The ETF Complete model closed the week down -0.4% compared to the SPY which closed up +1.0%.
The SPY closed the first week of the year positive after another series of high-volatility days. The Jobs report on Friday blew out the estimates and some dovish talk from the Fed Chairman helped propel the markets to their highest levels since mid-December.
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This Week’s Strategy Lesson: 2018 Year Review (Part 1)
With 2018 now officially in the books, its time for our annual review of how the models performed last year both on an absolute basis, relative to the benchmark, and also relative to how they have performed in the past.
We now have over 12 years of history with the ETF models. The earlier years were backtested but we have about 5.5 years’ worth of live data and signals. All models have their ups and downs. You can think of the ETF models as a rule-set or algorithm that inputs stock data (primarily momentum as measured by the Trend Strength Indicator) and attempts to maneuver our holdings to outperform the market. Since no market environment, move, or correction is the same, some environments will be better suited for our ruleset then others.
Momentum has its own set of drawbacks. We have specific rules that attempt to migtigate some of the largest downsides. For example, we don’t want to hold ETFs with negative longer-term momentum (though this will not prevent some of the short-term drawdowns). We also have included short or alternative ETFs. There will always be some lag as the model makes the transition.
2018 was a tough year for the ETF models due to two primary factors. First, we had several quick and severe market drops. After a run-up in January, the market dropped over -12%, bounced off the lows and then immediately dropped again almost -10%. It then spent a few months recovering to put in a new high before another sudden drop of -12% in October followed by another drop of over -16% in December.
We have seen a few of these types of drops over the last few years, but not nearly to the extent we saw in 2018. We also had relatively few outliers. The Global Macro model (part of the ETF Complete) was the only one to find significant positive outlier trades (in USO and UNG).
The chart above shows the 1-month rolling returns for each of the ETF models and the SPY. Each point on the chart shows the prior 1-month trailing return. So if the SPY shows a -9% value on 12/31/2018, that means the ETF went down -9% over the prior 20 trading days. Displaying the data in this way makes it easier to see how each model responded to different short-term market conditions.
Of the models shown here, the Sector Moderate tends to be the most volatile relative to the market. This extra volatility can be a good thing when it can navigate to outperformance (in 2017, the Sector Moderate was up +43% compared to the SPY finishing the year up +19%.). The Global Macro model had a particularly strong end to the year as it hit a quick win in the UNG trade (hit a 33% first target (due to a big overnight gap) about a month after entry) and was otherwise well positioned with the other two holdings.
Next week we will take a deeper look at the Sector models and compare the 2018 annual performance against prior years in the models.