When I first started putting money to work 2 months ago the markets were stretched and bubbly. Based on where the market was trading when I wrote Bitcoin, the Stock Market, and Other Asset Bubbles there weren’t any terribly attractive mainstream asset classes. So I put money to work in some contrarian positions that included EWY and FREL. Since then the market has been a bit more volatile and is off its 2018 peak. We’ve made a little money just because of dollar cost averaging combined with a sideways market, but we’re not exactly crushing it right now.
Volatility! Trade Wars! Trump!
The headlines are creating noise to try to explain what’s going in the market these days. The good news is that none of it matters because in Signalee’s fun little experiment to take a $1,000 to $1 million, we don’t have enough money on the line right now to really care. Now that the markets have consolidated a bit we can ignore the noise and focus on is implementing a strategy that is robust, stupidly simple, and dirt cheap. The easiest way to accomplish this goal is to go back to the ol’ standby of momentum trading to put new $100 bi-weekly deposits to work.
Momentum Trading Asset Selection
The first step in implementing Momentum for Dummies is to select commission-free ETFs (we’re using ones from Fidelity) to mimic as many as the asset classes as possible:
- SHY: T-Bills
- IVV: US Large Cap
- IJR: US Small Cap
- IEFA: EFA
- IEMG: EEM
- IEF: US 10-year
- LQD: US Corporate Debt
- FREL: REITs
- FMAT: Commodities/Gold
There isn’t a good commission-free option for commodities or gold so I’m substituting FMAT, which is Fidelity’s Materials Sector ETF.
The crux of the Momentum for Dummies strategy is to take a look at the past twelve months performance and buy the second-best performing asset. That asset is then held for 12 months and the process is repeated. We’re going to get a little fancier, purely by accident, because we’re going to run the numbers every 2 weeks every time another $100 gets deposited into the brokerage account.
Where’s the Exit?
I typically preach that a trader needs to have a well-defined risk management strategy that takes into account the macro environment and some sort of stop loss. Right now it’s too expensive to have a stop loss given how small the account is and we’re likely to be a net beneficiary of any short-term market swoons given the relative size of the $100 deposits versus the current account size. However, even though the headlines might lead you to believe that the end (of this bull market) is nigh, recessions typically don’t happen when there is full employment and inflation is below 2.5 percent.
Instead of using a typical risk management strategy based on price we’re going to use a time stop. Once the value of Signalee’s account gets to $2,000, which will give us access to margin, we’ll close out all the positions.
Unless something crazy happens, this should happen in May or June this year.