Volatile Markets Got Your Down? Look To The Sector Funds
Before we start today's editorial on Sector Timing, we want to
remind subscribers to be sure they use timing strategies that
match their emotional investing comfort level.
The current markets are as volatile as any we have seen. Huge
rallies lasting only days, followed by huge sell-offs.
Volatility is great if it is within a trend, but volatility that
only moves the markets up and down quickly, within a sideways
(no-trend) trading range, can be quite unsettling.
Such markets are great for day traders, or should we say those
who happen to be nimble enough to take quick profits. But for
market timers and trend traders, the "lack" of a trend often
results in small losses.
While no one wants to lose, we must keep things in perspective.
Remember the saying, "keep your losses small, and let your
profits run." That saying has been around for a long time for a
good reason. There are times when you generate small losses, and
that is just a fact of aggressive market timing and trading.
We should not lose sight of the second part of the saying...
"let your profits run." This is what all market timers look for.
The next trend "is" around the corner. There is always another
trend, and when it begins, the profits are made.
Although this commentary will look at the sectors as an answer
to market volatility, for those who find current aggressive
trading unsettling, we also suggest looking at the Bull ProTimer
strategy, or even the Conservative S&P Timer. They do not
usually generate frequent small losses because they do not trade
the bearish signals (they go to cash instead). Both are
excellent and profitable strategies.
Diversification Has A Place In All Portfolios
Remember that while very aggressive timing strategies do
incredibly well over time, they can be frustrating over short
time frames. During such times it is comforting to be at least
somewhat diversified. We have spoken about and recommended
diversification within timing strategies many times in this
column. Believe me, it has its place in "your" timing portfolio.
"...If aggressive timing is causing you heartburn, try
diversifying."
If aggressive timing is causing you heartburn, try
diversifying. One of the easiest ways to diversify, while still
actively trading the markets, is to use sector funds. Our Sector
Fund Timer rarely has drawdowns, and is a powerful profit
generator. Let's take a look at the advantages of sector timing.
Trading The Sectors
How does a mutual fund market timer take advantage of
volatility, while protecting himself or herself from the very
real risks such volatility creates, as well as from the
potential drawdowns that can occur during such times? The answer
is by trading the sector funds. Here is a "quick" list of
reasons why:
1. Diversification: By having small positions in multiple
industries, you reduce exposure to any single industry being
affected by a negative news event.
2. Volatility: While individual sectors are no less volatile
than the rest of the market, they do not move together. So the
volatility to one's portfolio is considerably reduced.
3. Drawdowns: Because sector funds go to cash during sell
signals, and because there are always some funds in bull markets
at the same time there are others in bear markets (during which
those sectors are protected in money market funds), drawdowns
are kept to extreme minimums.
4. Good in All Markets: There are always single industries in
their own bull markets. Even during a cyclical bear market, such
as we experienced during 2000-2002, there were always some
industries moving higher. And if not, you are still protected by
being in money market funds.
5. Active Timing: Though sector timing is not aggressive, it is
certainly active. You will always be trading the bullish
sectors, and exiting the under performing ones. In some
respects, it is the equivalent of running your own well managed
mutual fund.
6. Trends: Industry sectors tend to trend. And when they trend,
they often move further (in either direction) than anyone
expects. During a strong bull run, it is common to find
individual sectors that double the gains of the overall market.
Winning The Battle
The FibTimer sector timing strategy covers 16 industry specific
sector funds found in the Rydex Fund Family. Several other
widely used fund families also have sector funds, including Pro
Funds and Fidelity Funds which can be used with our sector
timing signals.
Even in volatile market conditions, (current markets especially)
during which the overall stock market is performing abysmally,
the Sector Timer strategy performs exceptionally well.
"...because there are always some funds in bull markets at the
same time there are others in bear markets, drawdowns are kept
to extreme minimums"
Because those industries which are poor performers will push
their corresponding sector funds into cash positions, sector
timing winds up with only the most bullish sectors actually
invested. This is proactive money management at its best.
Constantly putting your money in the strongest sectors while
removing it from the weakest sectors.
This is where the diversity inherent in sector timing stands
out. Top performing sectors are where your timing funds are
allocated, and no one sector can cause irretrievable damage to
the portfolio should that industry collapse without warning.
But most importantly, as a "diversified" strategy, sector timing
is winning the battle against a very difficult stock market.
Conclusion
Over the years, sector fund timing may go down as the "best
strategy ever created" because of its ability to target funds
into "only" those industry sectors which are performing well.
The low drawdowns, low volatility and diversification inherent
in sector timing, not to mention strong profitability, cause
this strategy to stand out from all the others.
In volatile market conditions, such as we are experiencing now,
sector timing can create profits when other traders are lucky
just to be holding onto their capital. Drawdowns, if they occur
at all, become almost a non-event.
While sector timing may not make huge gains during cyclical bear
markets, being mostly in cash, the strategy will protect your
investment capital. And it will then outperform during bull
markets, always keeping you invested in those industries that
are in their own bull markets.
Sector timing does require active participation. The FibTimer
Sector Timer usually makes a change once or twice a month.
Sector timing does require a minimum account size. Remember,
there "could" be as many as 16 open positions at any one time,
and closed (bearish) positions should be in cash (money market
funds) with those funds remaining untouched. A good guess is
that a sector timing portfolio should be at least $20,000 -
$25,000 to start.
The FibTimer Sector Timer is my personal choice for IRA accounts
(including my own accounts). Its potential is excellent, there
are no short (bearish) trades so whipsaw losses are a non-event,
and it only requires a couple of minutes a day to check for and
make changes if they are needed.
Be sure to read the "Trading Rules and Details" at the bottom of
the FibTimer Sector Timer report page before using the Sector
Timing strategy.