Monday, September 9, 2013

A New Model (in progress)..9.9.13

The response to the new ALPHA model has been enthusiastic and several readers have asked if I could create a model that focused more on the countries and the currencies as an alternate tactical approach to trading forex (FX) (foreign exchange markets).  I use to trade FX on a daily basis using an overnight bracket order approach that produced steady and low risk returns.  I frankly don't know why I stopped trading the system since it required so little attention but these recent inquiries may be an excuse to revisit the FX markets and the safety of bracket orders. There are more than a few trading gurus who are forecasting major economic upheaval similar or worst than the 2008 crash based on the largely overlooked debt crisis.  Under such a scenario the value of equities and bonds would decrease dramatically, short selling would probably be restricted (as in the past), inflation would crush the value of cash, and one of the few opportunities for equity growth would be in the currency markets. Of course, this is just a few guys trying to get the rest of us really worried.
This new model is a work in progress and designed to focus more on short term returns (less than 90 days) in lieu of a longer term investment perspective.  The momentum ranking approach is still used but, as with the ALPHA model, paying attention to the stop signals is critical. As with the development of previous models I generally start with a larger basket of portfolio candidates and then track the winners and cull the losers in a momentum based model.  Such is the case here where we start with a fairly broad stroke portfolio and then create a couple 6 component models which are later combined into a larger 11 component version.
This is a blend of ETFs with just a few basic metrics like daily volume and price volatility defined to help see how thay might interact with one another.
And, as a first draft of a 6 ETF model, here's one portfolio (below) that has performed well on the short term metrics, but obviously underperformed the SPY longer term.  As I mentioned, this is just a starting point, but the results look very encouraging for creating a more robust and sustainable equity curve while at the same time looking at trading and investment opportunity through a different portfolio blend than either the APHA, X Sector or DF (equity/bond default models).  The model currently likes the China and Canada ETFs and has for quite a while (the duration of the recently upslope P6).