Stocks & Commodities V. 23:1 (39-45): A One Rank Screening Technique For Mutual Funds by Norman J. Brown

Stocks & Commodities V. 23:1 (39-45): A One Rank Screening Technique For Mutual Funds by Norman J. Brown

Here’s a momentum-following method using three technical analysis tools to help switch your mutual funds.

In my earlier articles describing a “One Rank” (OR) switching methodology (see “Related reading”), I emphasized that the switching rate (S/Y or S) was the driving parameter enhancing mutual fund returns and lowering risk. I also showed that S is a direct measure of a fund’s persistence and could be used to screen equity type mutual funds for improved OR performance. Unfortunately, most funds cannot be switched at the high rates demanded by OR due to imposed restrictions by the various mutual fund suppliers. This restriction has been eliminated in the last few years by firms such as Rydex, Potomac, and ProFunds, as well as a new class of “low-cost” funds called exchange-traded funds (ETFs).

In this article, I propose a method that negates the need to switch a couple times a week, as in OR, by using a timehonored technical analysis approach utilizing momentum-following methods to switch. This results in only three to 12 switches per year. The three methods studied herein are: moving average convergence/divergence (MACD), made famous by Gerald Appel; stochastic (stoch.), pioneered by the late George Lane; and Accutrack (AT). These are all well known in the technical analysis community, so I will not elaborate on the details.