Market Pulse: Relative strength investing Part 1
Special to the Tribune
Is it better to be a value investor or a growth investor? Last year growth indexes were exceptional while value indexes were little changed. That isn’t always the case (see 2016).
Instead of being locked into one philosophy, it is best to employ a strategy that allows investors to rotate to whatever style is working. When growth outperforms value like last year, hold a growth ETF like PowerShares QQQ Trust (QQQ). Once value outperforms then switch to an ETF like iShares S&P 500 Value (IVE). Similarly, when small-cap stocks lead then hold a small-cap ETF, but when large-caps do better then switch to a large-cap ETF.
Rotating to the leading market segments is what my Style Index rotation model is all about. I’ve published this mechanical model in my two ETF trading books, ETF Trading Strategies Revealed and Exchange Traded Profits, both of which are available at Washoe County Libraries.
How do you know what segments are leading? Each weekend I post relative strength rankings for style index ETFs and sector ETFs free-of-charge on the analysis page of http://www.ETFtradingstrategies.com.
Last year was exceptional for relative strength investors. Aggressive growth investors that trade sector ETFs did very well if they held the strongest ones like Invesco Solar (TAN), which rose over 200%.
The growth strategy that I prefer sticks with the style index ETFs. I use the Nasdaq 100 ETF (QQQ) to represent large-cap growth. That was strongest until mid-October when small-cap indexes became the leaders. The model rotated into iShares Russell 2000 (IWM) and it remains in small-caps (see the current relative strength ranking).
Trading style index ETFs allows investors to gain well-diversified exposure to a specific area of the market and gives investors the flexibility to quickly move from value stocks to growth stocks, or from small-cap stocks to large-cap stocks. By owning the better performing ETFs (top half of the relative strength ranking) an investor can outperform.
Instead of limiting yourself to one investing style, a better approach is to own the style index ETF that is currently working best.
Which market segment will outperform in 2021? Relative strength investors don’t care to guess. They let the market reveal itself. But for now, portfolios are in iShares Russell 2000 (IWM) and iShares Small-Cap Value (IJS).
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.
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