The most robust investment strategies are often the most simple. — Nickolas Atkeson – Founding Partner Delta Investment Management.
I could not have agreed more. For teachers, non-location based travelers, and common folks like us we need simplicity and effectiveness in investing.
As Atkeson mentions in today’s issue of IBD print edition ‘We target high relative-strength stocks experiencing the fastest price appreciation over the past six months.
I will elaborate on relative strength in other posts, but the fundamental philosophy of yours truly is this : Price is the true North star.
Combined with the basic physics principle Newton’s first law – A body in motion continues to be in motion, unless acted upon by an external force.
We have a simple strategy – If the price is increasing as the volume is increasing we have a uptrend.
Now let’s look at: Guggenheim S&P 500 Equal Weight (RSP). It was created in 2003. An equal weighted index is just as it sounds. Every stock in the index has the same weight, regardless how large or small the company is. This gives us a broad exposure to the market. The greatest diversification with equal exposure to fastest and slowest moving stocks.
The S&P 500 is a market capitalization weighted index. The market capitalization of each stock is determined by taking the share price and multiplying it the number of shares outstanding. The companies with the largest market capitalizations, or the greatest values, will have the highest weights in the index.
Why does it matter: Equal weighted index tracks more closely the price performance of small growth companies when compared to S&P 500. Small caps will also have they say.
For example : Going to the S&P fact-sheet, as of March 2013, AAPL has index weight of 2.97% with its value of 415 million, whereas small companies First solar (FSLR) have no say at all.
How does it affect? FSLR grew 70% in price in the last 3 months, whereas AAPL grew 0%.
So we want an index that would reflect that, ergo: Guggenheim S&P 500 Equal Weight (RSP)
Now here is the most important thing I learned from the Atkeson’s report (page A8, print edition IBD): His company just uses 1 indicator: He sells all his stock holdings if more than half of the stocks in the index fall below their 75 days moving average (100% in cash), and buys if 50% or more stocks rise above the 75 day moving average.
Isn’t that wonderful and simple!! It reflects his performance in the above graph!
He adds “Two ETFs that offer excellent exposure to this group of outperforming securities are PowerShares DWA Momentum Portfolio (PDP) and PowerShares DWA SmallCap Momentum Portfolio (DWAS). PDP holds 100 high relative-strength, mid- and large-cap stocks and is rebalanced quarterly. DWAS holds 200 stocks. Combining PDP and DWAS provides exposure to 300 high relative-strength stocks covering the full range of market caps.
I personally like DWAS – its small cap technical leaders index. If we have a robust exit strategy (only around 1-2% risk management), this is a fantastic ETF.