Step-By-Step for July 2018
Manually Charting the Picks
07/01/2018
David Alan Carter
This was a tough month for manual charting, to be sure.
One of the common problem with manually charting the strategy's picks for an upcoming month is the time frame for the lookback period. This article addresses that critical step for the month of July 2018, and sets up the test on the free charting service Stockcharts.com. More specifically, we'll be using their PerfChart located under the "Free Tools" menu.
As we learned, the strategy charts the relative performance of our ETF selections by comparing their total returns using a 3-month lookback period. Because we'll be using Stockcharts.com, we'll need to translate those 3 months into trading days. In trading terminology, 3 months equals 63 trading days. But because we're comparing returns, we'll need to add one more day to make it 64.
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Sidebar: To calculate a 1-day return, we need to go back 1 day from the 'target' date. Why? Because a single day only provides one closing price. One price does not give us a return. We need two days of closing prices to give us that one day's return. Likewise, if we're calculating a 63-day return, we need to go back 64 days from the 'target' date to begin the process. (For our purposes, the 'target' date is the last trading day of the month.)
So, here's where we're headed. We'll first do the 60% portion of the portfolio, the equity trade. I've preloaded the ETFs into the links below. (The equities link includes SHY, our stand-in for cash. More on this below.*)
Secondly, we'll do the 40% portion of the portfolio, the bond trade.
PerfChart for Bonds
By default, the date slider beneath the chart is set at 200 trading days. We'll need to change that number to 64 in order for the chart to give us our 3-month return.
TIP: double-click inside the little slider box, and you can then type in the specific number you need -- "64" in this case. Then hit "enter" on your keyboard. That should do it. You can then move that 64-day slider one day at a time, forward or backward, by clicking the little arrows to either side of the slider. One click moves the slider one day, while keeping 64 days as the time frame.
​​Table 1 shows the set up for our "risk-on" equities test. Again, this is the PerfChart for Equities preloaded with our 4 ETFs. Note that the slider in the lower right hand corner is set to 64 days. With that done, we make sure the end date in the upper left hand corner reflects the last trading day of the month (our target date). If not, we can move the date slider one day at a time by clicking the little arrows on either side, keeping the 64 day time frame intact.
Table 2 shows the test results. I had to magnify those results because the pattern was so tight. And because of that tight pattern, one single day, more or less, throws off the results.
​​Table 3 shows the set up for our "risk-off" bond test. Again, this is the PerfChart for Bonds preloaded with our 2 bond ETFs. As before, we make sure the slider in the lower right hand corner is set to 64 days. With that done, we note that the end date in the upper left hand corner reflects the last trading day of the month (our target date).
Table 4 shows the test results. Again, for clarity, I magnified those results because the pattern was tight.
TIP: Want to avoid eye strain or piddling around with magnifying glasses? When the trendlines are in a tight pattern, look to the lower left-hand side of the table, and find the little square symbol that contains a green and red bar (hovering your mouse over the symbol will display the words: "Show Histogram Chart"). Clicking that will transform the previous line chart into a... histogram chart, a graphical display of data using bars of different heights. And because the percent returns for each ETF are presented, the top pick will become much more evident. [Thanks, Bill C.]
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Here's what the histogram chart looks like for the equity side of the portfolio:
So for July 2018, the strategy selects QQQ for the 60% equity side of the portfolio, and JNK for the 40% bond side.
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If it's any consolation, it's usually not this hard. In fact, I can usually use the 3-month button on my Schwab chart page and the results sync up with the strategy's picks.
But not always.
When chart patterns get tight, or adjusted data diverges from unadjusted data,** small details loom large. If I want to exactly match the strategy's picks, I'll use Stockcharts.com and 64 days on the slider.
Of course, whether or not an exact match is always absolutely necessary, assuming two ETF are tracking together in a tight formation (such as IWM and QQQ in the first magnifier above), is another story. [Here's how that story ends. When two funds are tracking this closely together at the end of a 3-month lookback, it's pretty much a toss-up as to which one will outperform in the coming month.]
Hope this helps.
Regards,
David
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* Remember the cash trigger: If none of the four Equity Funds are tracking above the 0.0% mark (the cash line), that portion of the portfolio goes to cash. So what is SHY and why is its graph line on the chart? SHY is the 1-3 year Treasure Bond ETF. The strategy uses SHY as a stand-in for cash, and most months SHY tracks close to the 0.0% line. But technically, it's the trendline of SHY that the strategy uses to determine whether or not the cash trigger comes into play. I've included SHY in the Equity Funds link (above).
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