Last week I shared with you how the TradeStops SSI strategy generated an impressive average gain of 37% across a deep data set of 1,300 securities back-tested over a 20-year period. This week I’m going to show you how you could use a similar strategy to beat the market on a much smaller set of ticker symbols.
A number of users wrote in after last week’s essay, saying that the study looked great but that it wasn’t exactly something that they could “try at home.” Point taken.
Last week’s study wasn’t meant to be a strategy for individual investors to follow. It was meant as a robust test of the SSI strategy over a diverse set of equities and a long period of time. The SSI strategy passed with flying colors.
This week I asked my research team to test the same kind of SSI-based strategy across the 9 Select Sector SPDR ETFs. These 9 ETFs break up the stocks of the S&P 500 into 9 sector-based groups:
- Consumer Discretionary (XLY)
- Consumer Staples (XLP)
- Energy (XLE)
- Financials (XLF)
- Health Care (XLV)
- Industrials (XLI)
- Materials (XLB)
- Technology (XLK)
- Utilities (XLU)
We came up with two different strategies for your consideration using just these 9 ETFs. Both had very good performance.
The first strategy we tested was extremely simple. Here are the rules:
- Be fully invested at all times in whatever Sector SPDR’s have an active SSI (i.e., the SSI is not in the red zone).
- Rebalance (with the TradeStops Risk Rebalancer) on the first trading day of each month.
- If an SSI stop loss is hit on a position mid-month then exit the position and keep that portion of the portfolio in cash until the next monthly rebalancing.
Beginning in the year 2000, the strategy handily outperformed the S&P 500. The S&P 500 is up 47% in that time, with 2 periods of steep decline. The Sector ETF strategy is up 90% over the same period of time.
That’s nearly double the original performance … and it came with less risk. There was only one time that the strategy suffered a serious decline and even then, the loss was less than that of the S&P 500.
There’s another strategy that my research team discovered that even outperformed this first strategy. This second strategy tripled the return of the S&P 500. I’ll show you the chart first this time.
This system resulted in 72.62% winning trades. And the maximum system drawdown was only -17.96%.
The unique twist to this particular strategy is that it requires that 7 out of the 9 Select Sector SPDR ETFs have active SSI signals in order for the system to be fully invested. Here’s how it works:
- To initiate trading, 7 of the 9 ETFs have to have an active SSI Entry signal. You’ll notice that the first entry into the markets was not until late 2003.
- If any position hits the SSI Stop, exit that position immediately.
- Rebalance on a monthly basis (first trading day of the month) if and only if there are 7 or more ETFs with active SSI signals and one or more SSI signals occurred during the month (an active stock was stopped out or an inactive stock triggered a new entry signal).
- Rebalance annually if no rebalancing events occur over a 12-month period.
Doable. Right?
I’m pretty darn intrigued by these results. I hope you are too,
