volatile traders can feel their stress levels rising. But there is no
reason to be stressed if you are diversified. If a position turns into a
losing one, but that position is only 10% of a well diversified timing
portfolio, you will not feel the same as you would if it was your entire
portfolio. Diversified portfolios are just as profitable, but you sleep
better.
The current markets are quite volatile. Rallies lasting only days,
followed immediately by 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 (trendless) 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 active
market timing and in fact all 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. There are powerful trends in progress
right now! Look at the gold, the dollar and bonds.
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. One of
the easiest ways to diversify, while still actively trading the markets,
is to use sector funds. 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.com (http://www.fibtimer.com) 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 ProFunds and Fidelity Funds which can be used with our sector
timing signals.
Even in volatile market conditions the Sector Timer strategy performs
exceptionally well.
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. A one or two percent drawdown in a sector that is
only one-sixteenth of your portfolio, will not cause anyone to lose
sleep.
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. And
remember, cyclical bear markets are not an every-day occurrence.
Sector timing also requires 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 if using a Rydex
or ProFunds account.
###
Press Contact: Frank Kollar
Company Name: KOLLAR MARKET ANALYTICS INC
Email: email protected from spam bots
Phone: 434 823 8182
Website: http://www.fibtimer.com
AndhraNews.net News for May 15, 2006