Sunrise at Painted Hills – Central Oregon
Since the Sector BPI investing model was launched a little over a year ago several tweaks or adjustments have been made to the BPI model. This blog post explains another adjustment or refinement. Rather than complicate the model, this version is one of reduction or simplification. To explain these changes it makes sense to apply it to an existing portfolio. The Pauling investment quiver is used for this explanation. Follow along as I outline the changes.
Investment Quiver
The major change in the version is to limit or reduce the U.S. Equity ETFs to VTI and VOO. Keep in mind that the performance goal is to outperform or equal the S&P 500. VOO in particular tracks that index. Both VTI and VOO have rock bottom expense ratios so we save there as well.
- Buy and Sell instructions for sector ETFs will not change.
- When a sector drops into the oversold zone (30% or lower bullish) purchase the sector ETF to the Max AA shown in the third column from the right. Example: Utilities recently dropped to 30% bullish stocks so the recommendation was to purchase sufficient shares of VPU so we end up with 9.6% of the portfolio invested in Utilities.
- When a sector reaches 70% or high on the BPI scale we place a 3% Trailing Stop Loss Order (TSLO) under that sector ETF.
- When cash is available we first fill up VOO to a maximum of 65% of the portfolio. If there is still cash available we add shares of VTI to the portfolio.
- Once VOO and VTI are part of the portfolio do not sell unless cash is required to purchase sector ETFs that are recommended for purchase. Sell VTI first as we want to stay invested in VOO as long as possible.
- Stay fully invested at all times unless cash is needed for an emergency.
In the case of the Pauling, the available cash will be used to purchase more shares of VOO until it reaches 65% of the portfolio. I might lift this percentage to 70%.
Tweaking Sector BPI Plus Investing Model: Part II
These changes are minor. The idea is to use VTI and VOO to keep pace with the S&P 500 and to use oversold and overbought sector movement to gain a slight advantage on the S&P 500.
Sector BPI portfolios that are holding SPY, VEA, VWO, and/or ESGV will have limit orders place on those ETFs and the cash will be used to populate or add shares of VOO. When sector ETFs are in the “neutral” zone we will focus on populating VOO and VTI with VOO as the primary target.
Questions and Comments are always welcome.
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This is smart Lowell. On both a relative and absolute basis (if possible on the latter), you want the system to beat the benchmark (SPX).
One additional tweak you might want to do is when a sector is near of below 30%, you might want to wait until the sector bullish percent moves from O’s to X’s (i.e. starts advancing). Not sure if this is in your system, but it prevents you from buying a sector too early. The trailing stops (and/or sell stops) are a good profit maintainer.
Craig,
Thanks for the suggestion. If I had made this move with the recent action in Utilities I would have missed the move or the Buy opportuity. Here is what I’ve been doing, and it does not always work.
When I sector hits the 30% level or below, I place a limit order so close to the going price that it is almost sure to hit. But I don’t go for a full position. I set one or more limit orders below that first limit order as a sector will generally move even lower after first hitting the Buy point.
This does not always work, but so far using several limit order seems to be working. I would not do this if commissions where what they were 20 years ago.
Lowell
Another way to prevent buying too early is to set buy stops at the prior weekly candlestick high. You can move the buy stop downward if the sector continues to fall.
Craig,
This is a good suggestion. I have been using buy signals when HA=3 and HA=5 are both green to purchase the oversold sectors. It’s been a while back but I purchased a sector at about BPI of 20, so had a good run.
~jim
Jim,
Are you using the Investment Account Manager (IAM) to track portfolio performance?
Lowell
Lowell,
I do not use IAM.
I have only dipped my toe into the BPI approach, but have looked at a couple of tweaks to your strategy, both at the oversold and undersold conditions. For example, I don’t wait until a sector reaches exactly 70% before putting in a TSLO. Close is good enough for me. At the same time, I base the TSLO on the Asking price, rather than last price.
Close is also good enough for me when oversold. For example, I just bought VPU at a 33 BPI. At the same time, I’m ok with being patient when purchasing. I think it was VOX or VDE that I picked up a few months ago at a price significantly lower than the price at BPI 30. I can’t remember what indicator I used at the time, all I know is that patience was rewarded. I will use 3-day and 5-day HA signals (turn green) for the next few oversold ETFs to determine when I put in a purchase order. Regardless of the color of those signals, I will likely put in an immediate purchase if the BPI increases above 33 to 35.
My main objective is not to be too rigid that I miss a “decent” sell at the top, or that I purchase a sector while it’s price is still trending down. Not trying to be a hog, just trying to be a svelt pig.
I hope all this makes sense.
~jim
Jim,
I see nothing wrong in adjusting the basic model to fit your needs and intuition.
If you run into this approach elsewhere, let me know. To my knowledge, the Sector BPI investing model is unique to the ITA Wealth Management blog.
Each month new data is added to the database and it seems to be working after nearly two years of experimentation. I’m still not ready to call it “full-proof” as I’m not sure there is any such investing model. The stock market has a way of punching holes in the “confidence” balloon.
Lowell