Friday was a trade day for ETF Rankings. (The final Friday of every month is considered a trade day for ETF Rankings.)  Portfolio positions change at the open on Monday.

ETF Rankings appear every Friday. Any Friday could be considered a trade day but the last Friday is the one tested in backtest reports.

Performance Last Month

Last month the number one ranked ETF was RSX. It closed Friday at 22.08, representing a 1.19% profit from its entry price. Actually, the profit from this trade will not be known until Monday’s open when it will be closed out.

The ETF Rotational Trading manual shows that backtesting profit drops when more than one ETF is traded. For those interested, the two other highest ranked ETFs were: DIA and XLE. They were up 0.97% and  down 2.47% respectively. SPY was up 1.73% for the same period.

Trade Day for ETF Rankings

The new TN  ( “trading normal” ) rankings  are presented below:

Latest Rankings

These rankings will be used in backtesting to monitor the performance of the system. These are not recommendations to buy or sell. They are informational only. Readers may choose to use or ignore them as they see fit. They do so at their own risk.

Backtests assume entries and exits at the open on the Monday following a trade day. The ETF Rotational Trading manual provides historical data and backtests.

Heat Map

This heat map tracks the rankings over time. The first column is current and each column to the right represents prior weeks. Churn within market sectors can be seen as can the rise and fall of individual ETF rankings.

Heat Map of ETFs By Week

Last month’s number one rank, RSX, has fallen to a ranking of ten in the latest ranking.

Some Technical Analysis

The ETF rankings system is a complex form of technical analysis (TA). It combines various indicators and concepts to produce a single ranking for each ETF. Some readers have inquired about adding more traditional TA indicators to the presentation. That is underway. For the time being, two simple charts will illustrate TA in the context of last month’s number one ranked ETF — RSX.

The white background chart on the left is daily data. The chart on the right is weekly data. Both show RSX price data with three indicators below the price portion of the graphs.

RSX Technical Analysis

General Comments regarding these indicators

1. Price is in “candlestick” form. An open (greenish unfilled) candlestick represents a day/week where close is greater than open. Solid (reddish) candlestick means close was lower than open. The tails (lines above or below the boxed portion) represent the prices outside the open-close range. The tips of these lines are the lows and highs for the bar.
2. A moving average is imposed on prices. Typically price above a moving average is a positive sign (price is/has been rising).
3. The first indicator below price measures relative strength. RSX price is related to SPY price. When the shaded area is above the solid (moving  average) line, RSX is outperforming SPY, a positive sign.
4. The next indicator is SSSMO, a proprietary momentum indicator. Up (grey) bars are momentum rising; red bars momentum declining. The solid line is a moving average to smooth the bars. When the shaded gray area is above zero, the moving average of momentum is up.
5. The final indicator is the Stochastics indicator, one well-known to all technical analysts. Typically, when the red line is above the blue, it is viewed as bullish.

These explanations were necessarily simple. TA is more nuanced than suggested above. The web is filled with articles on how to use/interpret TA and popular indicators.

Some Specific Comments:

For simplicity, we will look only at the right graph (weekly data). You may do your own interpretation of daily data which tends to respond more quickly. Daily data generates more signals than weekly and more “false” signals.

RSX was the number one on the last trade day for ETF rankings (late December). It ranked number one a couple of weeks before the trade day (see the above Heat Map).

All of the technical indicators showed strength as early as mid to late November. Here are the signs of strength:

1. Top Box — Price begins to exceed the moving average in mid November.
2. Second Box — RSX begins to outperform SPY on a relative basis in late November.
3. The SSSMO bars begin to exceed zero in early November. The moving average line crosses above around the first of December.
4. The Stochastic Indicator red line crosses above the blue line in mid November.

Each of these points are bullish and each of them are early relative to the rankings. Each turned out to be subsequently correct:

1. Top Box — Price stays above moving average. It would have produced a great trade, entering below 20 in late December and remain in the trade today. The gain would have been in excess of 10%.
2. Second Box — The relative strength indicator would have entered the trade in November and remained in it. Another good trade.
3. Third Box — SSSMO (moving average) would have entered the trade in the beginning of December and still be in it.
4. Stochastics — Trade would have been entered mid November and exited mid December.

The indicators were consistent with the ETF ranking. The timing of entry and exit differed slightly.

That is not always the case. Short-term indicators generate lots of signals, many of which turn out to be false. Review the behavior of these indicators prior to mid-November, when RSX was not a factor in the rankings.

The shorter-term TA indicators were generating many “buy/sell” signals in earlier periods. Were you trading these indicators then you would have gotten many false signals (signals that quickly reversed). Applying these indicators to 45 ETFs would produce readings. For most periods half of them would be positive and half negative. But which one ETF is best? There is no way to answer this using single or a few indicators.

A bigger issue comes from false signals. These are signals which quickly reverse, a process known as “whipsawing.” Whipsawing creates many trades, most of which are unprofitable.

Trade Day for ETF Rankings — Technical Analysis Coming

Technical Analysis contains a broad array of tools. The ETF Rotational System is itself technical analysis. It combines many different indicators and trends into one composite measure that can be ranked. It focuses on a longer term than many traditional indicators and has automatic adjustment mechanisms built in to account for different market conditions.

Utilizing measures to confirm the ETF rankings can be useful. High-ranked ETFs should also rate highly on traditional technical analysis indicators.

TA key indicators will be included by the next trade day for ETF rankings.  The indicators will be more than shown in this article. The broader range of indicators is under review as is the method(s) to integrate them with the ETF rankings.

Commentary

General Market

The Dow broke above 20,000 last week. A growing belief that President Trump’s policies can turn the US economy around appears to be in play. His movement toward lower taxes and less regulations will help. Even if you strongly believe in these policies, do not believe markets are about to take off. While they may, downside risks still exist.

Among these risks are the following:

• Market valuations are extremely high right now based on most historical metrics.
• The US and most other major developed economies are insolvent. Their debts and promises can not be honored. A misstep triggering a currency crisis or default could bring a country or world economy down. There is no reasonable way to predict the timing of such an event. It could be near or a decade or more out. Recognize it as a real possibility and do whatever necessary to protect and hedge against it.
• Trump’s understanding of economics is intuitive. He is a shoot from the hip guy. Usually his instincts are good but not always. His meat cleaver approach to the Washington bureaucracy and the economic damage they have done is welcome. However, let’s hope he gets things right.
• The rebellion against Trump and his policies has not yet begun. Democrats are dysfunctional and almost a non-factor. The Republicans are still shell-shocked but they will attempt to stop many of Trump’s policies. There is little more dangerous than an elite establishment shown up for being fools and parasites. SwampTown, DC is likely to be in open revolt against Trump before long.

Any of these factors could tank markets. Be aware, regardless of how optimistic (or pessimistic) you feel, market performance is not predictable. There are no sure things and markets go both ways. Protect yourself.

Current Rankings

Last week I expressed some concern regarding EWG (index fund for Germany) rising to the top of the rankings. You may go back and re-read these if you wish.

This week EWG retains its top rank and has been joined by VGK (Vanguard European Fund) in third place.

Looking at the Heat Map, European markets have moved up rather consistently in sector strength. Intellectually, it is difficult to accept that Europe is a place to be putting money at this time. Nevertheless, the momentum algorithm is suggesting otherwise. I will follow the algorithm but with less dollars than usual.