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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 3 popular ETFs that track major indices within the U.S. stock market. That would be SPY tracking the S&P 500 Index, 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.
But I swapped out SPY for MDY, which tracks the S&P Midcap 400 index. This is an index of U.S. companies with market caps in the range of $1 billion to $4.5 billion, and has demonstrated slightly improved performance over the larger-cap SPY for the past 10 years. And I further broke down the market by separating out 4 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. 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 7 ETFs 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 eliminates exposure to equities and falls back to my go-to safe haven, bonds. Specifically, it will rotate between one of the following 4 bond funds:
Now, the selection and timing. |
The Mechanics
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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 then determines - via momentum testing - which 2 of the 7 equity ETFs have outperformed during the previous period. I buy those 2 funds.
On the other hand, if the broader market is in a "risk-off" environment, the strategy conducts a relative strength test on the 4 bond funds. The one that has performed the best during the previous period gets the nod, and I buy that fund. Rinse and repeat the next month. So, at any given time the American Muscle portfolio holds either 2 equity fund ETFs or a single "flight to safety" bond fund ETF. 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 11 years from 2008 to 2018, volatility of the strategy has been less than the S&P 500 (16.5% vs. 20.1%) and max drawdown has been considerably less (-19.1% vs. -51.9%). And the Sharpe Ratio, a gauge of risk vs return, is considerably higher than the S&P 500 (hint: higher is better, meaning less risk per return).
The beauty part? The strategy has delivered a total return of 701.2% vs. 116.8% for the S&P 500 over the same 11-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. |