Investors following the Strategic Asset Allocation Model (SAAM) focus on keeping the asset classes in balance. The SAAM is essentially a buy and hold or passive style portfolio. As mentioned frequently, it is a good idea to use this model for a portion of ones overall portfolio. The major negative to the SAAM is lack of risk control.
The second major model we follow here at ITA Wealth Management is the Dual Momentum Model (DMM). This approach is very simple to follow, provided one knows how to use the Kipling spreadsheet. We are now operating with version 2.1. If you look up the Galileo, Maxwell, Euclid, or Aristotle you will see examples of how the DMM works. It is a good idea to have a portfolio of ones portfolio managed using the DM or KT models.
I should add that we now have a slight variation of the DMM model with the introduction of the Kahneman-Tversky Model (KTM).
Another major model is know as the Tranche Momentum Model (TMM) and this is the one where buy and sell rules most apply.
First the sell rules as they are easiest to understand. They are:
- Sell if the security is ranked below SHY using our absolute momentum ranking system.
- Sell if the price of the security is below its 195-Day Exponential Moving Average (EMA).
Buy rules are slightly more complex as several hurdles are required. All the following need to be met unless there are special judgment calls.
- The security must rank above SHY using the absolute momentum ranking system.
- The price of the security must be above its 195-Day EMA price.
- The security must obtain a Group rank of 1, 2, or 3 based on information found within the Kipling spreadsheet. Rankings of 4 or 5 justify a Hold.
- Both the long and short Heikin-Ashi candles must be positive. Special situations might arise where this rule is diminished in importance.
- We are looking for securities that are classified as BX when we run the Point and Figure Ratio screen. BX is a situation where the security is growing faster than a benchmark such as VTI. The last graph in this blog post shows an example of a BX situation.
Those are the basic buy and sell rules I am currently applying to Tranche Momentum portfolios. Should there be a change in the rules, readers will be notified.