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American Muscle - ETF Rotation Trading Strategy
The New York Stock Exchange, largest in the world by market capitalization. The Nasdaq, second-largest exchange in the world by market cap. U.S. Treasury Securities, widely considered the safest investments available. And U.S. corporate bonds, fuel for the economic engine.
This is America strong, and select ETFs from these powerhouse asset classes form the backbone of the American Muscle strategy. But these assets don't necessarily move in tandem. There are long stretches when one broad market index (or a sector within that market) will outperform others. And vice versa. |
And Treasuries? They often demonstrate an inverse relationship with the major equity indices, moving up when the NYSE and Nasdaq move down. That's fine. We can use that. The key to maximizing returns? Knowing when to be in one ETF - and out of the others.
Strategy Assets
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I started with three popular ETFs that track major indices within the U.S. stock market. That would be MDY tracking the S&P Midcap 400 index (an index of U.S. companies with market caps in the range of $1 billion to $4.5 billion), QQQ tracking the largest stocks of the Nasdaq, and MTUM which tracks large and mid-cap U.S. equities, selecting for price appreciation (momentum) and low volatility.
And I further broke down the market by separating out four of the top performing sectors of the past ten years: consumer discretionary, financials, technology, and health care. Why? Because one or two sectors will often outperform their larger index family for an extended period of time. And I want to take advantage of that. Finally, I added three individual stocks. Not just any stocks, but the top 3 holdings in the S&P 500 Index (subject to change as the index changes). So here's what we've got for the equity side of American Muscle: Broad Market
This is the driving force of our strategy during bull markets. The strategy will rotate between these seven ETFs and three individual stocks when the broader market is in a "risk-on" environment, or regime. And if the broader market is in a downturn? If bearish sentiment prevails, the strategy reduces exposure to equities and falls back to my go-to safe haven, bonds. Specifically, the lion's share of the portfolio will rotate between one of the following two bond funds:
Now, the selection and timing. |
The Mechanics
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40% of the Portfolio:
Once a month, the strategy conducts a risk-parity calculation on QQQ and TLT. This calculation determines the percentage each will occupy in the portfolio for the upcoming month. Each month, month after month, these two assets are represented in the portfolio -- only by differing amounts. 60% of the Portfolio: Once a month, the strategy first determines whether the broader stock market is in a "risk-on" or "risk-off" regime. If it's "risk-on," the strategy selects the top two outperforming equity ETFs or stocks as determined by momentum testing. It buys those two assets. On the other hand, if the broader market is in a "risk-off" environment, the strategy conducts a relative strength test on the two bond funds. The outperformer gets the nod, and it buys that fund. Rinse and repeat the next month. So, at any given time our American Muscle portfolio holds, at a minimum, 2 uncorrelated funds (QQQ and TLT) in varying proportions. And depending on the regime of the overall market, the portfolio could hold either an additional 2 stocks or equity fund ETFs, or a second bond fund. Regarding benchmarks: SPY (the ETF that tracks the S&P 500 Index) is used as the benchmark to judge the performance of American Muscle.  Click to enlarge.
Performance notes: looking back over the past 12 years from 2008 to 2019, volatility of the strategy has been less than the S&P 500, and max drawdown has been considerably less. And the Sharpe Ratio, a gauge of risk vs return, is about three times as high as the S&P 500 (hint: higher is better, meaning more return for the risk).
The beauty part? The strategy has delivered a total return of 843.0% vs. 186.9% for the S&P 500 over the same 12-year period. Note: while the strategy rotates out of higher-risk equity funds and into the relative safety of bonds in the event of broad market downturns, nothing short of perpetually holding cash or cash ETFs will protect in the event of a flash crash or a sudden jolt to equity or bond markets. That said, the pain from most market downturns (i.e. recessions, bursting bubbles, market corrections) can be mitigated by a strategy that can switch to relative safety within weeks. |
What You Get
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Before the market opens on the first trading day of the month, you'll receive an email newsletter detailing the same actionable buy/sell signals that I will use to trade the strategy in my portfolio.
See a sample email newsletter to the right >>> Subscribers also gain access to the Members Page, offering up more strategy details, month-to-month performance data, and an FAQ specific to the strategy. |
Ready? |
The American Muscle Strategy is $7.95 per month. Cancel at any time. Follow along and see how the strategy catches market moves to the upside, while protecting hard-earned portfolios against major downdrafts.
First 2 months are FREE. Go to the subscription page to SIGN UP. |