Covestor pioneer Arold launches new momentum portfolio


Michael Arold is one of the original 10 money managers on Covestor’s online marketplace for investors, and now he’s out with a new portfolio.

Since launching in September 2007, his Technical Swing portfolio has an annualized return of 9.6% net of fees, compared with 6% for the S&P 500, as of March 18.

Arold is an aerospace engineer who says his background has helped him apply systematic, rules-based techniques to his style of technical trading. While he believes markets are “mostly” efficient, there are still small inefficiencies that can be exploited by active strategies.

Now, Arold has unveiled a new strategy on Covestor: Active Momentum portfolio.

He has hit another important milestone, launching A2M Capital LLC, a Germany-based Investment Advisory Firm, registered with the SEC in the United States. The strategy of A2M is to identify market anomalies and build investment models based on them.

Arold recently discussed how the new Active Momentum portfolio is different from Technical Swing.

He said Technical Swing is designed to exploit market momentum and short-term mean reversion in the markets. It invests primarily in individual stocks.

Active Momentum is a rotation strategy based on relative and absolute momentum. This portfolio invests in ETFs.

In Active Momentum portfolio, Arold says he ranks about 30 ETFs across various asset classes each month based on six-month performance, as well as absolute and relative momentum. By analyzing momentum, he’s looking for ETFs that have strong upward trends.

Arold said cash levels in Active Momentum recently climbed above 40% of the portfolio after selling some ETFs that had exhibited strong momentum but showed signs of tiring.

The portfolio currently holds Technology Select Sector SPDR ETF (XLK), Health Care Select Sector SPDR ETF (XLV) and PowerShares WilderHill Clean Energy Portfolio ETF (PBW).

The portfolio can rebalance frequently as Arold attempts to lock in gains and sidestep losses.

Typically, Active Momentum will hold five ETFs that demonstrate relative momentum and score high on Arold’s technical rankings. He also performs correlation analysis to select ETFs that potentially offer a  combination of upside potential and diversification.

Arold says he recently sold iShares Nasdaq Biotechnology ETF (IBB) and iShares MSCI Germany ETF (EWG), which is why the cash position is currently elevated.

IBB Chart

IBB data by YCharts

“Biotech has had a great run but the sector ETF recently went parabolic, which can signal a buying climax,” he said. “On the Germany ETF, it had great momentum until the beginning of February but that has recently collapsed.”

EWG Chart

EWG data by YCharts

Arold described Active Momentum portfolio as a quantitative strategy for the most part, based on rules. He determines ETF rankings on a monthly basis, and those scores primarily determine his buy and sell decisions.

Active Momentum is designed to hold ETFs for potentially months at a time. Meanwhile, Technical Swing can have holding periods of weeks or even days “because I’m trying to trade mean-reverting swings which can be shorter,” Arold said.

“Technical Swing is stock-based and can go short the market. It’s much more aggressive than Active Momentum,” Arold said.

He also pointed out that he’s “not happy” with the recent performance of Technical Swing, which started to underperform in late 2013.

“The reason is that Technical Swing needs a certain amount of volatility in the market, and its’ been well over two years since we had a 10% correction in the S&P 500,” Arold said. “It has been a ‘dip and run’ market, which isn’t very favorable for the strategy. The recent lack of volatility is similar to 2009, when Technical Swing also underperformed. However, volatility will come back at some point, and probably when investors least expect it.”

DISCLAIMER: The investments discussed are held in client accounts as of February 28, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Covestor Limited and A2M Capital, LLC are not affiliated. Past performance is no guarantee of future results.