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Selection Strategies

The simplest selection strategies address the same issues as the time-honored diversification practices:
 

Diversification

There are two ways to diversify and be fully invested at all times:

  • By asset allocation:
    Hold 30% of assets into A, 30%  into B, and 40%  into C at all times.
  • By Trading Strategy:
    Follow three different trading strategies. 

FastTrack's premise is that diversification over time is preferable. If you expect FastTrack to tell you which issues to buy and hold forever, then you will be disappointed. FastTrack is only of value to those who are determined to buy low and sell high . . , this implies active management.

Combining Selection and Diversification

Instead of thinking of diversifying your assets, consider diversifying you investing strategies. For example, apply part of your assets to each of the following:

  1. Buying and holding a good growth fund (Buy and hold is a strategy).
  2. Selecting among sector funds, specifically HITECH and HEALTH
    When neither is good, hold RYURX (Rydex Ursa bear fund).
  3. Selecting among International Equity funds.
  4. Selecting between Small Cap and Large Cap.
  5. Selecting between Value and Growth

The Rules for Sector Funds

  1. Start with sectors that are fundamentally sound.
  2. Look for sectors that are not highly correlated, that is,  sectors which have Cor= values below 70.

Relative Strength Pairing Strategy

  1. These are strategies that involve two issues like a health funds and a technology fund.
  2. Both issues should have good fundamentals.
  3. Their lines should not be highly correlated. The absolute value of the red Cor= should be less than 70 when the issues are placed in the red and green lines.
  4. The Standard Deviation (SD=) should be about the same. If one member of the pair is much more volatile, then use timing on that issue alone. Do not use it in a relative strength pairing strategy.
  5. All forms of technical analysis, including pairing, work better on funds and exchange traded funds than on individual stocks.
  6. If you pair stocks, low correlation doesn't mean as much, but similar SD= is very more important. Choose large, established company stocks and NOT speculative stocks in the pairing. If may help to use signals generated by sector indices or sector funds to timing the stocks in the sector.

 

Health vs. HITECH

For FastTrack's entire history the two sectors with the brightest futures have been Health (red line) and HITECH (green line). AccuTrack® was invented to trade these two sectors, and has worked amazing well since inception. This example trades between sector mutual funds.

  1. The BH= (Buy and Hold) of each sector fund has been about 800%+ for period
  2. The Ra= (Return Adjusted for switching) has return greater than the sum of the two funds' return. The Ra= is the return of the multicolor   composite line on the J Chart.
  3. The S/Y= (Switches per year) is less than three. . . not a lot of trading. Further, many of the trades could have been eliminated using trend lineconfirmation and trade delays.

These sectors have both fundamentals and demographics working in their favor. There is no reason to believe that these sectors will become fundamentally unsound in the near future or that they will become highly correlated.

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Sector Stocks Averages

As with the health and HITECH mutual funds, the average of families of high tech stock  and health  stocks show similar trading characteristics.

Further, it is possible to generate signals from the stock AVG and profitably apply these signals to the sector funds or even to individual stocks.

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Stock to Stock Using AVG Signals

This chart uses the signals generated by the stock averages above to trade Pfizer (HEALTH) and Intel (HITECH). The stocks could have been traded using AccuTrack® between them, but the signals from the averages work better with fewer trades.

This doesn't always work. Be sure to pick stocks whose correlation with the averages used to make the signals is at least 50%. If the correlation is less, then trade the stocks against each other directly instead of using signals from the averages.

Of course, in a bear market it is always possible for both issue to plunge. This is where timing or modeling using many different issues enters the picture.

Use trend lines . When both of the issues are trendless (moving sideways) don't trade or find a different set of issues to follow.

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Same Sector Trading

With mutual funds, trading between sector funds in the same sector rarely produces exciting results. However, stocks in broad sectors can have low correlation and be tradable. The example shows Microsoft vs. Intel trading directly. Two trades per/year would have produced outstanding returns.

Of course, in a bear market it is always possible for both issue to plunge. This is where timing or modeling using many different issues enters the picture.

 

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Energy vs. Transportation

Energy and transportation sector funds trade well. They tend to move in opposite directions although imperfectly. When energy gets expensive, airlines and trucking have higher costs and become less profitable.

  • The red/green composite line in the J Chart shows a much higher return than either of the funds on a Buy and Hold basis.
  • Trading is a minimal 1.86 trades/year. There is no fundamental reason to believe that these sectors will suddenly begin to move in unison.
  • The one problem with this pairing is that neither sector has been particularly hot over the years . . . however, they are fundamentally sound.
  • Neither energy nor transportation as an industry is in danger of obsolescence.

Of course, in a bear market it is always possible for both issue to plunge. This is where timing or modeling using many different issues enters the picture.

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Energy vs. Growth

Most growth funds will  trade well against energy and many other types of funds. Energy follows a beat of a different drummer. Weather, technology, international tensions, OPEC mandates, and currency fluctuations have a complex effect on the profitability of companies in the energy and energy services industries.

There are some whipsaw periods that create unprofitable trades. Use trend lineconfirmation to filter out those excess trades.

Of course, in a bear market it is always possible for both issue to plunge. This is where timing or modeling using many different issues enters the picture.

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Growth vs. Value

This strategy was originally published in FastTrack commentary in1993. It remains largely unchanged although updated on 3/2/96. The strategy switches between growth and value mutual funds depending on the long-term shifts in sentiment of the market.

Sentiment Defined

GROWTH funds hold promise for greater revenue, and profits. VALUE funds promise appreciation of assets, improved profitability, and gains from special one-time situations. When GROWTH stocks reach new highs, investor interest often shifts to VALUE stocks in search of issues that are not so far extended. When GROWTH funds are out of favor, the stock market typically underperforms its historical averages. However, during these periods VALUE AND CYCLICAL funds may do quite well.

What Funds to Use?

Unfortunately, it is hard to pick good VALUE funds. Many VALUE fund managers have abandoned their "value" objective in recent years to improve their performance. We suggest three pairs of Growth/Value funds you might want to trade.

  • Fidelity Value (FDVLX) vs. Fidelity Growth Company (FDGRX). (Use longer AccuTrack® parameters since FDGRX is so volatile compared to FDVLX. Fidelity does not have a true value fund.
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  • Gabelli Value (GABVX) vs. Gabelli Growth (GABGX)
    Gabelli also has an Asset fund (GABAX) that you might consider
    instead of VALUE.
  • Vanguard Index Growth (VIGRX)) vs. Vanguard Index Value (VIVAX). These are index funds that invest in the growth half and the value halves of the S&P 500.
Small Cap to Large Cap Using the J Chart

The J Chart is most commonly used for selection . .  picking between two issues

The screen shot above shows using AccuTrack® to signal switches based on the strength of the NASDAQ Composite (OTC-C) and the Dow 30 Industrials (DJ-30). You cannot invest in the Dow or the NASDAQ Indices directly, but these signals are appropriate for switching between funds in the CAP-SMALL and CAP-BIG families which include funds that invest in small cap and large cap issues, respectively.

These signals may be saved and then used to trade between any two large cap/small cap funds . . . or you may trade the funds against each other directly using AccuTrack®.

This strategy is the most appealing and most easily implemented of FastTrack's strategies. It involved the two largest identifiable segments of the market. There are many funds and many pairs to choose from. This strategy deserves to be part of every investors portfolio.

Of course, in a bear market it is always possible for both issue to plunge. This is where timing or modeling using many different issues enters the picture.

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Domestic vs. International

Many advisers suggest a 60/40 allocation of US Domestic investments and International investments. We agree, but implement it differently.

Pair a good US fund with a good International fund. Trade between them according to AccuTrack®. The chart to the right shows Rsk=60.26%. This is the time spent in red line, OAKMX, a domestic fund. The other 40% of the time was spent in the green line, OAKIX, and international fund.

The result is a return about the same as the better of the two funds, OAKIX. Although the J Chart's red/green Composite was invested 40% internationally, there was no net penalty.

This strategy give you sensible trading points between two very large investment options.

Of course, in a bear market it is always possible for both issue to plunge. This is where timing or modeling using many different issues enters the picture.

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