Replies to post #149 on Profunds index and sector trading (PRO)

[Tom K]

Thanks for the input now Steve

Was wondering if you were familiar with Ned Davis Research methodology in regards to sector selection? It's pretty interesting -supported by both out-of-sample and real time testing as well as academic research. NDR doesn't give the actual parameters they use, but I don't think it matters much. It works something like this:

1. Determine momentum period that suits your trading style. For example, calculate the ROC from 5 days to 45 days (5 day ROC, 6 day ROC, 7 day ROC, etc.) Make sure you divide each ROC by the number of days sampled so the longer term ROC doesn't have more significance than the shorter term ROC. Total the results.

2. Rank the sectors or industry groups from strongest to weakest.

3. Set up rotation rules: For example, buy the sector indice when it ranks in the top 5, sell the sector when it falls out of the top 8. Of course, if you're bearish on the market as a whole, you wouldn't go long in any sector.

4. This strategy also works for shorts.

This relative strength approach works for me (intermediate term trades). Don't know how well it works for short term trades, thought you might be interested.