Domestic Drop vs. International Cliff Diving

As a regular reader, you will undoubtedly have noticed that our international Trend Tracking Index (TTI) dove off the cliff after our Sell signal back on 11/13/07, while the domestic TTI tried to stay above water before finally succumbing to bearish forces. If you are not familiar with the charts, you may reference section 1 and 5 of the latest StatSheet.

Reader Ray had this comment:

Since your sell 11/13/2007 on the international index it has fallen off a cliff. It seems that it would take quite a long time for the index to recover and position itself in a buy mode. The domestic index is not in the same pattern, and is almost 10 percentage points closer to its line.

Do you have any sense as to a relationship between the 2 lines or do you just treat them as independent of each other? If you do treat them as independent, do you have a typical allocation between the 2? As an example, if you were to allocate funds between domestic and international what would your percentages be? Would you have 50% domestic and 50% international?

If that were the case, using your buy signal in 2006 and assuming you were 100% cash on 5/17/06 domestic and 100% cash on 6/13/06 international would you have been 50% international on 8/17/06 and deploy the 50% cash on 9/5/06 domestic.

I hope this question is not confusing.

Over the past 20 years, I have not been able to establish a direct relationship between the two indexes. I have noticed, however, that once the international TTI signals a buy, at least in the past, it tended to stay in that mode for a longer time period then the domestic market. In that sense, it almost behaved like some currencies, which tend to stay in certain patterns for several years.

Essentially, we have had time periods where the international TTI signaled a buy, which was followed by a domestic buy and vice versa. There also have been periods where we received a buy domestically, and the international market did not follow at all.

You never know. During 2006, we received an international buy first, and I allocated 33% of portfolio value to that area. A month later, the domestic market kicked in, and I allocated 33% there as well. As time went on, I added a few sector and country ETFs to reach a 100% invested position.

Had I only received one buy signal, my investment process would have been the same. First, I would have allocated 33% and then added to those positions that were gaining in value (5% gain) eventually reaching the 66% invested level. With the remaining 33%, I would have again looked for opportunities in sectors and countries.

Another alternative might have been to incrementally increase your position to 100% without using any sectors or counties. There is no right or wrong here, it would simply be a matter of preference and risk tolerance. No matter which way you decide to proceed in the future, using my recommended sell stop discipline is of utmost importance.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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