTAlpha Momentum modeling. Fidelity and ETFs-
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The chart shows daily averages of the Select,
Rydex, and Extraded (ETF)
families compared to the green S&P 500 fund.
What you see is that the unbiased, equal-weight average Rydex (only the long sector funds, no shorts) and average ETF underperforms the Select average by a wide margin. Since FastTrack Modeling strategies are primarily "long" strategies that trade infrequently, it only makes sense to start with the best set of funds, that is the Fidelity Selects. The Selects are notably missing international funds, bond funds, and Realty funds. Consider adding the exchange traded funds: TLT, ICF, and a few of the iShares MSCI international funds like EEM to your Select trading strategies. Since TLT has very little trading history for back-testing use VUSTX, but trade TLT |
What you see is . . .
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 Model Summary Momentum by Return Momentum by Sharpe Ratio Momentum by FTAlpha Momentum by Darts (Random Walk) |
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The top line shows that starting at 9/1/88, $100,000 in assets was divided equally among the
30 Select funds which existed at that time. These is no magic in this starting strategy. We
will discuss how real people start using the model further down. At the end of the month, 9/30/88, the model sells all or part of the worst funds until $26,025.14 of assets are in cash (25% after the month's gains). The term "investable" refers to issues which existed and had assets. These assets are then placed in equal dollar amounts into the top 10%, by count, of funds. Top funds are those which had the highest return during September 1988. |
LIST AVG Monthly Momentum by Return Rebalance Log on 11-07-2005 at 08:04:13 09/01/1988 Divided $100,000.00 between 30 issues, each getting $3,333.33 09/01/1988 All Asset Total= $99,999.999 09/30/1988 Sold: $ 3,209.42 of FSESX 09/30/1988 Sold: $ 3,218.76 of FSAGX 09/30/1988 Sold: $ 3,319.79 of FSENX 09/30/1988 Sold: $ 3,338.44 of FSDPX 09/30/1988 Sold: $ 3,344.63 of FSPFX 09/30/1988 Sold: $ 3,393.73 of FSAVX 09/30/1988 Sold: $ 3,415.70 of FSCHX 09/30/1988 Sold: $ 2,784.66 of FSCGX 09/30/1988 Total Sold $26,025.14 of bottom 8 investable issues 09/30/1988 Bought: $6,506.29 of FSCSX which now has $ 10,133.59 09/30/1988 Bought: $6,506.29 of FDLSX which now has $ 10,103.98 09/30/1988 Bought: $6,506.29 of FSHCX which now has $ 10,092.78 09/30/1988 Bought: $6,506.29 of FSTCX which now has $ 10,087.95 09/30/1988 All Asset Total= $104,100.562 |
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Scrolling NotePad to the bottom, you see the final positions at the last day of the database,
a 2270% gain since 1988 using a simple, not optimized strategy. There are an unusually large number of holdings (10) at the end. This occurs in prolonged uneven trendless markets. Usually, the strategy holds 5-6 funds at a time. |
... 10/31/2005 All Asset Total= $2,337,522.214 Final Positions on 11/04/2005 FSESX $ 644,234.58 Fidelity Sel Energy Service/43 FSENX $ 507,168.39 Fidelity Sel Energy/60 FNARX $ 244,494.18 Fidelity Sel Natural Resources/514 FSNGX $ 243,230.65 Fidelity Sel Natural Gas/513 FSAGX $ 141,037.69 Fidelity Sel Gold Portfolio/41 FSPCX $ 119,898.46 Fidelity Sel Insurance/45 FSLBX $ 119,823.89 Fidelity Sel Brokerage & Investment/68 FIDSX $ 118,451.73 Fidelity Sel Financial Services/66 FSRBX $ 117,465.93 Fidelity Sel Banking/507 FSCSX $ 114,576.97 Fidelity Sel Software-Companies/28 FSPTX $ .00 Fidelity Sel Technology/64 FSRFX $ .00 Fidelity Sel Transport/512 . . . Final Total assets = $2,370,382.50 |
The Momentum Model by Return is FlawedWe zoom into the chat above to look at the technology bubble of 1999. During the 95 market-day period between the poles, the Select AVG doubled. The model became 100% invested in the four Select HITECH funds achieving the gains, then suffering the losses when the bubble popped. There are other periods where the model became entirely invested in gold and then in energy. Any strategy that becomes highly nondiversified is not a good strategy. Also note, the unacceptably high volatility measured in the red Standard Deviation value, SD= 7.24%, in the upper left of the chart. Using Common SenseFastTrack has many other tools for timing and analysis. Use them. Don't be afraid to deviate from the model by putting some assets into money market when bubble conditions prevail. Common Sense, use FTAlphaInstead of having the model rank by return, rank by FTAlpha |
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FTAlpha Ranking
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What you see is . . .A yellow AVG line with excellent return (better than the red and green lines) plus resistance to drawdowns plus a modest Standard Deviation. This is an AVG drawn by the Momentum Model, trading monthly, ranked by FTAlpha. FTAlpha's Theory of OperationFTAlpha gives top rankings to good funds which are not highly correlated to your portfolio. Your portfolio, in this case, is defined as the yellow line. At the end of each month. FTAlpha reviews the shape and return of the yellow line, and then ranks the other issues in the family based on both return and correlation to the yellow line. Note that from late 1998 through most of 1999, the yellow line and the red line were similar. However, in late 1999, the yellow line sharply diverged, even to the extent of going down during the technology bubble. This happened because the portfolio became so heavily weighted toward technology in 1999, that FTAlpha began to low rank technology funds. The model dutifully diversified, choosing nontechnology sectors. Subsequently, the yellow line did quite well in the teeth of the bear market. |
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Disclaimer
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Keys: Select Momentum, Sector Momentum, Momentum Model, Fidelity Momentum, ETF trading Range, ETF Spread, Bid ask, Bid/Ask, underlying index, ETF underlying,