2023-11-07 00:24:25 ET
Summary
- The Sector Bullish Percent Indicator investing model uses BPI data to determine oversold and overbought sectors in the US Equities market.
- The model recommends purchasing ETFs for oversold sectors and placing trailing stop loss orders on overbought sectors to preserve capital.
- The Carson portfolio, managed using the Sector BPI model, has outperformed the SPY benchmark and other potential benchmarks since November 2022.
Several months ago I introduced the Sector Bullish Percent Indicator (Sector BPI) investing model, a contrary approach to portfolio management. The hypothesis of this model is based on Bullish Percent Indicator ((BPI)) data for the eleven sectors that make up the U.S. Equities market. The most recent BPI data is shown below.
When a sector is oversold, purchase shares in the Exchange Traded Fund ((ETF)) for that particular sector. Currently, two sectors, Staples and Materials are oversold while Energy is overbought. Oversold is when 30% or fewer stocks within the sector ETF are bullish. Overbought is when 70% or more stocks with the sector ETF are bullish.
When a sector ETF reaches the overbought zone, place a 3% Trailing Stop Loss Order (TSLO) on the ETF to preserve capital or reduce losses. Should a sector reach the 80% bullish level I lower the TSLO to 2%. If the sector reaches the 90% bullish level I lower the TSLO to 1% as there is a high probability the sector will drop from such lofty levels.
Below is the Investment Quiver and current holdings for a "live" portfolio known as the Carson. Investment Quiver is defined as the potential securities for investing. With the Carson this includes eleven (11) sectors and three broad security ETFs, VTI, VOO, and ESGV. The reason for including these three broad security ETFs is explained later.
The percentage to invest in a sector ETF that shows up as a Buy is based on a three-year volatility average. For example, 9.0% is recommended for Materials ( VAW ) while it currently holds 9.66%. I use the recommended percentage as a minimum or base amount.
Carson Investment Quiver and Holdings (ITA Wealth Management Spreadsheet)
Below is a worksheet that comes out of the Kipling Spreadsheet. This is where the money manager determines how many shares to invest in each sector that is oversold. With the Carson, the oversold sectors (Materials and Staples) are fully populated.
While no Buy or Sell recommendations are required for the Carson, Real Estate is under populated so a limit order is placed for 10 shares at a price well below the current price. Real Estate was recently one of the oversold sectors.
Below is the performance data for the Carson beginning on 12/31/2021. The Carson holds a commanding lead over the [[SPY]] benchmark as well as five other potential benchmarks.
Note: The Carson has only been managed using the Sector BPI model since early November 2022. The performance would be even better had the Sector BPI model been used for the full 22 months.
Portfolio risk is an important factor in portfolio management. The following data table deals with risk issues. Of the five risk ratios, the most important are: Jensen Performance Index, Information Ratio, and Sortino Ratio. Pay particular attention to the Jensen.
The red curve shows Jensen (sometimes known as the Jensen Alpha) data over the past year. The slope of the Jensen is currently negative.
Risk Ratios (Risk Ratio Worksheet from ITA Kipling Spreadsheet)
The following Portfolio Report shows detailed information as to how well the different sector ETFs performed while part of the Carson portfolio. Note that ESGV, VOO, and VTI failed to add value to the Carson. Their inclusion is explained below.
While every sector ETF did not outperform SPY, many did and this is why the overall portfolio bested the SPY (S&P 500) ETF.
What is a weakness in the Sector BPI investing model? Assume an ETF reaches the overbought zone (70% or more bullish stocks within the sector) and is then sold after it drops 3% and the TSLO is struck. Further assume the ETF rises back into the overbought zone before it ever dropped back into the oversold zone. One is left hold cash while the market moves higher.
To patch this potential weakness in the Sector BPI model three broad U.S. Equity ETFs are included. One could get by with including only one. I have added three as VTI covers the entire equities market, VOO mirrors the S&P 500 and ESGV is included for investors interested in socially responsible investing.
If extra cash is available, and this is frequently the case as sectors rarely use all cash, I rely in the Kipling spreadsheet to recommend which of the three broad indexes is the best buy.
While the Sector BPI investing model is still in the hypothesis stage, early results are quite positive. As a result, I'm in the process of moving several more portfolios over to this model. With more portfolios using the Sector BPI model I am able to reduce what is known as the luck-of-review-day since these portfolios will be reviewed or updated on different days of the week and at different times of the month.
For further details see:
Sector Bullish Percent Indicator Investment Model Update