Markets I Trade: December 11, 2018

In my non-registered investment account I am developing my trend following strategy continuously. I don't pretend to have all the answers; I am always exploring and learning and I am sharing that journey with you on this blog.

All I know for sure is that I want every trade to end in three ways: a small loss, a small gain, or a large gain. I predetermine my risk on each trade and aim to make sure that risk is never exceeded.

Due to account size, my brokerage, my location, and my experience, I am somewhat limited in what I can effectively trade at this time given my risk tolerance. I recently have done a lot of self education on options and have begun to use LEAPS options in my strategy.

I try to limit my investing process to the most liquid markets that have the highest potential for bigger price movements. This generally means ETFs, certain leveraged ETFs, the USD/CAD currency pair, and certain emerging market currencies against the Canadian dollar or U.S. dollar.

Thankfully this covers a large portion of the investable market. ETFs track many different markets and also can provide exposure to currency movements (unhedged country ETFs).

With long call options and long put options, I can very effectively access markets with a relatively high degree of leverage and great risk management. I use only LEAPS options—options that expire more than one year from the entry point.

To monitor each instrument I trade, I look at moving averages and volatility measurements. Although there is no holy grail indicator, looking at these tools can help paint a pretty solid picture of where the markets are going.

Moving averages help identify the direction of trends and can help show turning points in direction. Using volatility measures makes it easy to size each position based on pre-determined exit points. High volatility markets translate to smaller positions while low volatility markets allow for larger positions.

In a currency pair trade, I have found that moving average indicators can be quite effective as well. However, in using moving averages alone, the trader doesn't have the same embedded exit points to help determine position sizing.

This makes moving averages most effective for trading my two primary account currencies—the USD/CAD pair. I don't try position size the USD/CAD pair as I am equally happy with my account cash being 100 percent in the Canadian dollar or 100 percent in the U.S. dollar.

I also look at breakouts, although I am not using them to enter or exit positions. Breakouts can be very helpful in confirming trends and seeing points of previous resistance.

Brazil (EWZ)

Given the current market environment, I am holding very few positions at this time.

In today's post I will provide an update on my Brazil trade.

Back in early October, I took an upside position in Brazilian stocks. I talked about that position entry several weeks ago in the November 13 post.

Since my entry point, my Brazilian stock trade has done very well. It has jumped about 15 percent and, barring a massive gap over my stop-loss, this will be a profitable trade that exceeds my initial risk.

EWZ (Weekly Bar)

Source: Yahoo Finance

Since June 2018, where EWZ was technically oversold, and September 2018 where EWZ was in an interim bottom, we saw a quick jump up. However, EWZ seems to have stalled out at the moment and I am looking for new medium-term highs to be made.

That said, I still think EWZ has a decent technical picture. A move over $42 would solidify the upside and could be a decent entry point.

Upside Optimism

  • An interim higher high was made when EWZ jumped over $37.65 in early October.
  • At current levels, EWZ is not technically overbought and is sitting roughly in the middle of the optimism range.
  • Since early October, the price is holding on top of the 40-week SMA.
  • Volume seems to be generally higher on upwards moves, indicating desire to buy and hesitation to sell.

Upside Caution

  • The price has fallen slightly through the shorter term indication—the 10-week SMA.
  • Although it is flattening, the 40-week SMA is still declining at the moment.
  • The price is now effectively in a trading range of $37 to $42 over the past two months.

If EWZ continues to bounce up from its current price of $38.70, the $47 level will be a key point to look at. That is when the prior strong upwards move stalled in January 2018. If EWZ moves past that, it would signal strength in the upside.

Right now, EWZ would have to jump more than 20 percent to hit $47.

EWZ (Daily Bar)

Source: Yahoo Finance

Looking at the daily chart, we can clearly see the trading range that has formed over the past two months. Although it would clearly be nice to see repeated higher highs, even in the daily chart, the $37.50 level has held twice now.

This chart shows an update on my current stop level. My exit on this trade has moved up and is a little over $37. The stop has really tightened up to the price over the past few weeks and is now within 5 percent of the price.

I entered this trade using a liquid 3x leveraged ETF, trading as BRZU. If I had to do this trade again, I would consider using EWZ long-dated options as they are highly liquid and a more efficient use of capital.

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RM Portfolios Update: November 2018

Welcome to the November update for the different portfolios which I track here at The Rich Moose blog.

I use Canadian-listed ETFs where possible for the models I share to keep the tracking, purchasing, and selling easy for Canadian readers. However, because they are not available in Canada, I use U.S.-listed 3x Leveraged ETFs and track returns in U.S. dollars for some of the Leveraged Barbell Portfolios.

See the list of my favourite Canadian ETFs on this page.

Vanguard All-in-One Portfolio ETFs

These Vanguard ETFs hold multiple assets inside a single ETF. It's nearly a perfect solution for investors who want to buy just one ETF and hold it forever without worrying about re-balancing, tax trigger issues, and excessive costs. Read my post reviewing these products to get an idea of how they are designed.

While I personally believe there are better ways to invest when you have a larger investment account, these Vanguard Portfolio ETFs are great for newer investors, people who don't want to spend any time thinking about their investing process, and investors who want to minimize costs that would otherwise use a "robo" advisor or a similar, more expensive passive investment approach.

Here are the November monthly & year-to-date returns of these portfolio products (benchmark data).

Vanguard Growth ETF (VGRO.TO)
November:  +1.95 percent
YTD:  +0.55 percent

Vanguard Balanced ETF (VBAL.TO)
November:  +1.67 percent
YTD:  +0.39 percent

Vanguard Conservative ETF (VCNS.TO)
November:  +1.39 percent
YTD: +0.20 percent

The decision between choosing the Growth ETF, Balanced ETF, or Conservative ETF depends on your tolerance for risk and your investment time-line. The Growth ETF should have the highest returns and highest draw-downs over time while the Conservative ETF will show lower returns with more stability. The Balanced ETF is a middle-of-the-road option.

12-Month Dual Momentum Strategy

Dual Momentum is a strict, rules-based investing approach which uses an easy performance evaluation to decide your investment holding for each month.

Most months the holding will stay the same; trades occur fewer than two times per year on average.

By evaluating just once each month, you can reduce the negative effects of market noise and spend very little time managing your investments.

I use Dual Momentum in my own personal portfolio. Looking at the history, I think Dual Momentum investors have a good opportunity to have market beating performance with lower drawdowns.

The Dual Momentum strategy—as tested by Gary Antonacci of Optimal Momentum—has shown fantastic results over complete market cycles. Read his website, book, and research papers to get a full understanding of how the strategy works.

In my model, I evaluate the holding each month based on the 12-month gross performance of the MSCI USA Index, the MSCI ACWI ex-USA Index, and the annualized past return of 3-month U.S. Treasury bills.

Each month I will share the model signal as either U.S Stocks, International Stocks, or Bonds. Read the linked posts to understand the investment options and other questions related to these signals.

See how the Dual Momentum portfolio would have performed compared to a buy-and-hold index portfolio over the past 5 decades by visiting the Portfolios page.

Index Year-to-date Performance:  +1.01 percent
Index November Performance:  +1.95 percent
Current recommendation:  U.S. Stocks

Leveraged Barbell Portfolios

The Leveraged Portfolio strategy uses a unique mix of short-term bonds and leveraged stock ETFs to achieve growth while limiting downside risks. It's essentially a barbell strategy where all the risk and growth is contained in a small portion of the entire portfolio.

Although I add a trend factor into the analysis for my personal portfolio, the strategy I use in my non-registered account works very similar to this Leveraged Barbell Portfolio.

If you choose to implement the strategy, make sure you treat each account as a whole portfolio. Do not put bonds in one account and leveraged stock ETFs in another account!

Leveraged portfolios are re-balanced just once per year. For this reason, I will always track the Year-to-Date returns only.

Canadian-listed ETFs (2x Leverage Stock ETFs)

HSU.TO (50%) & XSB.TO (50%):  +1.74 percent
HSU.TO (30%) & XSB.TO (70%):  +1.42 percent

U.S.-listed ETFs (3x Leverage Stock ETFs)

UPRO (40%) & BSV (60%):  +0.80 percent
UPRO (30%) & BSV (70%):  +0.68 percent

These allocations are just a few examples of how Leveraged Portfolios can work. Leveraged ETFs amplify positive and negative returns so they should always be paired with low-risk assets to meet your personal risk tolerance. In a non-registered account, you may use margin debt to purchase your stock index ETF for somewhat better tracking.

Comments & Questions

All comments are moderated before being posted for public viewing. Please don't send in multiple comments if yours doesn't appear right away. It can take up to 24 hours before comments are posted.

Comments containing links or "trolling" will not be posted. Comments with profane language or those which reveal personal information will be edited by moderator.