Be fearful when others are greedy and greedy only when others are fearful.
-- Warren Buffett
-- Warren Buffett
Almost all Exchange-Trade Funds are listed on the American Stock Exchange (AMEX). The official definition of ETFs is "registered investment companies under the Investment Company Act of 1940, which have received certain exemptive relief from the SEC to allow secondary market trading in the ETF shares. ETFs are index-based products, in that each ETF holds a portfolio of securities that is intended to provide investment results that, before fees and expenses, generally corresponding to the price and yield performance of the underlying benchmark index."
Some of the heavily traded ETFs are:
SPY - the Standard & Poor's Depositary Receipt (SPDR) Trust Series securities, tracks the price and yield of the S&P 500 Index. The S&P 500 Index which is calculated as the number of common shares outstanding multiplied by the stock's price, is market-capitalization-weighted. Therefore, the big market cap stocks exert a larger influence on the index.
QQQ - the Nasdaq-100 Trust Series I, tracks the price and yield of the Nasdaq 100 Index.
DIA - Diamonds Trust Series I, Tracks the price and yield of the DJIA. The DJIA is price-weighted by each of the 30 components. Therefore, the highest-priced stocks have the most impact on the average.
iSHARES - pooled-securities with an open-ended investment structure issued by Barclays Global Investors. There are over 50 different iShares index funds that trade like stocks. Each share tracks a specific portfolio.
Value Line Composite Index
The Value Line Composite Index (VLCI), also known as the Value Line Geometric Index, is a geometrically weighted index of 1700 stocks in 90 industries. It was first appeared in 1961 to provide the "median" performance of all the stocks tracked. About three-fourths of the stocks are traded on the New York Stock Exchange, 20 percent are traded on the Nasdaq, and the remainder on the AMEX and in Canada.
On February 1, 1998, Value Line published a new index dubbed the Value Line Arithmetic Index (VLAI). The index provides the average performance of all stocks in the index. It is based on summing up the percentage price increase in every stock each day and dividing that total by the number of stocks in the index. Therefore, it is an equally weighted index of 1700 stocks.
VL4% Strategy
The VL4% strategy uses a daily chart of the VLCI. If the VLCI rises 4% from its last market low, based solely on its weekly Friday closing price, that is a buy signal. On the other hand, if VLCI declines from its last market top by 4% based on the weekly Friday closing price, that is sell signal. You cannot buy or sell VLCI because it is an index. Therefore, you should invest in an index fund or ETF instead.
Leslie N. Masonson, in the back-test, found that performance can be improved by adding the 20-dma (day-move-average) to the VL4% VLAI daily strategy. With the 20-dma, we add:
A buy signal occurs when the VLAI pierces its 20-dma to the upside, from below.
A sell signal occurs when the VLAI drops below its 20-dma to the downside, from above.
If the other strategy issued a buy/sell signal while the current buy/sell signal was in place, no action would be necessary.
Nasdaq Composite Index (COMPX) NC6% and Nasdaq 100 Index (NDX) NDX6% Strategy
The COMPX contains about 3500 companies. It tends to be more volatile and has wider prices swing than the VLCI and VLAI. Based on the back-test results, Leslie N. Masonson found that the weekly 6% signals are superior to the daily 6% signals as the latter are much more frequent because of the volatility of their respective indexes.
Back-test results in choosing the best dma
Michael McDonald, Predict Market Swings with Technical Analysis (Wiley, 2002)
S&P 500 Index - 72-dma and 132-dma.
Robert W. Colby, The Encyclopedia of Technical Market Indicators (McGraw-Hill, 2003)
DJIA - 66-dma and 126-dma
Leslie N. Masonson, All About Market Timing (McGraw-Hill, 2004)
Nasdaq Composite - 20-dma and 25-wma
