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Author: trader2012 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 2165  
Subject: Some ETFs to Explore Date: 6/15/2012 6:14 PM
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The recent ETFDB newsletter profiled “3 ETF Types For Downside Protection”.

RBS’s family of ”TrendPilot” exchange-traded notes offer investors exposure to a dynamic trading strategy applied across a variety of asset classes. Each fund tracks a rules-based index that strategically shifts allocations based on a simple historical moving average. The strategy is relatively straightforward: when an ETF’s underlying index is at or above its 100-day simple moving average, the fund goes long the underlying securities. If, however, the index closes below the simple moving average for five consecutive sessions, the ETF will shift exposure to “safer” short-term U.S. Treasuries.

China Trendpilot ETN (TCHI)
US Large Cap Trendpilot ETN (TRND)
US Mid Cap Trendpilot ETN (TRNM)
Gold Trendpilot ETN (TBAR)
NASDAQ-100 Trendpilot ETN (TNQD)
Oil Trendpilot ETN (TWTI)
http://etfdb.com/2012/etfs-for-downside-protection/#more-584...

The idea is attractive. An investor would own the underlying when it’s doing well, and he/she be put into cash when it isn’t. So I got to wondering how such an idea might work out if it were applied to bond funds. But, first, as with any experiment whose results one wants to apply, the experiment itself has to be replicated.

It’s safe to guess that their large-cap trend fund, TRND, would use the SP500 index as the underlying. So I plotted SPY (as a way to pick up dividends) against TRND and applied a SMA100. As you can see from the linked chart, the fund sat in cash from early Aug 2011 to late Dec 2011. OK, so far, so good. The fund seems to be doing what they say they would do. When a crossover occurs and persists, they get out. http://finance.yahoo.com/echarts?s=SPY#symbol=spy;range=1y;c...

So the next question becomes, “Why a 100-day moving-average (and not other parameters?) and why a simple moving-average (as opposed to other types)? The answer to the latter question is easy. Simple moving-averages (SMA) are the easiest to calculate, and they also are very robust, besides being able to closely replicate the behavior of the other common types (exponential, front-weighted, triangular, etc.) simply by varying the parameters of the SMA until it closely matches the EMA, WMA, etc. So, on their choice of moving-average type, I have no quarrels. SMAs are plenty good enough. What I do have quarrels with is their choice of parameters.

So I started running tests which you should duplicate. E.g., instead of 100, I plotted 90, 100, and 110 and saw no significant differences in the signals generated, as should be expected. But widening the parameter set to 50-100-150 did begin to make a difference, as should be expected. http://finance.yahoo.com/echarts?s=SPY#symbol=spy;range=1y;c...
So the next question becomes, “How fast do you want to get in/out?” meaning how much delay in the signal set are you willing to tolerate and/or by how much are you willing to let prices get away from you, or move against you, before you act?

Hold that thought in mind and take a look at another of their funds, the one that tracks the price of gold. http://finance.yahoo.com/echarts?s=GLD#symbol=gld;range=1y;c... In this case, a 100-day SMA does a very sucky job of creating acceptable entry/exit signals, but a 25-day SMA does a pretty efficient job of capturing the bulk of the available moves.

Obviously, a lot more testing would need to be done with various indexes and parameter combinations. But two conclusions already emerge:

(1) Their funds can be done better by individual investors and don’t need to be bought.
(2) Every index is going to have its own personality and needs to be traded on its own terms.

Charlie
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Author: kahunacfa Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2160 of 2165
Subject: Re: Some ETFs to Explore Date: 6/28/2012 12:44 PM
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So the next question becomes, “Why a 100-day moving-average (and not other parameters?) and why a simple moving-average (as opposed to other types)? The answer to the latter question is easy. Simple moving-averages (SMA) are the easiest to calculate, and they also are very robust, besides being able to closely replicate the behavior of the other common types (exponential, front-weighted, triangular, etc.) simply by varying the parameters of the SMA until it closely matches the EMA, WMA, etc. So, on their choice of moving-average type, I have no quarrels. SMAs are plenty good enough. What I do have quarrels with is their choice of parameters. - trader2012 | Date: 6/15/2012 6:14:44 PM | Number: 2159

trader2012,

The choice of a moving average term, i.e. 10-day, 40-day, six months, one-year, and so forth is in fact quite abritrary EXCEPT, it is best to pick and use a time-frame that has become kind-of an "Industry Standard" for Technical Analysis.

History:

When I first started to invest, February 1969 in Honolulu I ONLY used Technical Analysis. Then I did not invest, I traded, and traded successfully. Started with $2K, the minimum required for a Margin account. Used Charts, especially the Dailygraph charts that were mailed to me at the end of each trading week. Those charts would arrive Saturday. Reviewed the charts each weekend, selected the trades for Monday morning when the markets opened @09:00 EST or 05:00 HST. The markets in NYC closed @15:00 or 11:00 HST. My brokerage account was with the Honolulu Office of Merril Lynch, Pierce, Fenner & Smith(MLPF&S). A Buy or Sell transaction then used to be very expensive, in the range of $120 to $185 for a Buy or a Sell. Would, then usually have several trades per week. Since the main markets closed at 11:00 local time, I would very often go to have lunch with Ron, my MLPF&S broker at The Pub in downtown Honolulu. Last time I was in Honolulu, it was still there, still open and doing a brisk lunch time business. By March 1972 when I left the Islands, the trading account, with no new money, had a value of over $20K. Motovated by Louis Rukeyser's Wall Street Week on Maryland Public Broadcasting, I returned to the University of Wisconsin actually learn how to invest -- NOT Trade.

At the University of Wisconsin, I took this outstanding one year investment course, http://www.UWASAP.org. The course was founded my my UW Madison Adviser.

Kahuna, CFA
Venture Capital
General Partner
2012 - 2019

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