Bucking The Trend…Two Models That Got It Right

In a recent post by Meb Faber and as originally posted on the Au.Tra.Sys blog, it was pointed out that some of the largest and most experienced trend-following managers experienced a difficult June in terms of performance. The summary showed that the group had average loss in June of nearly -6% and a YTD loss of a little over 2%.

Given this group manages billions and billions in dollars and represents legendary traders with decades of experience, I am pleased to see that some of the Portfolio Cafe strategies have been able to buck the trend.

The Sector ETF Rotation model was up 4.90% in June and is up over 7% YTD. The model has benefited from its holdings in biotechnology and healthcare ETFs, two areas the model has now held for several consecutive months. I should also note that model is now making another new high in equity.

The Vanguard ETF Tactical Asset Allocation model also had solid performance in June…up 4.35%. The model rotated to REITs at the end of May which helped to provide some of the recent lift in performance along with large-cap U.S. stocks.

That been said, the market feels a lot like 2011 all over again.

Indeed, Investor’s Business Daily writes:

“Quick turnabouts in IBD’s Big Picture Market Pulse have been the pattern since the indexes marked intermediate lows in early June. In less than two months, IBD’s Big Picture Market Pulse has switched six times.

A look at the Nasdaq’s daily chart shows why. Action has been in an uptrend but in a choppy fashion — something investors saw last year.”

The nature of systematic investing, in particular trend-following strategies, requires that an investor have the proper psychological ability to stick with systems that have well demonstrated positive mathematical expectancy. For some investors this is difficult to do.

Our two international model results have not been as favorable this year due to the volatile and macroeconomic backdrop within the international sector. Does this mean that these models are broken? Simply….”No!”

All it means is that the underlying conditions of those markets is currently less conducive for this style of system…much like we saw in 2011. We do not attempt to forecast the market. Trading through directionless, choppy, and volatile periods is something that every investor has to learn to deal with. For some investors, that could mean adjusting position size downward…something very easy to do for investors who follow our models at Folio Investing.

Another way would be build your portfolio with complimentary styles. For instance, if the core of your portfolio is trend or momentum style strategies such as our ETF models, the one might consider satellite strategies more shorter-term in nature. Swing trading or volatility, and regression styles of trading come to mind.

Something new I will begin writing about is how I am actually allocating to the models which includes both the ETF models and the stock models. This should help lay the groundwork to our upcoming release of PortFolios where we will give subscribers the ability to own a professionally built, risk-adjusted portfolios allocated over several of our strategies.

What are the biggest investing challenges you are facing?