Reader Tom K left a question asking if momentum plays a role in how I weight to sector, cap, style or country.
The short answer is no. The longer answer is that I tend to make those decisions with a top down eye to what I think will happen. I've written a few times about owning Sweden in a couple of different ways. The top down view is better economic data than Europe, a current account surplus, a new more conservative government and an outlook for a strong currency lead me to think it will do well.
Sweden, as measured by iShares Sweden (EWD) has done well this year. It could be argued that the indicators I cited created momentum in a technical sense. Fundamentals leading to good technicals is far from a new concept.
There are of course many instances where this cause and effect is not easily seen. This is when investors can lose patience and give up on a solid theme that does not appear to be working now. The notion of not every theme working today is important. Tech did not work for ages and now it is working although the fundamentals are not very evident. Despite my being underweight this is something I have mentioned countless times before. Assume for a moment I am correct about tech having no fundamental catalyst; sectors or countries or whatever, can turn in the opposite direction for what seems like no reason at all. IMO, case in point now with tech.
So with this example there is some sort of momentum underway with out fundamentals.
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13 comments:
Is there one or a few sources that you use for cross country comparisons?
Not an area I am strong in, but the cleanest ones that I have seen are the IMF's Annual World Economic Outlook -part of one can be found here (they are easy to google):
http://www.imf.org/external/pubs/
ft/weo/2006/02/index.htm
I like their discussions of economic cycles within a multi-national context (see 2003 part II).
russell
OT- I have noticed that since I commented on Vodka Bars and Canyon Walks they are asking me to identify more letters in the word verification: is this some sort of sobriety check?
russell120, funny stuff.
I get country info from news feeds, Jyske Bank, Bloomberg, The Daily Pfennig, Financial Times, a little from WSJ, CNBC Europe and CNBC Asia to name a few.
> "Assume for a moment I am correct about tech having no fundamental catalyst; sectors or countries or whatever, can turn in the opposite direction for what seems like no reason at all. IMO, case in point now with tech."
That’s one of the reasons I use momentum rankings to spot new sector themes. The momentum/past winners phenomenon is one of the few anomalies that continues to confound the random walk crowd. I highly recommend reading the research by Moskowitz & Grinblatt, Jegadeesh & Titman, Rouwenhorst, Womack & Boni and many others. There is also good stuff written by the Ned Davis Research staff and David Vomund of AIQ Systems.
I’ve used momentum ranking systems consistently during the past 3 years and the results bare out the research.
Tom K it can work. i wasn't knocking but I don't really use it.
No worries, I didn't take it as a knock.
I could post my top sector and top country model ranks every week...if you wouldn't mind. I'll even add a disclaimer :-)
wokrs for me I'd be especially curious to see the country stuff.
The country model is a pure momentum model. I only track iShares right now. Below are the top ETFs as of last week - I do updates weekly. A "3" is a fund that reached my momentum threshold for the past 3, 6, and 12 months. A "2" only met the threshold during 2 periods.
MSCI Netherlands Index Fund EWN 3
MSCI Spain Index Fund EWP 3
MSCI Belgium Index Fund EWK 3
MSCI Mexico Index Fund EWW 3
MSCI Singapore Index Fund EWS 3
MSCI Switzerland Index Fund EWL 2
Note, I only consider these as my international investment options. For example, it would be very unlikely that I would load up on all 4 of these European ETFs.
I also use a model to determine my percent allocation between U.S., EAFE, and Emerging Markets. As of last week, that allocation would be 60%, 30%, and 10% respectively.
Here are last week's top U.S. sectors according to my model:
U.S. Telecommunications 5.5
U.S. Pharmaceuticals 4.5
U.S. Health Care 3.5
U.S. Banks 2.5
U.S. Consumer Goods 2.5
U.S. Financials 2.5
U.S. Real Estate 2.0
This model uses many more indicators than my international model: Sector momentum (30,90,180 days), cap/style momentum (30,90,180 days), Rydex asset flows, various OB/OS indicators, yield curve, economic cycle, sector seasonality, and even a small degree fundamental analysis.
I only track 26 sector and cap/style indices that coorespond to Profunds. Because sector funds are cap weighted, I treat mid value, mid growth, small value, small growth, and US microcaps as sectors.
tom k: This may be, likely is, OT, as a matter to pursue, but I'ld be interested in some more details of your model re:allocation,mom threshold criteria,software,misc resources. Do you believe in staying fully invested (david vomun d does,fwiw)? My own bias is to allow for cash and to have broader foreign indexes combined with country specific positions in order to control for risk and volatility. I would translate your list into these actionable choices:iev (europe),epp(asia ex japan), and ewl (switzerland) That's been my own actual positions, and wishn like the dickens I had stayed with emerging exposure-- too cautious to chase performance for now. I leave it to Roger to figure out the fundamentals of a country as his compass of where to place a bet. He certainly is willing to turn over a number of rocks.
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Anonymous,
The only similarity between my strategy and Vomund's is they're both based on momentum. I use a timing model that scales me into and out of equities. Right now I'm 100% equities but that model started to tick down last week because we're beginning to hit some
OB levels in sentiment. It looks like it could tick down again this week, so I could be decreasing exposer soon.
I agree with your comment regarding the use of foriegn indexes in cases where there is a regional theme. This should be based on the number of positions you hold. If using fewer positions, I would definitely trade broader indexes.
tomk: Is this your own timing model or a subscription? Lots questtions. Feel free to email: calluci@yahoo.com. If interested I'll then send you my active email. Thanks,Bill
tom k- since you mentioned David Vomund, thought you might be interested in his new book, ETF Trading Strategies Revealed. It discusses his sector trading strategy and also has discussions from Rashcke and Palmquist. Solid read. i got my copy from www.traderslibrary.com
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