Reader Frank had the following question:
You say that you sort the stat sheets by the M-index. For funds that have the same M-index are they truly in descending momentum sequence?
For example, there may be 10 or 15 funds with an M-index of 4. Does the 1st #4 fund have a higher momentum than the 2nd or are they just listed randomly within the ranking? Am I better off choosing a fund listed higher within a given ranking?
Let’s say there are 10 ETFs all ranked with an M-Index of 4. That means they have equal weighting, but they are randomly listed within the ranking.
You now need a tiebreaker to decide which one maybe appropriate for you. While there are several approaches, I focus on only two other numbers:
1. The DD% column: It tells me by how much a fund has come off its recent high. The number 0.00% means that it has just made a new high and is in tune with current market momentum.
2. The 4wk column: That too shows more recent strength as opposed to longer term momentum, which is represented in the M-Index itself.
For example, take a look at the chart above (listing of Top 100 funds as of 9/9/10). There are 3 funds listed, which have an M-Index of “6.” Based on the DD% column, DEF would be my choice since it has just made a new high, while the other 2 have come off their highs considerably.
Despite their higher 4wk momentum numbers, my choice would still be DEF. Assume for a moment that all 3 had DD% numbers of 0.00%; then my selection would be FKASX, since it has the highest 4wk momentum number.
Again, as I have posted before on several occasions, if you are selecting ETFs, be sure to use only those with high daily average volume figures due to lower bid/ask spreads and superior liquidity.
Disclosure: No holdings