Thursday, February 28, 2013

Closing out a volatile month, the three S&P 500 funds are all in the top 10. We saw something similar when our December 4th post highlighted the three in 4th, 8th and 12th place when Quant began to turn its focus towards the US. The S&P 500 then went on its huge run and we highlighted the three again on Valentine’s Day. That February 14th post explains how three funds that track the same index can have different scores and provides a good primer on how Quant works. That day saw them in 1st, 7th and 11th place and was on the cusp of a 3% correction which was less than most other regions suffered. So now that Chairman Bernanke has put the market fears to rest, what does it mean to have SPY, VOO and IVV in 1st, 6th and 9th place today?

We often remind you that Quant does not make directional calls but simply ranks which funds will perform best in whatever environment ensues. In that December 4th post we said it was going to be difficult for our top ranked funds to outperform the index since the index and similar funds were dominating the ranks. Outperform it did though and we will see how the algorithm performed subsequently when we update the calculations over coming days with February’s month end prices. Another month with the S&P 500 dominating the ranks will likely bring the outperformance spread down somewhat but the US market continues as the place to be.

A hint to what direction the market is going to take may be found in the average Red Diamond Risk Rating of the top ranked funds. We have been highlighting the top 10 average since it fell below 4 on February 5th. It bounced up slightly early this week in time for the rebound but has fallen back below 4 today. Our models are designed for the intermediate term so we try not to get too caught up in the day to day wiggles choosing to look for consistent messages in the ranking instead. Since we advised to be careful out there on February 5th, that low risk message has been consistent. We have had a nirvana of low risk providing high reward since then and with the Fed pumping $85 billion a month into the economy maybe nirvana can continue. Only time will tell if that low risk will be paired with further handsome rewards or lesser declines. Like Fox, we report you decide but we appreciate you looking to ETFGsm to support your investment decisions.

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