Comments on: FAQs

By: Chuck Remaley

Chuck Remaley — Mon, 07 Sep 2009 04:21:15 +0000

Meb,

I'm a new Alphaclone subscriber and I was wondering if there is any data on using options to hedge clones? I can't go short in an IRA, but I can buy puts or put-spreads. More capital can be used for the actual clone picks with ATM index-puts acting as a hedge if prices decline. Plus, loss of capital is limited should the market move higher. Wouldn't the leveraged nature/limited loss of the hedge lead to better returns then going short SPY?

I'd like to buy options at rebalance that expire at the next rebalance. I just don't have the backtested results. I'd imagine it's possible to estimate the cost of hedging by knowing the VIX, days till expiration and SPY price of past dates. I'd love to experiment with put spreads.

By: Chuck Remaley

Chuck Remaley — Sun, 06 Sep 2009 23:21:15 +0000

By: grock

grock — Wed, 05 Aug 2009 12:01:58 +0000

Ben, certainly 19.95 is high for an online broker and certainly are cheaper alternatives. I don't know what kind of money we are talking about but you need to look at the frequency of trading in Meb's work. Generally if the market will give us significant trends before it rolls over your not bouncing in and out that frequently and even with a smaller account sizes I think you would be better off in an ETF. Generally If you read the fine print in mutual's prospectus you will find fees as high as 1.5% of the fund. In some index funds it will be as low as .5% which compounded adds up. You can do the math with your own account numbers. Certainly if you get a low cost brokerage account it becomes a no brainer. Be sure and to be aware using the moving average system that sometimes the market will get mixed up on it's own trend and sometimes the moves will be buy high and sell low for small nicks in one's account before one has a big buy low and sell high. I have looked at various historical markets like the dow and Nikki going back decades using various trend following methods to back test and get a feel how they would work. I did this before discovering Meb's work. I would encourage you to go through the Nikki with say Yahoo charting program going back to the 80's and test the moving average model to get a feel for it. Not to say we will have that market for the next 20 years but the market run we have had since 82 to 2000 won't likely occur again for a very long time. Certainly the bank of America's low cost brokerage is worth investigating.
Hope that helps>
GRock

By: ben_h

ben_h — Tue, 04 Aug 2009 13:46:12 +0000

Ah, but Fidelity charges $19.95 per trade online (at their lowest tier). If I'm purchasing 3 or 4 ETFs per month, in addition to moving between cash and holdings based on the moving average, that will add up fast. Mutual fund trades are free at fidelity. I was considering moving to vanguard for the low-fee index funds, but they don't seem to have any good commodity funds.

So, I think I've come back to ETFs, and am now researching free/inexpensive ways to buy them. So far, Bank of America looks most promising: http://www.bankofamerica.com/investing/overview...

By: GRock

GRock — Sun, 02 Aug 2009 12:17:34 +0000

Ben personally I see no reason to use mutual funds instead of ETF type funds. Mutual funds have much much higher management fees as oppose to ETF's and all it will do is hurt your return compounded going forward. If your are attempting to model after the IVY portfolio I think this is the best way to go. My own comments above about using mutual funds is only because our group has no access to ETF's for our COLI plan. If you are using Fidelity you could just switch to their brokerage account and use the the ETF's.
As far as dollar cost averaging new money into the IRA you certainly could do equal amounts among the funds, or could put more in the laggard fund as a way to “rebalance” the portfolio. I kind of think it is best to do it equally since a hot sector will likely to stay hot for awhile and just rebalance on an annual basis.
GRock

By: ben_h

ben_h — Fri, 31 Jul 2009 03:07:44 +0000

Meb - thanks very much for your book and all the info you provide!

I am contributing monthly to my Fidelity Roth IRA, so am more interested in using mutual funds than ETFs to implement a 4-asset ivy portfolio (no bonds). I am considering moving the IRA to Vanguard to use their index funds without Fidelity's high commissions.

Can you suggest an index fund that is appropriate for the commodities portion of the portfolio? I'm having a hard time coming up with anything other than precious metals.

Second, with monthly contributions, is it better to evenly divide the contribution among the 4 portions, or allocate disproportionately to the portion furthest behind the 25% allocation?

Thanks again!

By: GRock

GRock — Sun, 19 Jul 2009 14:10:05 +0000

Mebane,
Your work has been extremely helpful, especially the QATAA paper and the Ivy book. I manage my own stock portfolio but have been trying to lead our 28 doctor group’s deferred comp (retirement plan) out of this 08 bear mess they have gotten us into. It has been invested in an S&P index mutual fund. Trend following/technical analysis investing is nothing new to me and have been trying to teach it to the group. Early last summer I tried to get the board to go 100% to cash and was met with extreme skepticism and buy and hold dogma. Well by the end of the year they started listening to me. In trying to help derive an investment model for the fund I did extensive searches on the net and stumbled over your work and have been sharing it with our board. I pre-ordered the book and obtained the first copy out on Amazon and have shared the information with the board members. It helps to having someone gone through the data and run the numbers so that I don’t sound like some crazy stock trader in getting them to understand the markets and that “Buy and Hold is Dead” and needs to be buried!
We have a number of self-directed mutual funds available to us in our COLI (company owned life insurance) that we can utilize. We will be having a board meeting in a few weeks to vote on using the trend following and allocation model. Currently I have recommended 20% each in (all mutual funds) #1 International fund that tacks MSCI EAFE. #2 Emerging market fund. #3 A commodity mining fund – tracks the XME type. #4 S&P index fund. #5 Real Estate fund.
We will use the corresponding ETF/index for charting and use the 10-month moving average for the timing model. Since we can’t get a ticker on these we will us the corresponding benchmark index or matching ETF for charting. Currently will not include bonds but will probable add in say 5 years when some of us start retiring out of the group. (followed in by new members). I’m am also looking at putting in a Tech fund into the mix since in the new world order will probably have quite a bit of outperformance in the next 5 or 10 years. However I don’t want to get to far from the KISS principle that the others can’t keep up with.
Appreciate your site and your info.
Sincerely
GRock

By: gerrydantone

gerrydantone — Sun, 12 Jul 2009 03:27:33 +0000

This post probably repeats points made by others.

1. In a rotation system, should one simply average the results from 3, 6 and 12 months returns of the 5 ETF catergories (or 10 or 20 if using the more granular categories) and the highest is # 1, second highest # 2, etc.; or are they weighted in any way; or all made equivalent to a yearly return and then averaged; etc.? The exact calculation would be helpful via examples.

2. If one uses a more granular approach, it would seem that 3 categories might not be best since they could all come from within one of the 5 original groupings. This would not be very diversified.

3. I downloaded ETF info from FundX's website (it's an investment newsletter) and compared the 3, 6 month calculation with their "CPR" calculation. They are highly correlated and led to practically identical results. One could use their CPR rating to determine which ETFs are the rotation leaders. Since they rate many ETFs (though not all), this would save a lot of work.

4. Could you use an ETF such as FXI (China) as a portion of a category rather than the generalized index ETF? I would limit a narrow ETF such as FXI to 20% of the generalized category for reasons of diversification. I would always use the index if the 3, 6 and 12 month returns average were higher however.

5. IT would be good to list the best websites to gather all the necessary info for the rotation system. As I mentioned, FundX is good but it costs money. Not every ETF is listed at FundX. VB is missing for example.

5. Wong's paper indicated a preference for a 6 month (100 day) moving average and he preferred the EMA 100 over the SMA 100. What do you think?

6. What's the minimum daily averager trading that you think is adequate to keep the ETF liquid? I've seen $1,000,000/day or 40,000 shares mentioned.

7. May I suggest trailing stop losses at about 2.5 to 3.5 times the Average True Range? This would equal about 5 days of losses in a row. IT would sem to be sensible to use a multiple of the ATR - the question is what is the multiple?

8. After I bought the book and had time to absorb it and figure out the methodology I wondered about how to install the system for the first time. Buying one of the 5 ETFs if it were above the SMA 200 sounds simple but what if it were above the SMA 200 for a number of months already and is about to run its course? When entering the system should one buy when an ETF first goes above the SMA 200 or within a month or two of it going above it, or does it not matter? I'd guess it DOES matter. I find it hard to believe that buying an ETF that has been above its SMA200 for ten months is the same as buying one that just went above it.

9. This is a question involving a rotation system with a more granular approach: right now the VTI or S&P 500 is below its SMA 200. However, the small cap ETF might be above its SMA 200. Should one buy the small cap ETF?

The same question goes out for all the other categories: if DBC or DBP is below its SMA 200, but say GLD is above it, could one buy GLD?

10. I wonder if corporate bonds and government bonds should be separated into categories. I suspect that they will behave much differently in the future.

11. Is there a place for TBT (short long Gov. bonds) in this system?

Finally I want to thank Mebane for a good book and a practical guide to improving one's chances in the market.

By: GaryFree

GaryFree — Sun, 12 Jul 2009 03:03:27 +0000

How does one use a mutual fund (or ETF) in the timing system: when a dividend is paid in a mutual fund it can greatly affect the price, pushing it to the 200 DMA, when in fact the fund is doing well. Is there a simple way to account for this?

By: hh

hh — Thu, 09 Jul 2009 17:26:00 +0000

even worse:

what if the peer change is 0 %.You can't divide by 0
I really don't get it how he got this one so wrong…