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Now that you have sat through the boring models, now it is time for our
"flashy" model--our mutual fund switching model.
Important: we only trade this model during zones 1 & 3 (when our stock
market model is bullish). We trade Fidelity's 39 Sector funds. We use
two time periods--one for new signals, and one for current trades. This
model is based on momentum and relative strength. Take the performance
of all the funds over the first time period (say, 5 weeks). You invest
in the top ranked fund over that time. You must hold it for 5 weeks to
avoid Fidelity's switching fee. At the end of that time, you rank all
the funds again--this time over the second time period (say, 10 weeks).
If the fund you are holding is still in the top "x"%, you hold on to it
another week until it drops out of the top "x"%.
You may have a new signal every week. Think of your money as "y" equal
1/"y" slots (for example, 5 slots, each representing 20% of your
money). The first signal goes into slot #1. Next week's signal (if
different from the first week's) goes into slot #2, and so on. You may
fill the remaining slots with an S&P index fund or a money market
depending on market conditions (yet another system).
Now money management: we use two different stops--an initial stop (z%
from our entry) and a retracement stop (a% from the highest high). We
have found that if you get stopped out during the 5 week holding period,
it is best to exit and pay the 0.75% switching fee, rather than stay in
the full 5 weeks.
Starting this week, I have started using anchored momentum for the
second time period (see previous posts).
Since 1986 (I realize this is a short time period), this model earned
35% while invested with a maximum drawdown of 8%.
"Putting it all together" in the next post.
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