Mechanical Stock Picking and Market Timing - Part 4

Momentum Investing and Moving Averages

In Online Investing, Jon Markman suggested to start investing in momentum mechanical portfolios when the Market crosses its moving average up. Sell everything when the market crosses its Moving Average down and wait till the next up crossover to re-run your mechanical investment strategy.

Momentum works best in Bull Markets: it therefore makes sense that his strategy is improved with the addition of Moving Average crossover.

His mechanical momentum strategy's performances jumped from 85% to 102% annualized returns from 1990 to 2000 if investing only when the 15 days NASDAQ moving average crosses up its 50 days moving average.

The improvement is done while being invested only 2/3 of the time suggesting lower risk.

The performances are spectacular because it is the greatest Bull Market in history and he invests in only 3 stocks with high Relative Strength. Performances are usually improved with lower number of holdings when Relative Strength is used, but risk is also greatly increased.

Such exceptional performances are unlikely in the near future but they illustrate how Mechanical Momentum Stock Picking can be combined with Market Timing based on Moving Averages to enhance returns while reducing risks.

Caution: Markman backtested his mechanical strategies only in Bull Markets so may lack robustness in more challenging markets.

High Beta Stocks and Market Timing

Since Market Timing's objective is to be invested when markets have higher chance of going up, leveraged Index funds are prime vehicles for experienced market timers.

Leveraged Index funds replicate major Indexes but with a beta greater than 1, typically 1.5 to 3. Use leverage only if you are risk taker as volatility inevitably increases. Now, a major drawback of leveraged funds is their high Expense Ratios often greater than 1.5%.

An alternative is Foliofn Aggresssive Folio: a ready made mechanical portfolio investing in the 30 stocks with highest Beta from the S&P500 while maintaining sector weighting for diversification. It simulates a Leveraged Index Fund but at a fraction of the cost.

Foliofn also offers a ready made Conservative portfolio that invests in the 30 stocks with lowest Beta from S&P500.

A strategy could be to invest in the Aggressive portfolio when your Market Timing system is in Buy Mode and use the Conservative portfolio when your Market Timing system is in Sell Mode. There is no cost for switching portfolios or buying/selling stocks with Foliofn.

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