Super Sectors: How to Outsmart the Market Using Sector Rotation and ETFs

Preface xiii

Acknowledgments xvii

Part I Five Wall Street Fairy Tales and Why the Conventional Wisdom is Flawed 1

Chapter 1 The Bear Facts about Bear Markets 3

The Bear Facts: Another Bear is Out There Waiting to Maul Your Portfolio 3

Conclusion 7

Chapter 2 The Fairy Tale of Buy and Hold 9

Ten Years of Negative Returns 9

Impact on Retirement 11

The World is Changing 18

Conclusion 18

Chapter 3 Four More Wall Street Fairy Tales: Conventional Wisdom That Could Cost You Money 21

Is Asset Allocation the Answer? 21

The Fairy Tales Revealed 23

Conclusion 24

Part II Why Exchange Traded Funds? 27

Chapter 4 History and Growth of Exchange Traded Funds 29

From Zero to 836 in 19 Short Years 29

Conclusion 32

Chapter 5 Types of Exchange Traded Funds 33

Standard Exchange Traded Funds 34

Index Funds 34

Market Cap and Style Funds 35

Bond Funds 35

Sector Exchange Traded Funds 35

Global Regions and Country Specific Exchange Traded Funds 36

Inverse Exchange Traded Funds 37

Leveraged Exchange Traded Funds 38

Actively Managed Exchange Traded Funds 41

Currency Exchange Traded Funds and Exchange Traded Notes 42

Conclusion 43

Part III Sector Rotation: What It Is and Why It Works 45

Chapter 6 Sector Rotation—The Traditional View 47

There’s Always a Bull Market Somewhere 47

Nine Basic Sectors 49

Will This Time be Different? 50

The Business Cycle Has Not Been Repealed 51

Why Use Sector Rotation? 52

Conclusion 52

Chapter 7 The New Science of Sector Rotation 55

It’s a Brave New World 55

Are There Only Nine Sectors? 56

The Velocity of Money and the Incredible Disappearing Investor 56

Conclusion 65

Part IV Trading Systems Designed to Outperform the Indexes 67

Your Personality 67

Your Lifestyle 68

Your Goals 68

Chapter 8 Almost Like Buy and Hold 69

But It’s Not That Easy 71

Cut Your Losses and Let Your Winners Run 72

“Almost Like Buy and Hold” Trading Rules 73

Conclusion 74

Chapter 9 The Simple Trading System 75

Conclusion 82

Chapter 10 The Golden Crossover Trading System 85

Conclusion 90

Part V The Sector Scoring System: Trading Concepts, Challenges and Conundrums 91

Chapter 11 The Five Signals for Entering a Trade 93

Signal No. 1: Point and Figure Charts Buy Signals 93

Signal No. 2: Point and Figure Charts: Trend and Bullish Price Objective 98

Signal No. 3: Moving Average Convergence Divergence (MACD) 101

Signal No. 4: Relative Strength Index (RSI) 107

Signal No. 5: Relative Strength 108

Conclusion 110

Chapter 12 Scoring Your Trades 113

Selecting What You Want to Trade 113

Scoring Your Trades: The Heart of the System 114

Scoring the Indicators 123

Conclusion 130

Chapter 13 Getting Out is Harder Than Getting In 131

Selecting What You Want to Trade: The Other Side of the Coin 131

Getting Out of a Trade: How, When, Where 132

Risk Management and Position Size 144

Exiting a Trade or “What Now?” 146

Signs of Weakness 147

Conclusion 150

Chapter 14 The Psychology of Trading 153

The Biggest Single Risk to Your Trading and Investing Success is You 153

Begin at the Beginning 154

Greed, Fear, and the Herd 154

Three Secrets to Trading Success 156

Trading and the Art of War 160

The Five Essentials for Victory 161

Trading With the Buddha 162

What Happens When Your System Stops Working 163

How to Manage Drawdowns 164

Conclusion 165

Part VI Super Sectors: Five ‘‘Super Sectors’’ That Could Change Your Life 167

Chapter 15 Super Sector No. 1: The Rise of Asia 169

A Closer Look at China 169

The Story Doesn’t End with China 171

How Can You Participate? 172

Conclusion 173

Chapter 16 Super Sector No. 2: Energy 175

The Bad News about Supply 175

The Bad News about Demand 176

Economic, Political, and Social Impacts 177

Possible Solutions 177

Possible Outcomes 178

How Can You Participate? 179

Conclusion 180

Chapter 17 Super Sector No. 3: Health Care 181

The Aging Baby Boomers 181

Baby Boomers and the Cost of Health Care 182

Growth in National Health Care Expenditures 182

Possible Solutions and Outcomes 183

The Ever-Growing Medical Monster 183

How Can You Participate? 184

Conclusion 184

Chapter 18 Super Sector No. 4: Technology 187

A Connected World 187

Highways in the Sky 189

Emerging Technologies 190

How Can You Participate? 190

Conclusion 191

Chapter 19 Super Sector No. 5: Financials 193

The Financial Sector 193

Warren Buffettology 195

The Dollar and Global Currency Markets 196

Interest Rates 197

Precious Metals 197

How Can You Participate? 198

Conclusion 198

Chapter 20 Ask the Experts: Insights and Advice from Today’s Top Investors, Traders and Managers 201

Larry Connors 201

Dr. Marc Faber 205

Keith Fitz-Gerald 207

Todd Harrison 211

Gene Inger 214

Carl Larry 216

Timothy Lutts 217

Tom Lydon 220

John Mauldin 223

Lawrence G. McMillan 224

Paul Merriman 228

Robert Prechter 230

Jim Rogers 233

Matthew Simmons 234

Sam Stovall 236

Cliff Wachtel 238

Gabriel Wisdom and Michael Moore 241

Conclusion 245

Appendix ETF Resources 247

Web Sites 247

Exchange Traded Funds Providers 247

Books 248

Notes 251

About the Author 253

Index 255