Updating The Curie Portfolio: 23 July 2012

Updating the Curie Portfolio is upon us again.  Even though the Curie is not one of the five ITARR experimental portfolios, I am using a modified Tactical Asset Allocation version of the risk reduction model and that is why developed international markets and emerging markets are both under target.  The Dashboard, extracted from the TLH Spreadsheet, clearly shows where we are with respect to the Strategic Asset Allocation plan.

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Portfolio Risk Management Using The ITA Risk Reduction Model

Following up on Bob Warasila’s article, published early this morning, a review of the ITA Risk Reduction model is in order.  In addition to reviewing the ITARR, I will add a few additional wrinkles that should improve portfolio returns.

The basic ITARR model has two rules.

  1. Buy Rule:  Buy the index ETF when the price of the ETF moves from below to above the 195-Day EMA of the ETF.
  2. Sell Rule:  Sell the index ETF when the price of the ETF moves from above to below the 195-Day EMA of the ETF.

Review the portfolio once a month.  My schedule is now to update each ITA portfolio once every 32 days for reasons I articulated in an earlier blog.  The ITARR rules are similar to the risk reduction rules explained in Faber and Richardson’s book, The Ivy Portfolio.  These two rules are nearly identical to those I was using when the October 1987 (Black Monday) shock hit the market.

Anytime one is using a mechanical method as described above, it is difficult to watch the ETF snap back after a rather long decline.  Losing out on those early gains is painful to watch.  Is there a way to counter this problem?  Follow along.

Platinum membership is available for a mere $5.00 per month. 

Check the link for DBC, our primary commodity holding.  Examine the recent action of the Relative Strength Indicator (RSI).  Note the upward movement of DBC after the second or third penetration of the 30% line.  This tends to be true for other ETFs as well.  Anytime an ETF drops from above to below the 30% RSI, the risk adverse investor goes on high alert.  Rather than wait for the ETF to move from below to above the 195-Day EMA, begin to make partial moves back into the market.  When an ETF dips below the 30% RSI line the “Delta Factor” is generally flashing a “Buy” signal.  Both the RSI and “Delta Factor” are responding to the “law” of reversion-to-the-mean.”

Another confirming metric we consider is the PnF graph.  Check this one out for DBC.  While the Point and Figure graph does not provide dates, we don’t need it to see what happened.  When DBC moved from below to above the 30% line in the RSI graph, the PnF graph soon after showed up with X’s in the right-hand column.  That was the time to jump in and begin buying shares of DBC to bring the asset class back into balance.  This is one of the “wrinkles” I would like to add to the two basic risk reduction rules of the ITARR model.

Summary:  Any time an ETF moves below the 30% line from the RSI graph, go on high alert.  Frequently, the firs move is too early.  Nevertheless, pay attention to the PnF graph and I will try to let Platinum members know what the “Delta Factor” is indicating.  Remember that the “Delta Factor” tends to be an early indicator.  Use the MACD and CMF graphs as confirming indicators.  The basic idea is to take advantage of those early reversals.

Photograph:  Mt. Hood, just east of Portland, OR.  Photo by John Fitzgerald