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Superior Performance Using
Technical Analysis and ETFs

Until the stock market bubble burst in 2000, many investors believed that mutual fund managers moved in and out of the equity markets according to market conditions. These investors thought, "since I am paying for professional money management, I assume the mutual fund manager will consider the risk to my capital and take my money out of the market when the risk becomes too great. After all, that's what I pay them for."

The unfortunate lesson these investors learned was that there are generally no systems in place to protect their equity capital from significant market declines. Mutual funds are not easily able to move their capital in and out of markets. Their size and regulation makes this impossible, even if the managers wanted to do so. If the market goes down, in most cases investor holdings go down with it.

 
The Problem With Buy and Hold
Traditional portfolio management is premised on a very long or infinite time horizon. However, this "one size fits all" approach doesn't correspond to the actual time horizon of most investors. An investor's sensitivity to market declines increases with age, simply because he or she has less time to make back any losses incurred in a downturn. As such, using a buy and hold strategy not tailored to an individual's time horizon still leaves equity holdings vulnerable to substantial market declines.

As the past few years have amply demonstrated, passively riding out market cycles wastes precious growth time and also has a negative psychological impact on investors. Prolonged losses cause investors to question their investment approach, their funds and their advisors. It also increases their awareness of the fees they are paying their advisors. More than ever before, investors have become critical of the perceived value for management fees paid.

To address these issues, Venable Park Investment Counsel Inc. has developed a disciplinel to help manage the cost and market volatility associated with the investment of growth assets. The process is based on prescribed technical filters that are not subject to opinion or conjecture. By utilizing objective quantitative criteria we are able to remove the extraneous noise of personal opinion and general market speculation and add the discipline required to earn superior risk-adjusted returns.

The Venable Park method reduces risk by monitoring money flow in and out of the market, following the premise that "a rising tide lifts all boats," and vice versa. Using exchange traded funds (ETFs) in our proprietary technical model has produced superior results for our investors.

 
ETFs and technical analysis
The Venable Park equity universe is comprised of 61 different ETFs that cover the world's stock markets and individual sectors, including:
  • S&P/TSX 60 Composite Index (Canadian market)
  • NASDAQ 100 Index (US stocks, primarily technology)
  • S&P500 Index (US market)
  • EAFE Index (International market)


Utilizing ETFs reduces research costs and specific company risk, which has two benefits for the client: lower management fees and lower volatility. As well, ETFs allow us to buy and sell an entire index in a single trade.

When our rules produce a buy signal on one of the indexes, we purchase an ETF that tracks the index. When we have a sell signal, we sell the ETF and shift the funds into money market securities until the next buy signal is triggered. In back testing of our model over the past 17 years (to January 31, 2004), this system resulted in approximately 2.5 trades per index per year. In addition, the approach has beaten the S&P/TSX 60 Index, S&P500 Index and the NASDAQ 100 Index with lower standard deviation.

 
Money Flow
The main technical indicator we use is money flow. Money flow is a momentum indicator that uses price and volume data to measure the strength of money flowing in and out of the market. As the indicator picks up the shift in money flow, a buy or sell signal is triggered.

Although this may be an overly simplistic description of a complicated indicator, basically money flow looks at accumulation and distribution patterns to identify overbought conditions (where the volume of buying is greater than justified by the fundamentals) and oversold conditions (where the volume of selling is greater than justified by the fundamentals). Thus money flow indicates when to enter and exit the market.

We also use other technical indicators to ensure that they corroborate the entry and exit points being indicated by the money flows.

The following charts show how the money flow indicator indicated buy and sell points for the NASDAQ index during the Crash of 1987, the Iraq Invasion of 1990 and during the period 2000 to 2003.
 
Does Buy and Hold have you Down?
 
 

Results

The result of using this combination of ETFs and technical analysis is first quartile returns over the past 3 and 5 years, a reduction in standard deviation and volatility, and an approximate 1/3rd reduction in the overall time spent invested in the market as compared to the 100% exposure of the typical buy and hold approach.

We find that the program offers investors much greater peace of mind, knowing they receive the benefits of ETFs combined with a proactive management style that protects their capital during declining markets.

 
Danielle Park is a lawyer, Chartered Financial Analyst and Portfolio Manager with Venable Park Investment Counsel Inc., Venable Park an independent fee- based Investment Counsel firm. She can be reached at

danielle@venablepark.com

Cory Venable CIM, FSCI is a CMT, and is the Technical Analyst for the firm. With over 14 years of market experience, Cory developed the technical risk management system used to manage the risk of equity investments for the practice.

cory@venablepark.com
 
This publication is intended to convey information only. It is not to be construed as a solicitation or offer to buy or sell any of the securities mentioned in it. The author has taken all usual and reasonable precautions to determine that the information contained in this publication has been obtained from sources believed to be reliable and that the procedures used to summarize and analyze such information are based on approved practices and principles in the investment industry. However, the market forces underlying investment value are subject to sudden and dramatic changes and data availability varies from one moment to the next. Consequently, the author cannot make any warranty as to the accuracy or completeness of information, analysis or views contained in this publication or their usefulness or suitability in any particular circumstance. You should not undertake any investment or portfolio assessment or other transaction on the basis of this publication, but should first consult your advisor. The author accepts no liability of whatsoever kind for any damages or losses incurred by you as a result of reliance upon or use of this publication in contravention of this notice.

All performance data represent past performance and are no indication of future performance.