After preparing my last post, I decided to test the thought of selecting ETF’s representing the top two best performing sectors over the previous six months each timer my timer generates a long signal. These two ETF’s would then be held until my timer generates a sell signal. I randomly selected six trades between 2007 and present and the average return on IWM (iShares Russell 2000 ETF) was 4.2% but the average return on the two selected ETF’s was 8.5%.
Obviously six trades doesn’t constitute a statistically significant sample size but I don’t have the time to test my hypothesis on every long signal my timer generated going back to 2000. However, I am reasonably comfortable recommending to subscribers that, if you are using my US timer to buy and sell IWM, you should consider splitting your purchases to 1/3 IWM and 1/3 for each of the two ETF’s selected as noted above.
One area for further study is whether we should evaluate the two ETF’s after holding them for one month. For example, if after holding the two ETF’s for one month we check the past six month’s performance and find that two different sectors are now the top performers should we sell our existing two ETF’s and purchase the two representing the noted sectors? One consideration here that is specific to the investor is the level of activity one is prepared to take on. Evaluating the holdings every month may be more than some investors want to perform.
I am considering changing my IWM/RWM model on Collective2 to buy IWM and two of the top performing sector ETF’s based on the previous six months when my timer goes long. If I do make the change and you want to follow this strategy, you can autotrade through Collective2 or follow the signals which are e-mailed by Collective2.
FJP
