ETF Core Strategies
Aim: To trend-trade general equity ETFs so as to ride rallies and buck busts in the Australian share market.
Unlike share market tipsters, MarketTiming does not try to forecast share prices.
Hulbert Financial Digest, which has been tracking the accuracy of all leading US stock and mutual fund newsletter services for more than two decades, has found that 80% of them cannot beat the market indices. The truth is that predicting the share market is impossible on a consistent basis. No one can pick the top and bottom of a market. Only by reacting to market realities can an investor join a rally and abandon a correction.
MarketTiming focusses on several well recognised technical indicators to gauge the present direction and momentum of the share market. When all “bull” indicators turn positive, our Conservative Strategy generates a ‘Buy’ signal which lasts until all “bear” indicators turn negative at which point it issues a ‘Sell’ signal. In other words, when the bulls are stampeding, buy shares, and when the bears leave their lairs, sell shares.
Our Conservative Strategy consists of four directional or trend indicators (moving averages) based on the ASX All Ordinaries index and four momentum indicators based on that index and a stop loss limit.
An example of a moving average is the red line in the top section of the following chart:
In this case, it’s an 80 day moving average for the All Ords index over 3 years. At any time on the chart, the moving average represents the average value of the index for the preceding 80 days. When the index falls below this average it indicates that it has broken the previous trend and shares are no longer in a rising mode, indicating it might be wise to exit the market.
However, before doing so it’s worth checking the market’s momentum. The bottom section of the above chart shows a simple measure of the rate of change of the All Ords index. In this example if the index’s speed has decelerated dramatically (i.e. fallen below zero in the chart) that is negative news.
So if the share market index has fallen below its moving average and also lost speed it would suggest leaving the market until it reverses direction and picks up momentum. It’s like ceasing sailing when the wind loses direction and speed.
Our timing model is more sophisticated than this example because it uses not just one moving average and one momentum indicator but several trend and momentum indicators to confirm that both the direction and speed of the market have changed. In other words, we don’t just rely on one weather vane, but several, to validate what’s happening.
For those who are familiar with technical analysis, the types of indicators we use are:
Don’t worry if you don’t understand these terms as you only need to act on our ‘Buy‘ and ‘Sell‘ signals to avoid the worst of market corrections and crashes. For those who want definitions of these indicators, we suggest you buy a good technical book such as Martin Pring’s Technical Analysis Explained, McGraw Hill, 2002 or Google technical indicator glossaries such as:
Subscribers can find more detailed explanations of our modelling methodology on the “Technical” page of this website.