Author: CJ Brott, Capital Ideas

Covestor models: Macro Plus Income, ETF Only

Both of our investing models, ETF Only and Macro Plus Income, have adjusted portfolio holdings and trading strategies as the market has evolved.

Since the October bottom of last year, market volatility has declined and the markets have trended higher.  As measured by the decline in the CBOE VIX to the rise in the Average Directional Index (ADX) price trends have surfaced which enable breakout buying and other momentum strategies to be successful.  Because of this we have diversified the ETF model from four holdings concentrated in food energy and mid cap US equities into more momentum driven ETF’s including PowerShares QQQ Trust (QQQ),SPDR Select Sector Technology Fund (XLK) and IShares MSCI Brazil (EWZ).

The Macro Plus Income model has successfully traded GNC Holdings (GNC), Ancestory.com (ACOM) and exited the position in Cascade (CASC). These securities demonstrated the type of price and earnings momentum we find attractive in a trending market.  The additional returns earned supplement returns from our core approach of investing in higher current income securities.  However, they also require being quick to liquidate such holdings when they have reached full potential, or when the market becomes exceptionally overbought and subject to risk of a pullback.

At the moment, according to both Bespoke Investment and Lowry’s Investment Research, this is the current condition of the market (overbought).  When we see these investment letters research agreeing with our own propriety indicators we are quick to raise cash and liquidate single momentum based stocks.

However, we will hold recently acquired momentum ETFs QQQ and iShares Dow Jones Transportation Average (IYT) pending confirmation of a market downturn.  Although the market is extended it may continue to move higher as underinvested entities are forced to commit new cash.  Therefore we will continue to liquidate specific stocks as they reach full valuation targets, but will refrain from selling broader market based ETFs.

Rather than calling a market top we hope to let the markets tell us when to exit broad holdings represented by the ETFs in our portfolios.  While monitoring our own indicators and those of Lowry, Bespoke and other experts, we will watch and wait to see if the market resolves its overbought condition through either time or price.