Strongest Market Timing Signals To Enhance Bull/Bear ETF Returns

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Introduction

Readers familiar with my doctoral research surrounding momentum cycles and signals to forecast market reversals will not need any background discussion on my latest developments. For those who are new to my weekly breakout stock picks based on multiple discriminant analysis (MDA) of over 75 variables and market timing indicators, you may benefit from reading some of my current and background work discussed in detail here: How I have been applying the momentum gauges and signals in the past:

How I use the MDA screener to select stocks every week in Segment 6 (Positive Acceleration) of my research that are the positive scores of momentum. I haven’t offered short selections since 2017, but they come from Segment 2 (Negative Acceleration) that represents the negative scores of momentum on the gauge:

A brief summary of how the momentum cycle is measured and what goes into the Momentum Gauges. More details are available to members including presentations on this subject and my doctoral defense material:

What now?

Having found a particularly reliable signal using the proprietary Momentum Gauges (described in many other articles and those linked above), I have naturally begun extending this market signal model to numerous profitable applications. This article reviews the 1-year gains produced from a sample of leveraged ETF/ETNs combinations in the market tested to further enhance market returns. The beauty of these comparisons is that they include some of the largest declines on record in 2018 as well as the very positive Q1 recovery in 2019 to thoroughly test the signals over 12 very volatile months.

The best returns using the Momentum Gauge as a market neutral trading model to switch between bull/bear fund combinations have come from the BMO REX MicroSectors FANG+ Index 3X Leveraged ETN (FNGU) and -3X Inverse Leveraged ETN (FNGD) in combination. Over the past 12 very volatile monthly periods, the SPDR S&P 500 ETF (SPY) has returned +3.50% through today.

In contrast, the 1-year gains produced by the FNGU/FNGD combination are +137.58%, even with a 1-day trading delay applied between signals. Nine bull/bear trading signals were generated by the Momentum Gauges over this 1-year period and the most profitable single bullish period generated +52.96%, while the largest bearish signal produced +44.19% returns.

Momentum Gauge Trade Signals (FNGU/FNGD) 1-Year +137.58%

The actual trading signal is highlighted in the red bar chart at the bottom of the FNGU/FNGD and Total Return chart below:

(Source: V&M Breakouts)

Without the use of market timing signals, the FNGU/FNGD funds returned:

Fund Strategy 1-Year Return
FNGU (3x FANG+ Index Bull Fund) -35.43%
FNGD (3x FANG+ Index Bear Fund) -52.74%
FNGU/FNGD Combination with Momentum Gauge Signal +137.58%

Again, in combination with the Momentum Gauge signals, these 3x FANG+ Index funds have returned +137.58% for the best combination of any ETF/ETN tested to date. The FANG+ Index sensitivities of these two ETNs are the strongest profit producers of any other market funds analyzed to date. The largest signal contribution from FNGU was +52.96% and from FNGD was +44.19%, each over a period greater than 27 trading days.

In addition, the AdvisorShares Ranger Equity Bear ETF (HDGE) was tested as a non-leveraged actively managed bear fund to replace FNGD in the combo trade above. The result of the FNGU/HDGE combination was a highly significant +86.46% 1-year return. The two largest contribution periods from HDGE during the downturns with a 1-day delay trading interval were 11.02% and 5.58%.

Momentum Gauge Trade Signals (SPXL/SPXU) 1-Year +102.18%

Members asked me to test the Direxion Daily S&P500 Bull 3X Shares (SPXL) and Bear -3x Shares (SPXU) as these ETFs provide high trading volume and are also optionable for even further gains. The actual trading signal is highlighted in the red bar chart at the bottom of the SPXL/SPXU and Total Return chart below:

(Source: V&M Breakouts)

Without the use of market timing signals, the SPXL/SPXU funds returned:

Fund Strategy 1-Year Return
SPXL (3x S&P 500 Index Bull Fund) -35.43%
SPXU (3x S&P 500 Index Bear Fund) -52.74%
SPXL/SPXU Combination with Momentum Gauge Signal +102.18%

Again, in combination with the Momentum Gauge signals, these 3x S&P 500 Index funds have returned +102.18% for the second-best combination of any ETF/ETN tested to date.

The largest signal contribution from SPXL was +52.12% and from SPXU was +40.62% each over a period greater than 27 trading days.

Momentum Gauge Trade Signals (TQQQ/SQQQ) 1-Year +122.06%

Taking a close look at one of the best Nasdaq ETF combos, ProShares UltraPro QQQ (TQQQ) and Bear -3x Shares (SQQQ), we find these ETFs provide high trading volume and are also optionable for even further gains. The actual trading signal is highlighted in the red bar chart at the bottom of the SPXL/SPXU and Total Return chart below:

(Source: V&M Breakouts)

Without the use of market timing signals, the TQQQ/SQQQ funds returned:

Fund Strategy 1-Year Return
TQQQ (3x Nasdaq 100 Index Bull Fund) -3.24%
SQQQ (3x Nasdaq 100 Index Bear Fund) -34.45%
TQQQ/SQQQ Combination with Momentum Gauge Signal +122.06%

Again, in combination with the Momentum Gauge signals, these 3x Nasdaq 100 Index funds have returned +122.06% for the second-best combination of any ETF/ETN tested to date.

The largest signal contribution from TQQQ was +67.36% and from SQQQ was +42.15% each over a period greater than 27 trading days.

Momentum Gauge Trade Signals (UWM/TWM) 1-Year +91.08%

Taking a close look at one of the best Russell ETF combos, ProShares Ultra Russell 2000 2x (UWM) and UltraShort Russell 2000 -2x Shares (TWM), we find these ETFs provide high trading volume and are also optionable for even further gains. The actual trading signal is highlighted in the red bar chart at the bottom of the UWM/TWM and Total Return chart below:

(Source: V&M Breakouts)

Without the use of market timing signals, the UWM/TWM funds returned:

Fund Strategy 1-Year Return
UWM (2x Russell 2000 Index Bull Fund) -20.86%
TWM (2x Russell 2000 Index Bear Fund) -34.45%
UWM/TWM Combination with Momentum Gauge Signal +89.08%

Again, in combination with the Momentum Gauge signals, these 2x Russell 2000 Index funds have returned +89.08% for strong annual results using a lower leveraged fund.

The largest signal contribution from UWM was +26.94% and from TWM was +39.10%, each over a period greater than 27 trading days.

Conclusion

Having run these results on top leveraged funds for the FANG+ Index, S&P 500, Nasdaq 100, and Russell 2000 where we would expect the largest gains, we find the FNGU/FNGD combination produces the best results. Mixing up fund combinations with the very strong TQQQ gains of 67.36% with the FNGD gains of +44.19% provided the highest mixed combination gain of +145.82% with a peak gain of +182.25 over the past 1-year period. These Momentum Gauge signals are updated daily for the best intraday opportunity to capture any major market changes. ProShares UltraPro Dow 30 (UDOW) and ProShares UltraPro Short Dow 30 (SDOW) were also evaluated with 82.75% 1-year results. A bit lower than the other 3x and 2x funds focused on smaller cap stocks with higher volatility.

I hope you enjoyed this extended application to ETF/ETNs of the Momentum Gauge models based on my MDA research spanning more than 75 top variables.

All the very best to you and have a great week of trading!

JD Henning, PhD, MBA, CFE, CAMS

If you are looking for a great community to apply proven financial models with picks ranging from short term breakouts to long term value and forensic selections, please consider joining our 300+ outstanding members at Value & Momentum Breakouts

Disclosure: I am/we are long FNGU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

2019-09-20 12:16:00

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