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Below, we give strategies for creating an ETF portfolio based on these lists. Our strength rank algorithm goes far beyond the simplistic Relative Strength RSI used at other websites.
When we say a stock or ETF is "strong," we are referring to strength that goes far beyond that measured by the Relative Strength Index (RSI), a mathematical tool popular with traders. The Relative Strength Index is an oscillator that ranges between 0 and 100 and is based on the ratio of upward price changes to downward price changes over a short period of time (usually 14 days). Our own strength indicator is far more sophisticated. If you scan 8000 stocks with the Relative Strength Index, you will find that many of the stocks that rank high are not really attractive because of overhead resistance or because the surge of strength measured is not really significant for some other reason (a non-significant rebound in a very unattractive or threatening chart pattern). The list selected by our own strength screens, however, will look much more attractive. The more stocks that are screened, the greater the difference will be in the quality of output. To see an illustration of how the output of the two systems can differ, click on the "Strongest Stocks" tab on the navigation menu. The stocks illustrated there were found by using the same algorithm that we use in this scanner. There you will find charts of stocks using the RSI and some were found using our algorithm so you can compare the two. When you look at our highest ranked "strength" ETFs, especially when they are selected from well over 1000 ETFs, you will know you are looking at ETFs that are very strong
We have said that we use our own strength ranking algorithm in creating the lists. However, we do think the RSI can be useful for other purposes. Therefore, we do include the RSI (14-day) for each ETF in our reports so you can use it to further sort the ETFs. Again, the RSI is woefully inadequate in comparison with our much more complex algorithm, but it might be useful to see if there has been a short-term surge in relative strength. For example, you could review those ETFs that have an RSI above 50 or some other level of your choice. The only reason we include it in our tables is so you can use it in the same way you might use volume surge information. For example, if there is a long list of ETFs that have generated signals, one way you could filter the list is to check only those that had a 50% or 100% surge in volume when the alert was generated.
The universe of ETFs that we scan numbers over 1200. This universe is then subjected to our "strength" algorithms (compare 50 stocks selected by using the Relative Strength Index with those selected by our own strength filter. The difference will be quite obvious). The ETFs we post in our ranking list will be the "strongest" 100 at the time of posting (ranked in order of strength). This list can also serve as a "Market Monitor" because it can be used to learn which markets and sectors are "hot" here and abroad.
Strategies for Using the List
Please remember that our reports do NOT constitute a recommendation that you personally buy or sell any securities. In the following discussion the words "buy" and "sell" refer to imaginary transactions in a theoretical portfolio and not to transactions in a real account. The word "you" is used for editorial purposes only and does not refer to you personally.
You could use our lists several ways. For example, you might put the more attractive ETFs on a separate "watch list" and review their charts daily, waiting for one of them to decline to its rising trendline. Then, as it begins to rebound off this support line on increasing volume, you could buy it for your portfolio. Your sell strategy might consist of selling any ETF that falls below its supporting trendline. Or, you might sell if it drops out of the top 30 in rank. For example, you might buy the top 5 ETFs and sell any that fall out of the top 30. Then you could replace it with one of the top 5 that you do not currently have in your portfolio. This concept is quite flexible. You might sell when an ETF falls out of the top 10, top 20, top 50, top 100. or whatever. You could build your portfolio around 5, 7, or 10 positions, based on your portfolio size, investment needs, objectives, and tolerance for risk.
There are many ways you could define your selling strategy. You could sell any ETF that drops 5%, 7%, 10% or some other percentage below your purchase price, or below the highest high, low, or close reached by the ETF since its inclusion in your portfolio. Alternatively, you might combine strategies so that a sale occurs if an ETF falls out of the top 30, if it declines 8% since its inclusion, or if it falls 10 levels (or some other amount) in its ranking. Of course, some of the strongest selling disciplines factor in the volatility of a stock or ETF. For example, when the decline of a stock or ETF is such that there is only one chance in a hundred that it would fall that much "by chance" or as a result of its "normal fluctuation" given its current level of volatility, a sale might be appropriate (because it represents a move beyond the "normal probability envelope" for price spikes). This is where the Stops tool can be a big help. Click on Stops (on the navigation bar or in the set of links at the bottom of this page) for more information on this.
Other strategies might be to select those from among the top 30 (or from a larger or smaller subset of the top 50 listed) that look the most "timely" (the most likely to move up soon) or to select those that have just moved up in rank (a move up in rank suggests new momentum or an increase of public interest in that market or sector). Sometimes a stock that is highly ranked might not be as attractive as a stock that is not ranked as highly but that is more likely to rise soon from current levels (perhaps because it is nearer to support or in the process of rebounding from support). An important consideration here is your anticipated holding period. Short-term traders will want to capture their gains quickly. That means they will be a little more "picky" about the ETF's "setup" and the timing of the purchase. Whatever method you use, your selections could be limited to those ranking among the 30 strongest ETFs. A portfolio that is always invested in the top 30 ETFs should do quite well over time. We would expect it to perform much better than most of the better performing mutual funds. (Note: there is a discussion of the meaning of "support" and "resistance" that can be found by clicking on "Free Tutorials" on the navigation bar and scrolling down to the section titled "Charts." Read all of that section.)
Unless you have selected a strategy that requires it, it is not necessary to monitor an ETF portfolio on a daily basis. Portfolio adjustments can be made once a week or once a month, depending on your strategy. We once managed a utility portfolio strategy that required adjustments only once a quarter, and its average annual return was about 20% a year for over 15 years after fees and expenses. Those who are bent on obtaining the highest level of performance might want to fine-tune their entry points for new positions by monitoring the charts of purchase candidates (their "watch list") each day after the market's close. Once they make their purchases and set their stops, they could then make weekly rather than daily reviews. Others will simply look at the charts of highly ranked ETFs once a week and make their decisions on the basis of their weekly reviews. Of course, there are also those who will want to monitor their portfolio on a daily basis.
There is another obvious way to use the ETF rank list. You might want to find out what sector is ranked the highest so you can begin your search for stocks in that particular sector. That is, the list could function as your preliminary scanner. For example, you could narrow your search for strong stocks to those that are included in the top five ranked sectors.
We provide lists of the strongest ETFs in rank order. Our strength algorithm finds stocks with persistent strength, and it is far more effective than the Relative Strength Index (RSI) at finding securities that are really strong. If you haven't already done so, we urge you to use the "Strongest Stocks" tab on the navigation menu to see some charts that illustrate the difference between the selections made by using the RSI and those made by using our algorithm. [NOTE: Before purchasing an ETF, you should look at its chart. To see a few websites where you can generate free charts, click on "Links" at the bottom of our Home page then click on "Outside Help."]
The strength algorithms used in generating the list are the same as the ones used for The Valuator's "STR RANK" (Strength Rank) measurement and in its "Highest Strength List." They are also the same as those used to generate the Strongest Stocks lists. It took time and effort to test and perfect our algorithm, and it is available nowhere else on the Internet. Unfortunately, the costs to operate a website are greater when a site provides unique content (we do not obtain our content through the use of "cookie cutter" uploads and we do not clutter our site with third-party advertisements). Therefore, in order to get a modest return for our efforts, we have decided to charge a small fee for the complete list of the 100 highest ranked ETFs arranged in rank order and updated weekly. You may be able to find free lists elsewhere on the Internet, but those lists will almost certainly be made by using the RSI. [It is standard practice to use the RSI to find strength in stocks because it is a cheap, quick, and easy pre-packaged upload for websites that do not have the mathematical expertise necessary to create more effective screening algorithms. At Stock Disciplines we do our own "number-crunching," model creation, system testing, and algorithm development.] The RSI will often rank an ETF highly even though it has a terrible chart configuration and dominating overhead resistance nearby while completely missing an ETF with a much better chart pattern or even a pre-surge "setup" and more persistent strength. Our algorithm avoids that problem. Its lists actually do consist of the ETFs with the greatest persistent strength arranged in rank order.
ETFs are ranked relative to each other. If there are no strong ETFs, a list will still be generated that consists of the strongest ETFs in a weak ETF universe. We provide the volume change for each ETF on the day we scan. That can be useful information when looking for purchase candidates. If an ETF is rebounding from support and volume has dramatically increased, that rebound is far more likely to be significant than if there is little change in volume or a volume decline.
Click the following link to read an article about volume and liquidity issues pertaining to ETFs, and our own comments about how we deal with those issues. ETF liquidity
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