V.9:11 (435-437): Mutual Funds As Stock Index Proxies by Joe Duarte

Mutual Funds As Stock Index Proxies by Joe Duarte

Both mutual funds and stock indices such as the Standard & Poor's 500 are collections of stocks, but the}e is a major difference between them. A mutual fund manager changes the stocks in his collection or portfolio based on his or her perception of the stock market and the investment goals and philosophy of the fund's charter. The components of a stock index, on the other hand, may remain unchanged for long periods.

The mutual fund's philosophy and its management style, however, smooth out the fluctuations in its net asset value as a function of time. As a result, as long as the fund's manager and philosophy remain constant, the fund will usually respond to the market's moves in a similar way in response to market conditions, much as an index would.

By keeping long-term data of a mutual fund's price action and using technical analysis of the market's trend, momentum, and the fund's response to market conditions, an investor can achieve fairly consistent returns by trading mutual funds, much as a stock index trader might.

The combination of a stock index and its moving average is the simplest indicator of a trend change that I have found. For diversified mutual fund trading, an easily obtainable and excellent indicator is the Investor's Daily Mutual Fund Index and its 50-day moving average (Figure 1). It is an index of 20 large diversified stock mutual funds, published five days a week. It charts the daily price over the previous nine months. If the index moves above the 50-day moving average, it is a buy signal, and if it drops below the moving average, it is a sell signal. To prevent whipsaws, I confirm the signals provided by the moving average by using a sentiment indicator.