WINNING INVESTMENTS with EXCHANGE-TRADED FUNDS


SYSTEM WORLDWIDE Version 1.1
Back | Home | Contact

[Read the Summary first if you have not before]
[Charts and tables illustrate principles;
they are not updated.]

 
EXPLANATORY NOTES

      How to Use. You should find this system ultra-clear, simple, and easy to use. If you do not, please tell me, and I will try to fix those parts which cause you any difficulty.
      Start with the weekly letter. The intent is to own the two top-ranked stocks at all times. Therefore, the letter simply says: buy, hold, or sell. If you wish to time the market, the letter exactly states that the trend is up or down and therefore buy, hold, or sell accordingly. That's all there is to it. Take a look here.
      Based on Friday's closing prices, recommended actions are posted each weekend, usually before 5:00 pm Eastern Time Sundays, for execution Monday mornings. Buy or sell 'at the market' on or near the opening.
      That's really all that is necessary. But there are two other quick, weekend review steps you can take if you choose--completely optional.
      Open the current weekly timing chart. You will see three curves
--the Worldwide Portfolio average price curve plus two trend curves, short-term and long-term. The only one used for (optional) active timing-decision-making is the short-term one. Take a look. The other (long-term trend) is for whomever would like to watch it, especially me. I feel there is considerable value here, but I have not yet done extensive testing and therefore have no reliable conclusions to report.
      The second, quick, additional review step is to look at the complete portfolio with its 20-week history of rankings for all the funds. You can track the progress of each at a glance. There are 23 funds in the portfolio currently. A list of components is here.
      Tips on getting started appear at the bottom of these notes.

      Charts, Tables, Data. All on this site are hypothetical. See Results below. None include commissions or fees, dividends or interest exept for a few instances that use Treasury Bills as cash.

      Drawdowns. Drawdown definition is the maximum percent decline from a price peak until the next price above the peak. There have been eight drawdowns. The average drawdown has been -12%. Drawdowns are not losses. They would become losses only if you were to buy at the absolute price peak prior the drawdown and sell at the absolute bottom. They are, rather, a psychological measure of discomfort due to negative price volatilty. They are inherent in all price-based trading and investing systems. They have no effect whatsoever on outcomes, only interior effect on the state of the mind of the owner during transient periods when the price of something may be lower that it was before.

      Failsafe. Means the system has built-in safeguards designed to control losses. See 'Stop-loss Orders' below. Further, it is impossible for the portfolio to go broke. None of the individual funds can fail in the same way that no index can fail. That's because the funds' managers, like index managers, continually weed out weak components and replace them with strong, growing components.

      Goal. To develop a system or systems that produce 40% annual profits, or higher, with a maximum worst-case drawdown of -20%.

      Hypothetical. See below, 'Results'.

      Leverage. The system results are reported with no margin or leverage. If you add leverage, obviously your results will be different. You can use margin and derivatives. With full compounded margin, you will get more than triple the total gain you would make unmargined. With leverage, principally through the use of derivatives, you can leverage capital gains up to six or seven times before you start to hit diminishing returns. See the chart. The dollar magnitude of the effect of leverage depends on the volatility of the underlying assets. Here is another example, with lower volatility assets. In either case, the power to enhance returns, up to a limit, is impressive.
      If you are a beginning trader, margin and leverage are the surest ways to rush to terminal ruin. Wait until you are making a little money gradually, steadily, serenely before tiptoeing into the heady, explosive, profits terrain of heavily leveraged accounts.
      Besides, you will not want to stray far from the straight and narrow path of small margins, or none, on your journey to growing wealth because the drawdowns will shock you into fervent conservatism.

      Losses and loss control. See below, 'Stop-loss orders'.

      Market Orders. Place orders "at the market" for the next day's opening, usually a Monday. It's close to a 50/50 tossup whether this will be to your advantage or disadvantage. Some wait until after the opening, say, 10 or 10:30 a.m. The system's test results all hypothecate an at-the-market opening.
      No Monday morning entry or exit price is good or bad. Against what comparison? There is only one question really: How good or bad are you doing over a year or two--compared with other investment possibilities? Random openings over time simply don't matter.

      Mistakes. We make them. The system does not. When they occur, they are noted in the real-time results records. Even computers can make processing errors, but the system is bedrock.

      Multiple holdings. The optimum number of holdings is two. The two top-ranked funds give the best results. Any other quantity diminishes returns. See here for details.

      Performance. Please see Results below.

      Portfolio. The portfolio is the two top-ranked funds held in the account. A broader meaning is the holdings (more than two funds, for example, and/or cash) in an account at any given time. An even broader meaning is all the component ETFs that are listed in the rankings tables. The analysis tables and charts shown in these pages use the second definition: two funds or cash, depending on timing, unless specified otherwise.

      Rankings--How to Read the Portfolio Table. Open a second browser window and a duplicate current Rankings table there. It will make it easier to follow along with this explanation. Note at the top of the table, under the heading RANKINGS, the column of ETFs in the portfolio. The next columns to the right are consecutive Fridays' weekly dates. In each date coumn, the number tells the strength rank of an ETF for that week. The strongest fund earns the number 1. This means it has been moving farther and faster than all the other funds in the list. The weakest is number 23.
      At the bottom of the Rankings section, the SUMMARY shows the average price of the all the ETFs in the portfolio except Gold, Treasury Bills, and Ursa. Those are counter-trend securities that typically move opposite to the 'market'. The next row shows the portfolio percent gain or loss for the week, rounded to the nearest whole number. The third row shows the Long-term trend direction, an experimental data series that measures the moving strength of the overall portfolio trend. It fluctuates beteen 0 and 100%. The Short-term trend is more trenchantly reported in the last row as simply Up or Dwn and appears as the short-term-trend curve in the Worldwide Portfolio and indicators
chart. It is the official timing mechanism used in system for calculating results and should be observed if you decide to use timing.
      The third row in the SUMMARY section Long-term trend, can safely be ignored. It is there for further experiment by myself or anyone else who feels it may be useful.
      In the next section down, under the heading PRICES, the table shows the weekly closing prices for each fund, rounded to the nearest whole number.
      It may help you to read a legacy page on the website from the last millenium on the use and effect of rankings and prices if you have time. Just go to How to Use from the 1999 website.

      RankingsTechnical Note: Occasionally, previous rankings may change in a current week's report. This is due to two factors: the use of exponential moving averages and the law of 'sensitive dependence on initial conditions'. When using exponential moving averages, the early dates' values affect the values of all subsequent results. Furthermore, moving averages by definition means you have a different beginning date each week. Since all the values in the series are defined by fixed fractional numbers carried out (on this computer) to the fourteenth decimal point, a change in a final decimal point can shift a rank standing reported in previous weeks to a different one reported in the current week's report. This phenomenon, when it occurs, has no practical effect on outcomes, but it can be mentally disturbing when it happens unless you the know the reason for it and the effect, if any. The current week's rankings are the binding ones on which all signals are based.

      Really easy. Means you can give your broker discretion to follow the system while you take a year-long trip around the world and check results when you get back on December 31st. Your expected average return will be 40% vs 12% (or some other multiple of 3 to 1) for the S&P500. You have one chance out of 200 of earning less than a positive +3% at the same time the S&P is losing -9%.

      Results. There are three kinds of results. Real, real-time, and hypothetical. Hypothetical will interest us most, because it applies to every record of performance you will ever see in print or electronic form anywhere. The one exception is your own record of securities that you actually own or have owned. That's the 'real' record of results, and it pertains only to you during the time you actually had ownership.
      'Real-time' results are a species of hypothetical. The only thing real about them is that they actually occurred in the sense that they were published on the date attributed to them.
      Other results that occurred before date of publication, as in the case of historical backtesting, are purely hypothetical. The limitations and shortcomings of reliance on hypothetical results are well known and treated elsewhere publicly and on this site (
here, here, and elsewhere).
      Results accounting compounds weekly. Dividends are are excluded in reporting historical prices of both systems and comparison indexes.

      Results table. Historic results comparison with benchmark indexes here.

      Risk. There is only one real risk: a realized loss. Risk is buying a security and then actually selling it voluntarity or involuntarily for less money than you paid for it.
      But the term these days more widely means 'volatility'. If you have looked at some of the earlier pages and charts, you have seen a lot of volatility, the wild jumps up and down in price behavior. None of that means 'realized loss'. Therefore it should only enter into our considerations as a reminder that these swings will occur and do not directly affect our final outcome.
      Other than taking actual realized losses all (?) other risk is air--measuring fictitious sets of different 'what-if' scenarios, none of which may ever come to completion. 'Volatility' is the leading meaning of the word 'risk'. Volatility is a measure of past ranges of price fluctuations of a security, air, but frightening air. Other risks include inflation: the probability that an investment will buy less in the future than it can today due to cost-of-living increases. Well, maybe. But most of that meaning is air, too--subject matter for another day. Bankruptcy: the usually drastic decline in the value of a security, possibly to zero. Bad corporate management: the inability to direct businesses to make satisfactory profits. Increased government regulations, changes in Generally Accepted Accounting Principles, onset of new, damaging competition, obsolescence of an industry, and so on.
      All in all, a risk isn't real till its realized even though the list above of 'risk' factors may affect your decision-making. The range of past volatility may suggest the mental pain or emotional distress you might expect to incur in the future.

      Rules. There are only two basic rules. Invest in the two top-ranked funds when the trend is up. Sell short the two bottom-ranked funds when the trend is down. Cash is the alternative option to short-selling, but results will be lower. Use equal dollar amounts in each when two funds are used.
      Special case. When the long-term trend is under 5, the market is especially bearish, and the long-term trend takes precedent over the short-term trend. The two bottom-ranked funds may be sold short. See the middle table in
Rankings and chart. If Ursa (the bear mutual fund) enters the top two ranks while the long-term trend is under 5, the rule is to continue to hold short (or sell short) the two bottom-ranked funds or hold cash.
      Note. Rules may be viewed as guidelines. Using your own discretion within the general framework of the system can produce superior results. For accounting and reporting purposes on the site, the rules are inflexible and rigidly adhered to with the sole, possible exception of an unprecedented government intervention in a specific sector of of the securities markets.
     To reduce the market risks of this and continuing interventions, rules are now modified to limiting short selling solely to a broad-market lindex, the Standard & Poor's 500 Composite Stock Index (SPY) in lieu of the two bottom-ranked funds. This rules provision will continue until there is clear reversal and withdrawal of government intervention from the capital and exchange markets to the status that prevailed before the financial panic that commenced in 2007.
     To repeat, the application of rules is optional. They may be varied personally to accept more risk (i.e. volality) than they are currently designed to restrain.

     SPECIAL NOTE. Germany this month (May 19, 2010) banned certain short sales and theatens to ban short sales in all German stocks. This is part of the seismic shock waves continuing to roll though the worldwide economy, the markets, and policy-making legislatures and agencies. Such bans are mistakes. Regulators' sole purpose should be to abate fraud and to enforce orderly processes, not to restructure free markets. When you impose structure, they are no longer free. Accordingly, the 'rules' here are amended to suggest a simple short sale of the S&P 500 or its equivalents whenever short sales of any other stock or funds is indicated. Adopted as of November 27, 2009 and reaffirmed January 22, 2010.

      Short selling. Although not necessary nor advocated (see rules), some (myself included) may want to use the system rankings and timing for shorting. The rule is: when the trend turns down, sell short the single bottom-ranked ETF.

      Short selling in Retirement Plans. Not allowed by regulations. You may, nevertheless, legally accomplish effective short positions by the use of so called 'inverse' funds or by buying put options. These move exactly opposite to the funds you may wish to sell short.

      Stop-loss orders. The system uses none. That's because they are already built into the system and are multiple. When a fund drops in ranking out of the top two, you sell it. That is a form of stop-loss. If you use the system short-term timing indicator, and it drops, you sell any funds owned. That's a stop loss. If a bear market emerges, one or more of three of the funds in the portfolio, Treasury Bills, Gold, or Rydex Ursa (Inverse S&P500 fund), will automatically climb into the top ranks and may become the fund(s) of choice to buy and hold subject to the Rules of buying and selling. If a serious bear market emerges, the long-term trend indicator kicks in and overrides all else. Please See Rules.
      I have always had a problem with 'stop-loss' orders. The fixed percent or dollar amount or initial or trailing price levels that you set are completely arbitrary even if you use a volality factor to adjust the decision. The market knows nothing of your personal cleverness, predilections, and caution.
      It seems better to me to let the market itself by its own internal actions automatically set loss-control operations with respect to itself and its components rather than to impose random, personal, psychological criteria from the outside.
      I did not always believe this, but after years of experiment surrendered to market behavior itself with me as a participant rather than as the dubious director of arbitrary orders.

      Timing. Click here.

      Tips for Getting Started. Wait for a drawdown. Then watch the two weekly timing indicators, short-term trend and long-term trend. When the short term trend turns up, commit funds. This trend information appears in the weekly chart or in the portfolio Summary in the middle of each weekly Rankings & Prices table. Special case: the long-term trend under 10 is very bearish and trumps the short-term trend: stay short. Commit funds when the long-term trend turns up provided it is above 10.
      A further safeguard to prevent buying at the peak of a price move just before a drawdown is to divide the size of your intended position into two or three or four parts and space each entry several weeks apart, separately, one portion at a time.

      Trends. 'Trends' mentioned on the site refer to the Portfolio Trend, the trend of all the funds in the portfolio taken together--not the general overall market, nor the widely followed indexes like the Dow Jones or the S&P500. Treasury Bills, Ursa, and Gold are excluded because they behave, or tend to behave, inversely to the general market.

      Upgrade. All systems degrade, or they (rarely) self enhance. Periodic adaptive testing discloses when the system needs upgrading if required.



2006-09 The 2000 Corporation
  All rights reserved.