Monday, December 17, 2012

Deconstructing the S&P with T2 & SPYDERS...12.16.12

This post is fundamental to understanding rotational models and identifying pockets of opportunity. Without going into too much nuance right now we'll use the SPYDER sectors ETFs to help isolate what's hot and what's not in the markets on a momentum basis and try to capture incremental grains along the way.
To provide a comparison benchmark we add SPY to our porfolio.  This gives us a 10 ETF model to examine and to see if there's any advantage to playing the sectors selectively based on momentum or whether we're just better to guts it out and hang with the SPY.  Turns out there are some benefits to playing the markets selectively both in terms of risk and returns.  In this case I've looked at the top 3.  With the T2 software you can load up this portfolio, save it as a separate file, and analyze the other possibilities.

As expected, money management is important but if we follow the simple RSQ and P6 guidelines we are way ahead of the buy and holders. While the top 3 chart mirrors the SPY chart it clearly shows higher lows and higher highs, the types of portfolio price behavior that we seek in order to get an edge.
To get a little different look at these they are all together in the T2 composite chart. At first glance you'd probably be inclined to say..."well, they all look the same", and in fact they pretty much do.
It's when we apply a momentum algorithm like T2 to a sample mix like this that we may discover some nuggets of opportunity not readily apparent.