Tactical Asset Allocation: 28, 29, 30. Rotate!

How about a long term trading system that needs only some 30 seconds each month to keep track? Amazing, but now by all means doable. Thanks to Kevin McGrath's Tactical Asset Allocation system. Kevin claims a combined capital growth of 70+% over the last five years and he has backtested the living daylights out of his system settings as well as the ETF selection.

In short: for this particular long only TAA system one determines at the end of each month the relative strength of four ETF's: EFA, IWM, SPY and AGG*. The ETF with the highest reading is considered strongest. That ETF is the pick for the next month and all assigned assets are then rotated accordingly. Even better: now thinkscript takes care of the monthly system evaluation. The only action for the user to do is pull up the chart and next enter one sell and one buy order. Nothing more, nothing less. Extremely simple, extremely effective!


On the chart the upper pane shows the relative performance of the four ETF's. On the lower pane for each ETF its relative strength is depicted and the pick for the new/current month is shown as a chart label. As a proxy for relative strength the 60 day ROC of a 3 day moving average is used.

After the close on the last day of the month, the four readings are evaluated. Based on the highest reading thinkscipt selects and locks the ETF for the new month. When the ETF for the new month is the same as the one of the last/current, no further action is needed. In case a new ETF does take over poll position, the only necessary action is to re-allocate all current holdings into the new top pick. This is an all in strategy and Kevin uses his system without stops, but in a bit more conservative approach one could of course set a (trailing) stop loss order at the level suitable to one's trading style.

As there is no trading activity during the month, the number of trades is very limited, thus keeping brokerage costs at a minium. And because most of the time an ETF is kept for 30 or 31 days (except for February), even TDA's commission free* ETF's are eligible (do read the fine print though!): AGG* is one of those 100+ selected ETF's.
On a side note: Kevin's back testing proved inferior results for leveraged ETF's.

See the post on the TAA_Equity curve for suggestions and alternative usage of this TAA-system.

The TAA-suite consists currently of the following scripts for usage on a daily chart (of SPX):
- TAA_Monthly_Vline: plots a vertical line on the price chart on the last trading day of the month.
- TAA_Prices: super imposes the price of the selected ETF on the price chart while hiding the price plot of the charted instrument (SPX). This study has to be loaded for each separate ETF, so four times, and all four of them are to be moved to the section for Upper Subgraph Studies (see screenshot below). Also adjust the names of the ETF's and their coloring accordingly (see for coloring the chart labels of the lower pane study).
- TAA_Rotation: loads the lower pane study for the ROC-comparison and monthly ETF selection.
- TAA_Equity: for description and script see this post.
The mentioned studies are available for copy/past in the comment section.


Tip: after setting up the system, which admittedly takes a bit more than 30 seconds, do save the chart style for easier future usage: select "Style" > "Save Style" > Enter Style Name: TAA and tick the box to Include Study Set.

Kevin based the developed this TAA-system on a key paper by Mebane T. Faber: "A Quantitative Approach to Tactical Asset Allocation" and he keeps track of the system on his site with monthly updates. For further background reading and to have a close look at the evolution of his system, please take a look at the StockFetcher forum. The details for the actual version are in the last posting on page 40.

Enjoy your free time and trade safe!

[Update February 9, 2013: chartlabel with name of the month added in TAA_Rotation]
[Update February 10, 2013: key paper source added and study load instructions extended]
[Update March 1, 2013: TAA_Rotation script updated and new equity curve chart]
[Update March 9, 2013: fix for missing "concat" statements in TAA_Rotation script]
[Update March 10, 2013: another idea by Aurelia: currentETFline  added to TAA_Rotation script]
[Update December 8, 2013: label logic expanded to show next month's pick at EoM]