Should I invest in oil stocks?

That’s a question that a lot of investors have been asking themselves over the last couple of years. The fundamentals of the oil stocks story aside, the case can be made that investing in oil stocks is a reasonable way for the average investor to hedge his individual energy costs (like the price of a tank of gas or your electric bill) with part of their portfolio. It’s interesting that paying an extra $5 a tank at the pump doesn’t feel so bad if you have oil stocks in your portfolio that have just gone up 5% as well. And many average investors can’t trade crude oil directly.

Of course, these are some of the most volatile stocks around, and many of the penny stocks are associated with the energy industry as well. So, how best to invest in oil stocks?

One of the most common issues that you will have to deal with when building your investment portfolio is the tradeoff of stocks vs bonds in your investment mix. The conventional wisdom regarding stocks vs bonds is that stocks are riskier than bonds. Let’s take a look at the background information that supports that conclusion, and see if it applies to your investment portfolio.

The primary advantage to bonds is that they have a fixed maturity and, ignoring the potential for the company going bankrupt, you know exactly how much money you will be getting and when. But this is only true if you hold the bonds to maturity. For a 30 year bond, that’s quite a commitment. But this is the basic assumption that is underlying the ideal that stocks are riskier than bonds.

Saw an article today on Yahoo Finance. The Man Group has announced that they will list their hedge fund as an ETF on the New York Stock Exchange. The type of ETF is what make this announcement interesting to me.

We’ve gone through the development of a price based mutual fund trading system. We’ve taken a look at the requirements for the data feeds for our mutual fund trading system. But what kind of trading system software can we use for this system? Is there some free trading system software we can use?

We’ve just written about using recent price performance as a way to build a trading system for mutual funds, specifically in this case the Fidelity Select Fund trading system. So, given that the integrity of the whole system is built solely on the price information that we have available, it would be no surprize to find that the integrity of the data feed is very important. The good news is that you can find mutual fund quotes on loads of web sites, so this is really of little concern. Well, that’s not quite true.

Today the market as measured by the S&P500 made an all time high. It finally eclipsed the high set in March of 2000. We are happy to see that, as all our systems are either at new all time highs or withing 1% of it as well.

Of course, what that means is that over the last 7 years, if you were invested in the grandaddy of all index funds, the Vanguard 500, even reinvesting the dividends the total return was just slightly less than the return of Fidelity’s money market fund FDRXX, but included a much more exciting drawdown of almost 50%. So what have the markets done over the last 10 years?

One of the more common questions we get: Which Fidelity Funds do you use for your system? Why don’t you use all of them?

There are some times when there are no strong sectors for our sector rotation to work with. 2002 is an example of one of those years when nothing seemed to sustain any strength. Those are the times when a sector rotation strategy may still produce returns greater than those of the market, but in a year when the market is down more than 15%, that may be of little comfort.

As we noted last time, just using price change as the way to make our selection of the top Fidelity Select Fund, has historically been profitable, but can be volatile and have some breathtaking drawdowns along the way. We’ve also written in the past about the problems with volatility when trying to identify the best mutual funds.

As an example, take a look at the plot below. It shows some recent price action from FSVLX and FSCGX for about one month. As you can see, they both have about the same percentage price change over the last month, but the red line (FSCGX) is much less volatile, and just looking at it you would suspect that it is more likely to be in a true uptrend than FSVLX over this same time period.

We’ve written before about using relative strength and sector rotation as our way to find the best Fidelity funds. One simple example is shown in this article about a simple Fidelity Select sector rotation system using just one Select fund at a time. That simple example uses just the one month percentage change in price as the strength metric, and it has done quite well over the years. But it is fairly volatile.

The most common question: How do we make our mutual fund and ETF trading system selections? Ours is a system based on sector rotation using a relative strength. We touch on this in our fund trading course, but we often get asked to supply more information on our systems. Today we will start a small series of postings on just how we select our funds.

In a previous article on gold mutual funds, we explored the impact that holding a postition in gold mutual funds could have on the volatility and risk of your overall portfolio. The impact was not as great as you would think given the standard advice to hold a metals position to diversify your portfolio.

Many investors like to use narrow sector index funds as a good blend that captures some of the trending tendencies of individual stocks, but with significantly less volatility as a vehicle for a sector rotation system.

There was another interesting article on Marketwatch today about the effectiveness of the old 39 week moving average as a market timing tool. You can read about it at Hulbert on the 39 Week Moving Average. The interesting thing is this was originally made popular by Doug Fabian in his old Telephone Switch Newsletter. His son, Dick Fabian, seems to have moved away from the basic tools made popular by his father, however, if you look at his track record, it seems that he would have been better served by sticking to what Dad taught him.

Lindsay at Wallstrip tackles seasonality….

Source: Michael Covel: Author of Trend Following

The first of May is upon us, and every financial journal seems to have some article about the merits of a seasonal strategy for getting in and out of the market. While there is something to be said for it’s performance long term, we’ve previously taken a look at the performance of seasonal trading with our portfolios, and adjusted it somewhat.