Using SectorSurfer

  My Strategies Page

• What is a Strategy?
A Strategy, in the context of Sector Surfing, is a set of up to 12 mutual funds, ETFs, or stocks along with an indicator algorithm to evaluate the performance of each to determine which one, and only one, is currently demonstrating leadership and should be owned. You can browse the performance characteristics of numerous ready-made Free Strategies and Premium Strategies, or you can create your own Custom Strategy using the funds of your choice — an important thing if you are limited to using only those mutual funds offered by a company-sponsored retirement plan.

Click the picture to the right to view the layout and functions of the My Strategies page. This is where your investment Strategies are managed and your Trade Alerts are viewed. To go to the My Strategies page, click the My Account tab on the top menu, and then the My Strategies tab on the second level menu. Since the Strategies on your page are yours alone to manage and edit, creation of an account and login is required. Click Here to create an account — there is no cost to do so.


Algorithm Automation Simplicity!
Although indicator algorithms can be complex and difficult to understand and configure, the good news is that we have totally automated the indicator algorithm configuration for each Strategy according to the character of your chosen funds/stocks. There are significant differences in the behavior of mutual funds, bonds, and stocks. For example, commodities, such as oil and gold, will behave differently from the stocks of companies that manufacture consumer goods, or from funds holding T-bills or certificates of deposit (money market funds). SectorSurfer automatically determines the algorithm and parameters most appropriate for the character of each Strategy so you don't have to. That's why we say "Our computers will do the hard work while you go have a life!" Just throw a set of funds at it, and SectorSurfer automatically figures out how best to treat them.


Making a Custom Strategy
A Custom Strategy is simply made by editing any of the ticker symbols in an existing Strategy, adding new ticker symbol to a Strategy, or deleting an existing ticker symbol from a Strategy. All of these actions are initiated by clicking the ticker symbol (or blank) to open the popup window to "Find a Mutual Fund, ETF, or Stock." The popup window enables you to search by either ticker symbol or by words in its name. To add it to your Strategy, click the button. The popup window also provides a means to delete the current ticker symbol by clicking . As shown above, when you place the mouse pointer above a ticker symbol, its name, pertinent hold days, and early trade fees are shown. At each step of your Strategy development, you can check its progress by clicking the chart icon, and selecting other properties of the Strategy by clicking the information icon.  See more information about Making Great Custom Strategies here, and some simple rules for quickly building a great 401k Strategy here.

 
Recommended Short Video Tour
We highly recommend that you view the short My Strategies Tour video by clicking the video icon to the left. It will quickly demonstrate all of the significant features and functionality of the page and likely save you a lot of time reading detailed instructions and eliminate the frustration of guessing how everything works.


Making a Strategy-of-Strategies
A Strategy-of-Strategies uses special ticker symbols to refer to your other Strategies. As with a normal SectorSurfer Strategy, it will pick the one, and only one, best performing Strategy from among up to 12 candidates. Use the ticker symbol format of SSSnn, for SectorSurferStrategy # nn, where nn does not have a leading zero if it is only a single digit. You can also mix normal ticker symbols with the Strategy ticker symbols if you like. A Strategy-of-Strategies does make buy/sell decisions and thus is not a free Strategy. Finally, all referenced Strategies must come before (lower number than) the Strategy-of-Strategies because Strategies are processed sequentially every evening and all referenced Strategies must be processed before the Strategy-of-Strategies in order for it to produce meaningful results. See also the concept of a Portfolio-of-Strategies.

 
 

My Strategy Page Controls, Column-by-Column

Strategy Number and Subscription Status
In the left column of your Strategies list is the Strategy number and its subscription payment status. Three examples are shown for Strategy #1. The first indicates that it is a  FREE  Strategy that will never require a subscription fee to receive email Trade Alerts and see the most recent trade. The next two are for a Premium Strategy that requires a paid subscription to receive email Trade Alerts and see the most recent trade.  PAID  indicates the subscription fee has been paid.  NOT PAID  indicates that either the subscription fee has not been paid or that the subscription has lapsed, thus disabling the ability to see the most recent trade. To fix a subscription problem, click the button that appears on the page and follow the instructions.

Add Strategies to Your List
The My Strategies page contains your personal list of up to 30 Active Strategies for which Trade Alerts are sent and may require a subscription fee, and up to 20 Sandbox Strategies which are for experimental evaluation, but neither send Trade Alerts nor require a subscription fee. Three brief performance measures of the Strategy are shown below its name: (1) Score, a measure of risk-adjusted return, (2) Safety, a measure of return severely punished by large drawdowns, and (3) the Max Drawdown in any 2-year rolling measurement period.

There are three ways to add a Strategy to your list:

1. Select ready-made Strategies by clicking the Strategy icon and considering the Strategies presented in the
    Select-A-Strategy popup window. Click the row of the Strategy to select it, then click the button
    at the bottom of the page to add it to your Strategies list.

2. Import a Strategy using a Strategy-ID by clicking the Strategy icon, pasting the Strategy-ID into the text box at
    the upper right. Then click the   button above the text box. To send a Strategy-ID to a friend, click
    the Information icon to find the Strategy-ID, then copy and paste it into an email. 

3. Assemble your own Custom Strategy by clicking the ticker symbol positions in the Strategy List and selecting one
    from the many thousands of mutual funds, ETFs, or index stocks on the list that pops up. Additional details and tips
    for building great Custom Strategies are detailed below.

View Trade Signal History for a Strategy
You may view the Trade Signal History for a Strategy by clicking the History icon. The Trade Signal History, as pictured to the right, should not be confused with the Actual Trade History found in the Trade Information section of the page. The Trade Signal History is what the Strategy algorithm says one should have done to achieve the results portrayed on the charts.

The list shows the entire history of trade signals, days held, performance for each holding compared to the S&P 500 and the cumulative value for both the Strategy and S&P 500 had you invested $10,000 in each at the start of the available data for the Strategy.

The generic symbol $CASH is used when StormGuard directs you to move to the safety of a money market fund. Not everyone has access to the same money market funds, and they are all pretty much like "peas in a pod", so whatever your brokerage has available will work just fine.

At the bottom of the listing, you can click the button to download a CSV (comma separated variables) spreadsheet of all the important Strategy statistics and trade signal history. It also contains daily data for the Strategy and the reference fund.

Correct Interpretation of History Data: A common misinterpretation of the Trade Signal History data is that each line reports performance associated with the BUY fund. The correct interpretation is that it reports the status on the date found in the left-hand column. On the day of the Trade Signal Date, one has only just bought the BUY fund. Thus the performance data reported relates to the SELL fund. A good reminder of this is the 4th column title "Days Held (fund sold)."  Thus, when you click to view the example above-right, the proper interpretation is: On Jan 31, 2011 SectorSurfer signaled to BUY EWY and to sell IIH which had been held for 248 days. During the 248 day period from May 28, 2010, to Jan 31, 2011, the S&P 500 returned 19.5% and the Strategy returned 23.0%.

View Strategy Performance Charts
You may view the current performance charts for a Strategy by clicking its Chart icon. In a single view, five separate charted measures of risk and return performance are provided, as described in the About SectorSurfer Charts section below. Fresh charts are made within a few seconds whenever you make a change to a Strategy to enable evaluation of the change's effects. Fresh charts are also produced: (a) during daily data update processing, (b) when a Strategy is imported to your list, and (c) when you change a fund in the Strategy or change its Minimum Hold Time (see below).

Strategy Information
The Strategy Information popup window contains these elements:
 • Strategy Name editing so you can rename it to something meaningful to you.
 • Strategy Notes editing so you can better remember which investment account this Strategy is meant to control.
 • Strategy Classification to indicate the investment style. This is for your reference only, it does not affect the Strategy.
 • Strategy Minimum Hold Time to control when a Trade Alert can be issued. (See notes just below.)
 • Strategy-ID number for you to copy and paste into an email so a friend can import an exact copy of the Strategy.
Note: The Information icon will be replaced with the warning icon if SectorSurfer detects a problem with one of your Strategies (such as one of the funds going defunct). The warning message will be displayed when the icon is clicked.

• Minimum Hold Time
There are seven choices for the Strategy Minimum Hold Time, as listed below. You can select one in the Strategy Information popup window by clicking the Information icon to the right of the Strategy name.  This parameter can be used to make SectorSurfer's algorithms comply with minimum hold time requirements, whether imposed by a particular fund, or by a particular investment plan. For example, most mutual funds and ETFs have no minimum hold time. However, Fidelity Sector Funds all have a 30-day minimum hold time with a 0.75% early trading fee, most Fidelity International Funds have a 90-day minimum hold time with a 1.5% early trading fee, and all 529 College Savings Plans have a one-year government mandated minimum hold time.

SectorSurfer maintains a file of the minimum hold time and early trading fee for hundreds of popular funds; however, there are many thousands of funds available. If we have the information for your fund, it will be listed in the right column of the Find-A-Fund popup window on the My Strategies page, or in the screen tip text that appears when your mouse pointer is placed over the ticker symbol to display its name. When SectorSurfer knows the minimum hold time for a fund, it is incorporated into the trading algorithm only if the "Trade Automatic" setting is selected. Currently, we have the minimum hold information for Fidelity, Vanguard, and American funds. In the future, on request, we will add such information for other funds of importance to you to support your custom Strategies.

SectorSurfer generates a new Trade Alert when trend leadership changes according to the Hold Time Option selected:
 • Trade Automatic - Trade alerts issue at month end only, but will wait additional months if a fund hold time is > 30 days.
 • Trade Any Day - Trade alerts issue immediately, but you'll be warned if a fund hold time is violated.
 • Trade Weekend - Trade alerts issue on the weekend only, but you'll be warned if a fund hold time is violated.
 • Trade Month End - Trade alerts issue at month end only, but you'll be warned if a fund hold time is violated.
 • Trade if >30 days - Trade alerts issue if the current fund has been held at least 30 days.
 • Trade if > 60 days - Trade alerts issue if the current fund has been held at least 60 days.
 • Trade if > 90 days - Trade alerts issue if the fund has been held at least 90 days.
 • Trade if > 6 months - Trade alerts issue at month end only if the current fund has been held at least 6 months.
 • Trade if > 1 year - Trade alerts issue if the current fund has been held at least 1 year.

Note: Trade Automatic is the default setting for a good reason. Not only does it watch out for special hold time rules for funds, but it also trades month-end, which almost always performs better than Trade Any Day because it can be shown that the trend signals actually do become more reliable around the end of the month when many fund managers start making next month's changes. This is documented in the Hurst Exponent Fingerprint section of the Sector Rotation Theory page. If you are anxious to have a faster responding system, please read about The Faster Response False Dilemma.

Note: Changing Minimum Hold Time will cause the algorithm to re-evaluate and determine what the best parameters are for the Strategy, and could result in using a longer or shorter trend measurement period, and consequently a possible change in the one designated as the trend leader. Determining the trend leader depends heavily on the period of time over which the trend is measured. Imposing a holding period imparts a delay effect much like changing the trend measuring time constants, thus it should be expected that changing the Minimum Hold Time rule will cause a change in the optimum trend measuring time constants.

• Fund or Stock Ticker Symbols
By clicking the position of a ticker symbol, the Find a Fund, ETF or Stock popup window will appear and enable you to search by either ticker symbol or by words in its name. To add it to your Strategy, click the button. The popup window also provides a means to delete the current ticker symbol by clicking . As shown above, when you place the mouse pointer above a ticker symbol, its name, pertinent hold days, and early trade fees are shown.

Mutual Funds & ETFs: There are in excess of 12,000 mutual funds and ETFs available to choose from. Please contact us if there is a mutual fund or ETF that is important to you but is not on the list. We will do our best to make it available provided it has at least 3 years of data. The reason for requiring 3 years of data is that SectorSurfer's algorithm cannot properly characterize a fund that has not seen a variety of market conditions, and you risk the possibility of unexpected Strategy behavior in the future. If you must have a fund or ETF with shorter duration history, you may be in love with it for the wrong reason. The right reason is having increased probability of higher returns and decreased probability of loss. A sexy name or low introductory fee is not a sound reason for a financial marriage — long-term character matters.

U.S. Stocks Available for Strategies: Our database, from FastTrack, contains well over 3,000 U.S. Stocks from the three major exchanges (NYSE, AMEX, NASDAQ), which include many foreign stocks listed for trading on the U.S. markets as an ADR (American Depositary Receipt). However, we generally do not make new stocks available until they have about 3 years of data. SectorSurfer's algorithm cannot properly characterize a stock that has not seen a variety of market conditions, and you risk the possibility of unexpected Strategy behavior in the future.

Note: Ticker Symbol Changes Causes Re-Optimization: Each time you change one of the ticker symbols, SectorSurfer will re-make your Strategy chart so you can immediately see the effect of your changes. Note: Changing any ticker symbol or the Strategy minimum hold time causes SectorSurfer to re-evaluate and determine what the best parameters are for the Strategy, and could result in using a longer or shorter trend measurement period, and consequently a possible change in the one designated as the trend leader. Determining the trend leader depends heavily on the period of time over which the trend is measured. Performance ranking last week is not the same as performance ranking last month. Consider that there are many routes to your favorite restaurant, and right now there is an optimum set of roads in the route. But that may change if some roads are closed and new ones are opened, or if you impose a rule for how frequently you can make a turn. Likewise in a Strategy, there are often multiple sequences of ticker symbols that produce fairly similar results, and small changes to the Strategy can cause a different sequence to become the optimum sequence.

Extended History Ticker Symbols The data history length of each of your Strategy ticker symbols can have a profound effect on the projected performance of your Strategy. For example, if you are modeling a Strategy with the original 9 SPDR sector ETFs and you want to see if additional safety is afforded by adding either IEF or TLT (treasury fund ETFs) to the Strategy, you will quickly note that neither of these ETFs has data that extends back past mid-2002 and thus they cannot suitably model performance of the intended Strategy during the 2001-2002 market crash. Matters are even worse if you want to use the UBT (2x treasury ETF) because its data does not start until January 2010, thus making it impossible to model performance during either of the two recent market crashes.

One solution to the problem of satisfactory modeling is to create artificially extended versions of important modeling symbols.  Some of these symbols can be artificially extended by adding on older data portions taken from another fund that can act as a proxy for this fund during earlier periods. Leveraged 2x and 3x ETFs require the use of a scale factor when extending them using 1x data.  However, 2x and 3x ETFs have other characteristics that require a scale factor somewhat less than would be expected from its name. The main cause of this problem is volatility, which causes daily rebalanced ETFs to decay over time (go ahead ... Google that). The scale factors we used were derived from actual performance comparisons during generally rising markets (which is the only time the relative scale factor matters with True Sector Rotation). These extended ticker symbols have a "-" added to them to indicate they are extended versions. A list of the available extended history ticker symbols follows:
 

Extended History Ticker Symbols 

Tip #1. One of the better uses for the long-term treasury ETFs is with StormGuard as the Bear Market Symbol so that when StormGuard triggers, instead of going to the safety of $CASH (your favorite money market fund), you will instead receive a trade alert to buy the specified Bear Market Symbol. Since long-term treasuries are negatively correlated to the S&P 500, you can generally expect a bit of a performance improvement when implemented. Click to expand the Treasury ETFs comparison chart (right) showing the significant difference between these ETFs, and their differences in character from the S&P 500. Numerous ready-made Bear Market Strategies have been designed to span the range of aggressiveness and address the problem that long-term treasuries have not always been negatively correlated to stocks.

Tip #2. The 1x ETFs in the pink section were extended to provide better Strategy modeling in conjunction with Strategies using SPY, MDY, and the original SPDR sector ETFs, all of which have histories that go back to the mid/late 1990s.

Tip #3. The 2x leveraged ETFs in the grey section and the 3x leveraged ETFs in the orange section were extended to have a common start date of 1/2/2004 so they all could participate in the initial tuning of the Strategy, as opposed to effectively tuning for one set of ETFs, and then starting forward walk with a different expanded set of ETFs that may not play together well in the same way. Your objective, as a Strategy designer, is to provide the algorithm with a truly representative sample of Strategy characteristics prior to the specified BornOn Date so that it can properly tune itself.

Tip #4. The VIX futures contract ETNs in the bottom section aren't for the faint of heart. We've posted an example Strategy on the popup list entitled "A Nose for VIX." While it has posted strong returns, its volatility is quite high. It may inspire contemplation (over a glass of red) whether these funds have completely crossed the line from that of investing to gambling. There is not even a remote connection to owning a piece of a company's assets or earnings. Ah, but in the end, is it really any different from owning a pack of faceless companies in a fund that you trade for another pack in just 30 days proving you really are just betting on the froth rather than loyally supporting development of a worthy, innovative corporation?

• BUY/SELL Trade
This is where the trade details can be viewed, including: (1) the trade signal date and BUY/SELL ticker symbol information, (2) a red button to acknowledge completion of the recommended trade and to inform SectorSurfer that you have completed the task so that no further reminder emails will be sent, and (3) a green button to indicate that you have already acknowledged the most recent trade. If you find you acknowledged a trade in error, click the Strategy Trade History icon where you will find the button to undo the trade acknowledgement status in our system (not the actual trade at your brokerage).

$CASH, $WAIT, -NEW-
When StormGuard indicates it is time to move to/from the safety of a money market fund, it uses the generic symbol $CASH for the Buy/Sell ticker symbol because not everyone has access to the same money market fund. When you see $CASH, substitute your favorite money market fund. When creating a new Strategy it is important to choose a good entry point into the Strategy's recommended fund. If there are only a few days until the next likely Trade Alert or if the last recommended Buy ticker symbol has a short-term trend that has gone negative then SectorSurfer's algorithm will use the $WAIT symbol to indicate you should wait a bit for a better entry point into the Strategy. For Strategies that trade month-end, the $WAIT will always be resolved into one of the ticker symbols at month-end. In the meantime, acknowledge the $WAIT signal by clicking the red button.  There is also important and specific technical trade advice offered when you see the icon. Always be sure to read and consider this important information.  The -NEW- ticker symbol will appear as the SELL symbol for new Strategies that have no prior recorded history of trade acknowledgements to specify what you actually do own and should sell.

Warning or Special Trade Advice
If there is a special situation regarding the recommended trade, the Warning icon appears instead of the icon. When you click the icon, the warning message will be displayed. The message could be generated for numerous reasons, including: (1) the current fund you own may have a stronger trend signal than any of the funds in the new Strategy you have just selected, (2) one of the funds in your Strategy is defunct and should be deleted or replaced, or (3) you have just created a new Strategy and special technical advice is offered.

Trade Options Information
If there are no special considerations associated with the suggested trade, the Trade Options Information icon appears to the right of the button, to let you know that there are multiple options for how one might respond to the recommended trade. When the Option Information icon is clicked, the following text is displayed:

You have four options for acknowledging this trade:

1. Click the Broker link to go to your brokerage account and make the trade and then return here and click the Acknowledge Trade button so SectorSurfer will no longer send you email reminder Trade Alerts.

2. Delay making the trade until a later or better time and don't click the Acknowledge Trade button until then.

3. Reject this Strategy in favor of another Strategy by clicking the Strategy icon and selecting a new Strategy from the list.

4. Exit for the sidelines to sit in cash (any money market fund) for a while until you figure out what to do. 

View Strategy Trade History
You may view the history of trades you have made in a Strategy by clicking the History icon in the Trade Information column. Unlike the "Trade Signal History" controlled by the Strategy algorithm, this is a list of all trades you have acknowledged, rejected, or that still may be pending. It is a log of your activity for this particular "bucket of money," not a list of "trade signals" for the Strategy. If you acknowledged a trade in error, click the button on this screen to undo the trade acknowledgement status in our system (not the actual trade at your brokerage).

Change Brokerage Link
In the far right column is the link to your brokerage to make the actual trade. You can change the brokerage link by clicking the Brokerage icon. There you can select from a list of dozens of brokerages, or enter your own brokerage name and link.

Delete a Strategy from Your List
To delete a Strategy, click on the Delete icon on the far right of the Strategy line. You will be asked to confirm that you really do want to delete the Strategy before it is removed. The first Active Strategy has a grey icon indicating you cannot delete the first Strategy - but you can edit it or import another Strategy over it.

  Strategy Charts

• Charts Demo Video
We recommend viewing the short demo video, to the right, describing our comprehensive Strategy charts. Each SectorSurfer Strategy chart contains the information you need to evaluate a Strategy's risk and return performance. By clicking the Chart icon, you can instantly compare and contrast the performance of Strategies you are evaluating. Fresh charts for each Strategy are generated (a) each night during our daily processing, (b) when you import a Strategy to your list, and (c) instantly when you make any change to the Strategy.

Seven-In-One Charts Each SectorSurfer chart (click image to the right) contains these 7 features: (1) a logarithmic price chart showing all of the Strategy's constituent funds along with the S&P 500 Index plotted in white and the SectorSurfer's results plotted in yellow; (2) a bar chart comparing the annualized return performance of the Strategy and the S&P 500 Index over 3-Years, 10-Years, and Max-Years; (3) the Sharpe Ratio measure of risk; (4) the 10-year maximum drawdown; (5) the probability of loss of real money; (6) the relative trend strength for each fund in the Strategy; and (7) the StormGuard Indicator.

• Screen Popup Text
Each major element of the chart has popup explanatory text when you place the mouse pointer over it, and some further provide clickable links to portions of this page. CLICK HERE to see an example of the popup text.

• Logarithmic Price Chart
A logarithmic price chart has the advantage of vertical interval spacing that provides the same percentage change for each interval. On a logarithmic price chart, performance is measured relative to its price at the start of the chart — hence everything starts at 0.0% return on the left side and goes from there.

On the chart to the right, the first vertical interval above 0.0% is 41.4%. A 41.4% gain at the first vertical interval grid line means our total account value at this level is 1.414 times as large as the starting value. We have the original unit amount (1.0) plus the return (.414). Thus, if we started with $1,000, we would now have $1,414.

Likewise, the next interval up will be another 41.4% return, compounded on top: $1,000 x 1.414 x 1.414 = $2,000, which is a 100% return on the original amount. With another 41.4% return we would have $2,000 x 1.414 = $2,828, which is $1,828 more than what we started with and a total return of 183% — and so on.

One nice feature of this is that a straight line represents a constant percent return per year. For example, if you drew a straight line along the crests of the bumps of the yellow curve, it would have a slope that takes approximately 11 years to raise 7 intervals (.64 intervals per year), or roughly  .64 x 41.4% = 26.5% per year.

As can be appreciated when viewing this chart, the relative performance of the Strategy's performance (plotted in yellow) can be compared to the S&P 500 index (plotted in white) and each of the constituent funds. By clicking one of the blue buttons in the lower right, the logarithmic chart can be viewed in three different time scales — 3-Years, 10-Years, and Max-Years (where Max is the full number of years in the fund database for at least two of the funds). If fewer than 10 years of data is available, the 10-Year button will disappear.

• Annualized Return Bar Chart
Below the logarithmic price chart is the annualized return bar chart that compares the annualized return (average yearly return) performance of the Strategy to the S&P 500 Index over the most recent 3-Years, 10-Years, and Max-Years. The numerical value for SectorSurfer's performance for each of those periods is located below its corresponding vertical bar.

• Sharpe Ratio Risk Measure
The Sharpe Ratio is commonly used in the financial industry to measure an investment's added return over that of a very safe money market fund relative to the higher investment risk taken. It is named for William Sharpe, Professor of Finance, Emeritus, at Stanford University's Graduate School of Business and the winner of the 1990 Nobel Memorial Prize in Economic Sciences. The mathematical expression for the Sharpe Ratio is:

                Sharpe Ratio = (Fund Average Return - Money Market Return) / (Fund Standard Deviation)

The Fund Average Return is calculated by first finding the ratio of the ending value to the starting value of the fund, finding its Nth root, and subtracting one — where N is the number of years between the starting value and the ending value. The  Fidelity SPRXX money market fund is used as the riskless reference return to beat.

               Fund Average Return = (EndValue/StartValue)^(1/N) - 1

The Fund Standard Deviation is calculated by stepping through the database day-by-day and calculating gain/loss from one year earlier less the Average Annual Return, squaring it and summing it to form a TotalVariationSquared value. The TotalVariationSquared is then divided by the total number of days. By taking the square root of this value we get the Fund Standard Deviation. 

• Sortino Ratio Risk Measure
The Sortino Ratio is commonly used in the financial industry to measure an investment's added return over that of a very safe money market fund relative to the higher investment risk taken. The ratio is named for Dr. Frank A. Sortino, an early popularizer of downside risk optimization. The mathematical expression for the Sortino Ratio is:

                Sortino Ratio = (Fund Average Return - Money Market Return) / (Downside Deviation)

The Fund Average Return is calculated by first finding the ratio of the ending value to the starting value of the fund, finding its Nth root, and subtracting one — where N is the number of years between the starting value and the ending value. The  Fidelity SPRXX money market fund is used as the riskless reference return to beat.

               Fund Average Return = (EndValue/StartValue)^(1/N) - 1

The Downside Deviation is calculated by stepping through the database day-by-day and calculating gain/loss from one month earlier relative to the monthly return of the money market fund. If, and only if, the monthly return is less than the money market return is the difference in return (StrategyMonthlyReturn - M.M.MonthlyReturn) squared and added to a TotalVariationSquared value. The TotalVariationSquared is then divided by the total number of days. By taking the square root of this value we get the Downside Deviation. 

• Relative Risk Chart
In the field of Behavioral Finance, the seminal paper "Prospect Theory" by Daniel Kahneman and Amos Tversky showed that "losses hurt more" than "gains feel good" and leads to loss aversion behavior. This discovery led to the development of Post-Modern Portfolio Theory and the Sortino Ratio, both of which use downside deviation to measure risk, as opposed to standard deviation.

Likewise, SectorSurfer's Relative Risk (R.Risk) is calculated as the ratio of downside deviations between a portfolio of interest and the S&P 500 Index. The R.Risk value is displayed on all SectorSurfer charts in the statistics section as well as on the Relative Risk chart (right). A Strategy or Portfolio with a 71% R.Risk has a downside deviation that is only 71% as large as the S&P 500 Index. The downside deviation is calculated using quarterly returns measured daily across the entire time span of the portfolio's equity curve. To ensure consistency of the ratio, the same time span is used for computing the downside deviation value of the S&P 500 Index. Please also see the Prudent, Suitable, and Relative Risk section below.

In this example Strategy chart, the Reference S&P500 (white) has a R.Risk of 100% and 8% annualized return. The Strategy (yellow) has a R.Risk of 30.8% (relative to the S&P500) and a return of about 32%. The R.Risk and return for each of the underlying funds is also plotted.

• Relative Trend Strength
The Trend Strength is the final singular figure of merit that SectorSurfer generates and uses to determine which one, and only one, of the funds has taken leadership and should be owned. The green-bar trend chart is calibrated in percent return per month and is an indicator of possible returns next month — to the degree that the current trend continues. Although "trend" means that something in the recent past tells us something about the near future, the future is also buffeted by the random events of the world.

Trade Alert vs. Top Trend: It is important to understand that just because a fund/stock makes it to the top of the Trend Chart does not mean that you should instantly run out and buy it. Each Strategy also has a "Minimum Hold Time" rule, such as "Trade Month-End," which determines when the Strategy will actually employ the Trend information and possibly generate an email Trade Alert. In the case of Trade Month-End, only after the market close on the last trading day of each month will the algorithm check the Trend for each of the funds/stocks to determine if there is a new leader, and if so, update the Sell/Buy information for the Strategy and send an email Trade Alert. It's not uncommon for one fund to be in the lead mid-month, but another to take the lead near the end of the month before the actual decision is made. Only with the "Trade Any Day" setting will a new email Trade Alert be sent on the exact day there is a new trend leader. Reasons for selecting more restrictive settings include early trade fees for some mutual funds, and that generally, month-end trading actually does perform better as described here. You can edit the Strategy's Minimum Hold Time parameter by clicking the Information icon to the right of the Strategy name on the My Strategies page.  

Inconsistent Trend Position: It's not uncommon to see a pair of funds in one Strategy have trend ranks become reversed when they are both also in a second Strategy. The reason this is possible (and rational) is that there is no perfect fixed definition for "Trend" that is optimum for everything. One fund may have a better one-week trend, but the other may have a better one-month trend. Thus, positions can swap depending on exactly how the trends are measured. Each Strategy has a custom set of trend algorithm parameters that are determined specifically for the set of funds in the Strategy. If one or more of the funds change, it is likely there will be at least a small variation in what constitutes the optimum measure of trend for the Strategy.

Strategy Editing: Further to the point above, if you change something in a Strategy and then reverse the change, there is no guarantee that the original set of trend parameters will be used again. Parameters are determined in full view of all past market data. Thus, parameters set with data that is current, versus data from one year ago, will likely be a little different. A difference in how the trend is measure can result in a slightly different path of fund ownership. Similarly, a change in the Minimum Hold Time will also generally change the optimum parameters for measuring the trend. There is more than one route to your favorite restaurant, but the optimum route will depend on how traffic patterns change over time, on roads that are added or deleted, and on whether traffic lights get installed.

Unsubscribed Premium Strategy: When you view an unsubscribed Premium Strategy, such as this one (click here), you will note the yellow text on the relative strength bar chart that says "Unsubscribed Strategy — 90-day-old trend data." If you are using a Free Strategy, or you have a paid subscription, then this message will not appear and the green bar trends will be current. You may freely evaluate any unsubscribed Premium Strategy and build and evaluate your own Custom Strategies without paying a subscription fee, but the green trend bar chart and the Buy/Sell information will not be current.

• StormGuard ^TM Indicator
There are seven different StormGuard Indicators shown in the figure to the right that are used on SectorSurfer charts to show you the general state of the market. When there is a market storm, SectorSurfer's StormGuard algorithm will override the normal selection of the best fund in the Strategy to instead provide a trade signal to move your funds to a safe money market fund. This is called asset class rotation. The StormGuard Indicator is located on the right side of the title bar of the chart, as shown in the figure to the right. It includes a numerical value which appears to the left of the icon. When the StormGuard Indicator value goes negative the Strategy will produce a Trade Alert (according to the rules below) to indicate that you should move to the safety of a money market fund. StormGuard uses the generic symbol $CASH in the Buy/Sell fields to mean "pick a money market fund available to you" because not everyone has access to a common money market fund.

The character of the StormGuard Indicator is shown in the chart to the right. Its value will typically range from about -4% to +4%. The value is calculated daily using a proprietary algorithm that may be reasonably described as a differential multi-order exponential moving average on a basket of broad market indicators. It is designed to perform a balanced optimization to simultaneously reduce whip-saw losses from knee-jerk reactions to market dips by not reacting too quickly, and minimize the crippling losses from long duration market storms by not reacting too slowly. For practical examples of real world events, please check out these two articles:

  •  Japan: A Short Market Slap, or Economic Malaise?  
  •  Should You be Panic Selling on Bad News?  No!   

Please note that the StormGuard Indicator may be slightly different from one Strategy to the next as can be seen when viewing a few of the charts on the Example Strategies page. This is because each Strategy is separately evaluated to determine the amount of storm protection required according to the character of its funds. For example, a Strategy composed of broadly diversified funds will do best if it exits to $CASH as soon as broad market averages start a protracted decline, whereas other Strategies composed of sector funds are likely to have one or more funds doing a bit better than the broad market averages as the market decline commences, and thus should be allowed a little more running room before exiting.

StormGuard Versions:  SG-Std,  SG-AQR  and  SG-Armor The standard version of StormGuard is compliant with the trade hold setting for your Strategy, including the Trade Automatic setting which respects extended hold requirements of certain mutual funds. StormGuard - AQR (asymmetric quick response) is designed to "come out of the hole" quicker following a major market selloff and does not respect the trade hold rules. StormGuard-Armor is designed for maximum safety and the ultimate in using multiple factors to determine when to exit the market. Please read more about these options at the StormGuard-Options page to better understand the features and benefits of each.

The "Faster Response" False Dilemma is a common investment strategy fallacy leading to hair-trigger "ants in the pants" when the markets look scary, with an ever stronger desire for shorter time constants to tighten up the response. The reason this is a false dilemma is because shorter time constants do not lead to better returns. There actually is an optimum time constant, as described earlier, that balances whipsaw losses from when one reacts too quickly, against major decline losses from when one reacts too slowly. Please consider this carefully as you review the meaning of the white chart (that emerges) in the Trade Signal Stationarity topic on the Sector Rotation Theory page. The reason why month-end trading generally performs better is documented in the Hurst Exponent Fingerprint section of the Sector Rotation Theory page. Additionally, if you have not yet done so, please also read this pertinent article: Should You be Panic Selling on Bad News? No!

 

• SwanGuard for Rapid Black Swan Market Events
SwanGuard is an exception to the rule above which counsels to exercise patience rather than knee-jerk reactions to trade that typically result in whipsaw losses.  When the move in volatility, equities, and treasuries are all sufficiently extreme to indicate the start of a rare and extreme Black Swan market event, SectorSurfer’s SwanGuard Indicator will trigger at any time of the month and send trade alerts to head for safety.  Please see the SwanGuard page for complete details.

 

• Dual Defense, TrendGuard, and Backstop Funds
This relatively advanced concept combines StormGuard (as the first line of defense) with TrendGuard (as the second line of defense) to more completely defend your Strategy from the ravages of short-lived or transitioning bear markets, particularly if the set of candidate funds in your Strategy should all happen to start performing poorly relative to a Backstop fund that is designed to compete for momentum leadership against the set of candidate funds seeking to establish a performance floor. Please see the Backstop Dual Defense page for complete details.

• StormGuard Bear Market Symbol
The default setting for StormGuard when a bear market rages is to recommend moving to the safety of $CASH (any money market fund). A major market crash can last more than a year, as it did in both the 2001-02 and 2008-09 bear markets. By specifying something other than $CASH for the Bear Market Symbol in StormGuard's advanced options settings, you can do something more proactive than simply hiding until the sun shines on the market again. To access StormGuard's advanced settings, click the Information icon and the button to show the StormGuard options, which include a text box for entering a Bear Market Symbol. The default setting is $CASH, which means that when StormGuard triggers the BUY symbol will be "$CASH" (representing your favorite money market fund). You can change the Bear Market Symbol to anything you like, including; (a) mutual funds, ETFs, (b) special extended history ticker symbols, (c) our ready-made Bear Market Strategies ticker symbols, or (d) the special ticker symbols used for the Strategy-of-Strategies. If you use a Strategy-of-Strategies special ticker symbol, such as AD12, then your Strategy will import the equity curve from your own AlphaDroid Strategy #12 as the bear market Strategy to use when StormGuard triggers.

For example, setting the Bear Market Symbol to "UBT-" means that instead of modeling the StormGuard period by simply going to $CASH, it will instead model the period using the extended history version of UBT, a 2x leveraged long-term Treasury ETF. Long-term treasury funds are somewhat negatively correlated to the market and will almost always make a worthy improvement to your Strategy's performance, particularly when paired with SG-AQR. Treasury funds vary considerably according to the period of time their holdings are committed. Ten variations are listed in the extended history ticker symbols section, which is provided to aid in Strategy backtesting through artificially extending their history to include one or both market crashes.  Strategies that are tamer do well with TLT-.  Sector rotation Strategies will likely do better with UBT- or TYD.  More volatile stocks and leveraged ETF Strategies will likely do best with TYD- or TMF-. Numerous ready-made Bear Market Strategies have been designed to span the range of aggressiveness and address the problem of hindsight selection bias that may cause us to favor use of long-term treasuries based on their recent negative correlation to stocks, even though it has not always been the case.

• Score, Safety and CAGR (Return)
Score: Each chart contains a Score value intended to represent overall performance in a single number. The formula includes the average return for all years, the average return for the most recent three years, and the Risk Of Loss value for the Strategy. Both long and short-term performance are important, and excess risk reduces the Score. The exact equation is shown below. Higher Scores are better.

       Score = (AllYearReturn + 3YearRetrn / 2) / (40% + RiskOfLoss)

Strategies constructed from general purpose diversified funds typically produce Scores in the 45 to 55 range, while a good selection of sector funds may produce a Score in the 80 to 100+ range. If a Strategy has only a short history (of about 5 years or less), be cautious of reading too much into the comparative value of the Score.

Safety: The Safety value is designed to aid evaluation of Strategy suitability for conservative retirement portfolios. Previously we used a formula that included the Max Drawdown. However, because it does not specify how long it is drawn down or how often it is drawn down it was eventually judged to be much less reliable as a measure than we had hoped. The new method relies upon the Sortino Ratio, which is Return/(negative-deviation), but further divides it by Relative Risk to ensure it is more heavily affected by negative-deviation than it is by return. A Strategy with a Safety of 10 or higher is really quite good. The calculations are made from data available in the downloadable CSV spreadsheet on the Trade Signal History popup page. Examples of excellent Safety Strategies with smooth and uniform returns can be found on the Hall of Fame page. 

   Safety = (Sortino Ratio)/(Relative Risk)

CAGR: Compound Annual Growth Rate is the annualized rate of return. It is the constant rate of return that produces the same total return that was produced in the real world by a varying set of returns each year. It is close to, not quite the same as the average rate of return because one method uses a compounding calculation and the other uses a simple division of the total by the number of years.

• Prudent, Suitable, and Relative Risk
As detailed in our white paper "Satisfying the Prudent Man," strikingly absent from all regulatory documents pertaining to financial advisors is (a) any practical definition of risk and how it is quantitatively measured; (b) any guidance for determining how much diversification is required; and (c) any specification of the risk categories (conservative, moderate, and aggressive) financial professionals most commonly discuss. Fortunately, the traditional risk-classification model portfolios promoted by respected industry leaders can be used to form a de facto consensus set of risk-ranked portfolios (right) that can be modeled, quantified, and used as reference standards in assessing the relative risk performance of other portfolios.

In the field of Behavioral Finance, the seminal paper "Prospect Theory" by Daniel Kahneman and Amos Tversky showed that "losses hurt more than gains feel good" and leads to loss aversion behavior. This discovery led to the development of Post-Modern Portfolio Theory and the Sortino Ratio, both of which use downside deviation to measure risk, as opposed to standard deviation.

Likewise, SectorSurfer's Relative Risk (R.Risk) is calculated as the ratio of downside deviations between a portfolio of interest and the S&P 500 Index. The R.Risk value is displayed on all SectorSurfer charts in the statistics section (right) as well as on the Strategies Management page. A Strategy or Portfolio with a 71% R.Risk would thus have a downside deviation that is only 71% as large as the S&P 500 Index. The downside deviation is calculated using quarterly returns measured daily across the entire time span of the portfolio's equity curve. To ensure consistency of the ratio, the same time span is used for computing the downside deviation value of the S&P 500 Index. Downside deviation is calculated as the standard deviation of all negative returns for all 90-day intervals over the full time span. (Note: Prior to March 2021, R.Risk was calculated relative to a standard financial industry aggressive portfolio. The change was made because differences are minor and the revised method is more easily explained.

• Quarterly Wins and Beats
The Quarterly Wins parameter reports the percentage of time that a Strategy or Portfolio makes money over a period of three months.  The Quarterly Beats parameter reports the percentage of time the Strategy or Portfolio beats the index reference, which is set to the S&P500 by default, but may be changed within the Strategy Information popup window in the advanced settings section.

• Rolling Drawdown and Max Drawdown 
Maximum drawdown can be measured in many ways. Originally we measured it as the absolute maximum drawdown from any point to any future point in time over the time span of choice... a 10 year period. In 2016 when we added the 2-year rolling drawdown chart we changed our measure to use the rolling drawdown methodology that is also common in the industry. The measure for each date is the maximum drawdown from the first date through the subsequent two-year period. The year-dates along the top of the chart represent the end date of the two-year period. Thus the end of the most recent two-year time span measured is aligned with the current date. Please keep this in mind as you try to make sense of the drawdown spikes on the chart in comparison to major market event dates.

Just below the chart, the Maximum and Average values over the whole period are displayed. The Strategy had a 20% maximum drawdown over the period versus a 55% maximum drawdown for the reference S&P500, and the Strategy had just a 2.4% average max drawdown over the period whereas the S&P500 had 15% - over 6 times the average drawdown.

An important matter to keep in mind is that in spite of the popularity of Max Drawdown by investors, it suffers terribly from the fact that it does not tell you how long the drawdown lasted. In this chart, the S&P500 drawdowns were not only large, but they lasted years. Conversely, in addition to the Strategy drawdowns being much shallower, the worst of them lasted only months.

• Born On Date
On the left side of the main chart, there is a date indicating when the Strategy was born. With Standard SectorSurfer optimization (no Forward-Walk Progressive Tuning) It is set to today's date whenever you edit a Strategy and change either the Min Hold Time setting or any of the ticker symbols, both of which trigger SectorSurfer to re-optimize the Strategy parameters for the current set of conditions you've set. Standard SectorSurfer charts show a combination of back-tested performance and real-time performance where the back-tested performance is shown to the left of the Born On Date and the real-time performance is shown to the right of the Born On Date. Certainly, Strategies with older Born On Dates have more credibility than do freshly optimized Strategies. However, the trend character of Strategies does exhibit statistical stationarity and is why back-testing to determine the character of a Strategy is valid. See Trend Signal Stationarity on the Sector Rotation Theory Page for additional technical information.

An optional advanced feature of SectorSurfer is the Forward-Walk Progressive Tuning method of backtesting and tuning updates. The Forward-Walk methodology is considered the gold standard of backtesting. Please read more here at the Forward-Walk Progressive Tuning page.

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