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In two previous posts (here and here), I introduced a tactical asset allocation or "rotational" strategy that uses relative strength and momentum criteria to select ETFs on which we can sell bullish vertical put spreads.
The attached table shows the list of ETF candidates we select from each month.
The list represents every major asset class including U.S. and international stocks, U.S. bonds, oil, gold, agricultural commodities, the dollar, and the euro. Let's review some omissions. With the exception of iShares Dow Jones US Real Estate (IYR), none of the U.S. equity sector ETFs made the list, and the reason is that they scored very similarly to the major stock indexes in most tests. In other words, they didn't offer much diversification at the time horizon we cared about, and as a result were not selected very often for allocations.
The same reasoning applies to "me-too" alternatives to other assets here: iShares Silver Trust (SLV), PowerShares DB Com Indx Trucking Fund (DBC), and some of the other country-specific ETFs were considered, but their correlations to other peers (SPDR Gold Trust (GLD), PowerShares DB Agriculture Fund (DBA), and iShares MSCI Emerging Markets Index (EEM), respectively) was high enough over the long run that they weren't showing up often in selection results. Finally, there were a few underlyings that were of real interest, but simply didn't have enough option volume to warrant inclusion in the strategy: CurrencyShares Swiss Franc Trust (FXF) was one example.
The resulting list of 17 ETFs is still long enough to provide us with genuine opportunities for macro-level diversification, and has the virtue of offering a simpler and more intuitive set of trade candidates.
In the next post on this strategy, I will discuss the rational behind the three-slot allocation method.
The updated strategy allocation as of 12/31/11 is:
The only change from the week prior was in QQQ, so we will reduce our size in the January 54/55 put vertical from five units to two; the spread was last priced at $0.26.
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