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Hey, hey, what’s up my friend?
I’m excited to share with you that an updated and improved version of the Follow the Money, A.K.A “FTM trading system” is available.
To walk you through, what this is about?
The SPY
If you look at this, these are the original rules of the Follow the Money Trading System.
This is the result from 2016-2024
You can see the equity curve over here.
Then you are going to look at the figures about 11% over the last 9 years.
Maximum drawdown of about 16 %.
You might be wondering — “Rayner why you don’t run from 2016 to 2024?”
The reason will be apparent in a short while.
The SPMO
This SPMO is the improved version.
You can see the equity curve.
The yearly results every single year, we are in green. It’s pretty much a banger year with a 34.70%
Whereas the SPY version is up 24% with a couple of losing years in between.
You can see that the improved version is much better if you ask me.
The annual returns since 2016 are about 14%.
The maximum drawdown is about 14%.
You can see that we have increased our annual return and reduced our maximum drawdown.
Now…
What’s the secret?
What is the change to this trading system?
It’s a small change only.
Let me tell you what the change is…
The change is Instead of trading SPY as our ETF, we are going to replace it with SPMO.
You might be wondering…
“Rayner, what is SPMO?”
What is SPMO and how does it work?
If you look at Google/yahoo search…
“The funds generally will invest at least 90% of its total assets in the securities that comprise the underlying index. The underlying index is designed to measure the performance of approximately 100 stocks in the S&P 500® Index that have the highest “momentum score.”
What this fund does is that it invests in stocks that exhibit signs of momentum.
It’s a kind of momentum trading fund if you want to call it that.
So, it pretty much buys stocks that have shown signs of strength recently.
Holdings
Right now, some of the holdings it’s like 10% of the ETF are assigned to Amazon, almost 10% to NVIDIA, and then META about 6%, all the way down.
Looking at the different sectors now, it’s kind of overweighed in the financial services, Technology, and consumer cyclical.
Not so much in utilities, real estate, and basic materials because these sectors, or rather the stocks in these sectors are quite weak.
Probably not in an uptrend, probably, in the downtrend, ranging or whatsoever.
This one pretty much just puts…
I would say — It’s money in stocks that have exhibited signs of strength, assigning a momentum score to each stock.
Then those stocks that have a stronger performance, better performance, stronger momentum, they’ll put more money into the stocks as you can see over here:
The top 10 stocks and top 10 holdings make up about 56% of its total assets.
Moving on…
How has the SPMO performed over the SPY over time
There are three lines over here:
But just pay attention to the S&P index, the one in light blue, and then the S&P Momentum ETF.
Because this is the one that we want to buy, the SPMO.
If you look at the S&P 500, the one in blue, and then the ETF which is the dark blue line:
You can see that they are correlated.
When the overall market goes down, guess what?
This ETF also goes down over time through drawdowns.
But where it’s apparent is that usually when you see the drawdown,
This ETF, the drawdown based at least on the last few years, is shallower compared to the SPY and S&P.
Let’s say the SPY has a drawdown of 50%.
This fund probably will be around 45-46 % drawdown.
The draw is not as deep. It’s still going to be deep, but not quite as deep as the S&P500.
When the market rebounds higher, the fund tends to be higher as well.
You can see there’s a light blue line when the S&P 500 rebound higher, this fund rebound up higher even more.
From a risk-adjusted return, this ETF has performed better than the S&P 500 over the last few years.
This is because instead of buying every stock out there, it focused mainly on stocks that have exhibited signs of momentum, signs of strength, and it’s a proven factor in the market.
Momentum is one of the factors or it’s one of the strategies that has proven to work over the last few decades even till today.
That’s why we have systems like the Trend Following System, and MOMO stock trading system for those of you in the Ultimate Systems Trader program, you may be familiar with all these systems.
We are taking advantage of or exploiting this momentum effect, this factor if you want to call it.
People in the academic world call this factor.
There’s a momentum factor, there’s a value factor, a small size factor even, etc.
But momentum is, I would say the top of the list.
The one that has been perceived for the longest time.
If you ask me, the reason is largely because of psychology.
When people see the market going up higher, they may think, it’s not logical to buy at this height, but you know, FOMO.
This is why they buy and push the price even higher, that’s why there’s this momentum effect in the market.
Back to where I was at.
You understand what the SPMO ETF is about.
You’ve seen the price performance compared to the S&P 500.
How can you implement this in your trading for the FTM trading system?
Well, it’s very simple.
What you’re going to do now, so it’s basically, you know which are the ETFs that you’re trading.
The first version, we have…
- SPY
- GLD
- VEA
- TLT
- TBC
What we’re going to do now is we’re going to remove SPY because it’s going to be replaced by SPMO.
Then everything else remains the same.
Every month, you calculate your ROC (rate of change), and you calculate these 5 ETFs.
SPMO has now replaced the S&P 500.
That’s pretty much it.
This one change will be likely to improve your risk-adjusted returns over time.
Just making this one small change.
To answer back the earlier question, why do we start from 2016?
Very Simple.
If you look at SPMO, this ETF started back in 2016
This is why as much as I wish to go back to 2008, we just don’t have the data available.
Looking at the last 9 years of data taking into account the COVID, Russia, and Ukraine war, low inflation, and high inflation period, this seems to be holding up pretty well.
This is why I’m confident that…
“Hey, trading the SPMO instead of the SPY would yield better risk-adjusted returns moving forward”
If I just compare this with the spy you’ve seen this earlier, but I think maybe now it’s a bit clearer.
You can see this is the returns of the S&P 500.
Since S&P 500 is the one in red then the SPMO is the candlestick chart.
You can see that whenever there’s a drawdown.
It both goes down together.
Sometimes the drawdown might be of a similar magnitude, but where it really shines is that when the market takes off, the SPMO usually will take off much higher compared to a buy-and-hold on the S&P 500.
Hopefully, this makes sense, right?
Go out there.
Beat the markets, generate extra income, and grow your wealth.
I wish you all the best.
Good luck, good trading…
I will talk to you soon.