Sunday, April 14, 2013

Notes - Masonson's ETF Buy - Don't Hold

These are some summarised notes on the fantastic book on how to trade ETFs by Masonson "Buy - Don't Hold"
It presents a technical strategy based on momentum using relative strength.





Chap 2
- investment questionnarire may determine the risk profile but then most managers use it to allocate asset based on conservative, balanced, aggresive, into asset classes with fixed percentage. It does not account for which asset classes may perform better or worse at
that time.
- better questionnaire at www.finametrica.com  and www.riskprofiling.com 
- risk management in stocks include knowing when to sellout. Some like to hold on whle the stock keeps crashing. The question when you want to keep holding is would you buy that same stock today?
- types of risks - market risk, individual stock risk, diversification risk, inflation risk.
-  Mechanical non emotiona trading has the highest probability of making money
- Buy and hold investing is very risky and can lead to huge losses
P52 use average true range ATR, when go above 0.75, then major bear
may be coming, so exit all holdings, there should still be some time.

Chap 3 - Personal Investment Plan - 6 steps Road to Success
- SIX step investment plan
i determine your risk level
Ii review existing investment portfolio, use sites from Web, WallStreet Journal, Barron's http://online.barrons.com/home-page
Iii assess the stock market condition - use Stock Market Dashboard in Chap 5 to determine market condition, buy when above +3 and sell when below -3
Iv Invest in ETFs instead of stocks - 5 classes of ETFs are;
Morningstar style box, S&P Indices, Individual countries, Fixed Income, Commodities.
v. find top ETFs of specific class using Relative Strength Analysis.
Web: ETF FamilyWeb sites, www.morningstar.com
vi. Protect using stop loss
- a section on retirement investing with details for US residents, but the principles can be applied elsewhere.

Chap 4 - Using ETFs
- contrary to their own thinking, investors are not more intelligent than their peers.
-  most investors lose money, including managed funds
- over 75% of active managers do not beat their benchmarks over a 10 year period. So not point paying over 1% in management fees.
- index funds (ETF is a type of this) has a beta of 1.0 (a measure of volatility)
- ETFs are usually a basket of stocks that mirror the index. So most reflect the indices and they do not beat the indices. Hence the majority are passively managed and so has lower fees. It lets investors follow the indices since most actively managed fund perform
poorer than the indices over the long term.
- list of low cost brokers:
www.digeratilife.com/blog/index.php/2009/05/22/onlinediscount-brokers-smart-money-broker-survey 
- A table 4.1 has a list of the main ETF families (providers?) and they types of ETFs they offer.
- there are many types of ETFs such as those that mirror the main indices like S&P500, commodities, various sector ETFs, currencies, bonds and also inverse ETFs that make money when the market falls (ProShares, Direxion, Rydex).
- benefits of ETFs are: transparency, liquidity, low fees, better performance, simpler tax implications, allow shorting by buying inverse ETFs without actual margin based shorting, can implement trading/investment strategies, earn dividends/income.
- risks: different price in ETFs to their underlying (eg when market is suspended), general market risk, spread in buy/sell, inverse ETFs may be suspended in extreme market conditions.
- leveraged ETFs can magnify gains and losses. The author warns against leveraged ETFs because of higher risks and suggest their use as hedging or intraday trading.
- leveraged ETFs are rated using beta. If beta =1.25, then the ETF move 25% more than its underlying in the same direction.
- 4 types of asset allocation is given according to the profiles:
conservative, moderate, aggressive, very aggressive. Morningstar and SPDR ETFs are recommended for all profiles. Fixed income range from half to zero from conservative to very aggressive classes. IShares countries ETFs range from low to high percentage from conservative to very aggressive.
- a long list of various  ETFs and their ticker symbols are presented in Chap 4

Chap5 - the Stockmarket Dashboard - key market indicators to Gauge
Market Directions
- websites : www.stockcharts.com
- Dashboard consist of 8 indicators. Since each indicator is not always reliable, investment decisions are based on an aggregate of the 8 indicators.
- When the indicator is +3, start buying stocks up to indicator of +7.
When an indicator is - 3, sell ALL stocks.
- Returns on Stock is determined by 70% market trend, 20% industry trend and 10% individual stock fundamentals.
- 8 components of the StockMarket Dashboard
i) Percentge of NYSE stock above their 50d MA. If above 75% then move downwards then market top has been reached. Similarly for the 25% to indicate market  bottom.
ii) NASDAQ crosses 100 DMA. Crossing upward from below means trend has changed upwards and vice versa. The NASDAQ is chosen because it usually leads the other indices.
iii) New daily highs minus New daily lows on NYSE. When this  is -750 and the next day the number reverse to more than + 750 then a market bottom is reached. For market top, find number of new weekly highs divided by number shares traded. If this is 25% and goes lower in the next week, then it is time to sell.
iv) Percentage of NYSE stocks whose Point and Figure Charts has a buy signal. When this number is 70% and turns down it may be a market top.  If the number is 25% and turns up, it may be a market bottom.
v) American Association of Individual Investors (AAII)  survey of weekly bullish sentiment. When 50% is bullish and turn lower next week, then market top. If 25% and turn up, then market bottom.
vi) MACD on NASDAQ where the difference 26dayExpMA-12dayExpMA line crosses the 9dayExpMA, then market has changed direction.
vii) Invest 6months - be in the market from 1 Nov to 30April and out of the market for the other 6 months. Use MACD of S&P500 to fine-tune when to enter and exit markets.
viii) NASDAQ Summation Index (NASI) - When this crosses the 5day EMA
from below, it is a buy signal and vice versa. This is used together with MACD for confirmation.

Chap 6 RELATIVE STRENGTH ANALYSIS (RSA)
- RSA is based on picking the selected stocks which are outperforming their peers in terms of their stock price.
- calculate the % change in stock price over a given period then rank them with other stocks.
- The suggested time frame is 6 months
- Sell the stock if it falls below a certain ranking. And replace with other stocks that increased in ranking.
- RSA have been shown to outperform buy and hold strategies.
- perform analysis every week, based on 6 month price performance.
- sell off those that drop out of top ten and buy those that get into top 10.
- can be used with stocks, also ETFs if there are hundreds of them.
- before buying, check the ETF 2 year chart 50dma and MACD are in an uptrend.
- Strategy #1 - after ranking the ETFs according to their categories, the choose the top  few from each category.  The number of stocks from each category depends on the risk profile. For aggressive investors, choose more stocks from risky category, such as International ETFs.
- Strategy #2, rank all ETFs together ignoring their categories. Pick the top 10 ranking ETFs in this universal ranking.
- when coming out of market bottom, avoid top ranking ETFs which are bonds or inverse ETFs.
- www.robertwcolby.com  - list the top 10 rank ETFs
- www.etfscreen.com - provides relative strength analysis  on ETFs.
- www.morningstar.com - has ETFs info
- www.marketwatch.com - has more details on ETFs
- www.etftable.com  - ETFs stats and ranking
- www.etftrends.com - performance data but no RSA
- www.etfinvestmentoutlook.com  - also performance data but no RSA

CHAP 7 Subscription Software
High Growth Stock Investor software
- screening tools, filter, indicators, charts, groupings, Relative Strength based on price performance or other criteria.
VectorVest software
- powerful back testing, portfolio management, filters, searches.

CHAP 8 Putting it all together
1. Determine your investor profile: conservative, moderate, aggressive, very aggressive. www.kiplinger.com/reports/investor-psychology
2. Review current asset allocation, against your risk tolerance and investor profile determined from previous step. Rebalance portfolio if necessary, ie sell some stocks and replace with ETFs where possible.
3. Use the Stockmarket Dashboard to decide when to buy (+3 or above) and sell (-3 or below) shares. The Dashboard provides general market timing, it does not select which shares to buy or sell. When buying from+3, some strategies include buy everything at once or buy some, then buy a bit more when it increases to +4, +5, +6, +7. When selling, once the market falls down to -3, then sell the complete
portfolio.
4. Stock selection and therefore fundamental analysis of individual companies are not necessary, because this approach is to buy ETFs. The ETFs can also be categorised according to riskiness. Based on the investor risk profile, each profile can have a certain ETF allocation strategy. For example the Conservative allocation can consist of 53% Fixed Income ETFs (safe), 13% iShares Countries ETFs (risky), etc while the Very Aggressive allocation may have no Fixed Income ETFs, 40% iShares Countries ETFs and so on.
5. Selection of which ETFs to buy is based on the Relative Strength Method, using websites which rank them (see Chap6 for web links). Review your portfolio of ETFs at least weekly and if they ranking fall below 50%-tile within their group, then replace that ETF.
6. Always continue to use stop loss for protection. Do not change the plan once started or stray away from it. www.buydonthold.com  - more details on the book.

The Stockmarket Dashboard was used for backtesting with  two examples related to the GFC. The first case was for the market at Mar 2009, the recovery after the GFC, with a score of +7 - a strong buy signal. The second case looks back to Oct 2007, just before the GFC, with a score of -6 - a strong sell all signal.