My recent posts on the Fidelity Sector Fund Rotational Strategy generated many comments. The following strategy was suggested by the commenter named Redshark.
The problem with these rotational strategies is that unless someone is giving out the signals or the investor has the ability to set up the strategy in Excel, there is no easy way for the investor to trade the rotational system. There are simply too many variables to calculate by hand, and most investors do not have the time or inclination to learn R or learn how to code in Tradestation or the like.
What I like about Redshark’s idea is that as the title states, it is very easy to calculate the signals. In fact, all one needs is the most basic of charting packages.
I have tested it over the Fidelity Sector Funds, which I particularly like because they can be traded with no slippage and zero commissions. This makes them the perfect candidate for testing over as historical results are more likely to be able to be generalized into the future.
All that being said, here are the rules:
- Buy the 3 funds that have been above their 50 day moving averages for the most days
- Hold the funds for at least 30 days
- On the 30th day, if the $SPX is beneath its 50 day moving average, all funds will be liquidated the next day and the system will not trade again until the $SPX is above its 50 day moving average.
- On the 30th day, if the open positions are still in the top 3, do nothing and re-evaluate the next day OR if a fund(s) is not still ranked in the top 3, sell it on the 31st day and buy the fund that has replaced it in the top 3.
That is all there is to it. I have not at all optimized the variables. I chose 50 days for both because I simply prefer the 50 day moving average.
Results from 1.1.2000 to 2.2.2012
- Compound Annual Return: 12.21%
- Winners: 60.78%
- Maximum System Drawdown: -32.10%
- Sharpe: 0.74
Historical Profit Table:
I expect that most readers will wonder what this will do with ETFs. I’m wondering too.
Redshark suggested using bonds. I did add two Fidelity bonds (FBNDX and FTBFX) to the portfolio, and they had a deleterious effect on performance.
So there you have it: A very simple rotational system that beats buy-and-hold with reduced drawdowns, and you don’t need any specialized software to generate the signals.