Market Leaders Strategy

Market Leaders is a momentum strategy that picks the strongest assets among stocks, bonds, and commodity markets. The strategy has two protections: assets are re-evaluated monthly to always be in the leading assets and it uses sell stops to minimize the effect of a crash.

“There’s no question that markets have momentum.”

— Warren Buffett, January 10, 2018

Strategy Return – Hypothetical past performance, which does not necessarily indicate future results. Results are total return: net investment income plus capital gain/loss with reinvestment of dividends. We have not subtracted brokerage commissions, trading costs, nor advisory fees.

S&P 500 – Total return of capitalization-weighted index of 500 stocks that reflects US stock market, computed by Morningstar.

Treasury Bond – Total return of TLT (iShares 20+ year Treasury Bond etf), computed by Morningstar.

Gold – Total return of GLD etf, which owns physical gold, computed by Morningstar.

ETF – Form of a mutual fund that trades on an exchange.

Strategy Description – Owns 3 large, liquid ETFs (in equal percentages of an account) having the strongest momentum among stocks, bonds, and commodities. Can be 100% in cash if ETF candidates are falling.

Downside protection is provided by:

  • monthly evaluating strongest ETFs – those weakening are replaced by stronger ones and
  • placing trailing market sell stops based on standard deviation of each ETF.

Two cases of downside protection:

  1. S&P500 fell 53% from Oct 2007 to its bottom in March 2009 – while the model made money.
  2. Gold fell 45% from Sept 2011 to its Dec 2015 low – while the model made money.

By investing in the strongest assets the strategy is often in the “hot” thing to own but when the strength of that asset fades relative to other investment choices, the strategy moves out of the hot assets into whatever assets are stronger. This process can keep the strategy from holding asset classes that enter into deep bear markets. Stops are intended to protect when an asset enters a substantial decline quicker than our system can detect it.