By Michael Brush
Lesson #3: Don’t fight the tape
This concept is one of the core pieces of wisdom from Marty Zweig’s classic book, “Winning on Wall Street.”
“You have to stay on the right side of market,” agrees Howard. “If you try to trade long in a bad market, it is painful.”
In other words, don’t try to be a hero.
“Sometimes, not losing money is where you want to be,” he says.
Likewise, don’t turn cautious just because the market hits new highs — like now. You should love new highs, because it is a sign of market strength that may likely endure.
Lesson #4: Keep it simple
As you’ll see below, Howard doesn’t use esoteric instruments such as derivatives, swaps or index options. He doesn’t even trade foreign stocks or currencies. This is refreshing for individual investors, because we have a harder time accessing those tools.
“You don’t have to trade crazy stuff,” he says. “You can trade plain-vanilla ETFs and beat everybody out there.”
Lesson #5: How to trade the current market
First, be long.
“The HCM-BuyLine is very positive. We are 100% in,” says Howard. “The market is broadening out. It is getting pretty exciting. We do not see it turn around any time soon. We are buying pullbacks.”
One bullish signal is all the cash on the sidelines. “If there is any relief in Covid, we may see a big rally. We may end up with a great fall [season].”
Howard uses momentum indicators to select stocks and ETFs, too. For sectors he favors the following.
He likes health care, tradable through the iShares US Healthcare /zigman2/quotes/210086508/composite IYH +0.01% and ProShares Ultra Health Care /zigman2/quotes/201097244/composite RXL -0.27% ETFs. He’s turning more bullish on biotech, which he plays via the iShares Biotechnology ETF /zigman2/quotes/206189322/composite IBB +0.20% .
He likes consumer discretionary tradable through the iShares US Consumer Services /zigman2/quotes/203227168/composite IYC +1.91% , and airlines via US Global Jets /zigman2/quotes/207744796/composite JETS +0.33% . He also likes tech exposure via the Invesco QQQ Trust /zigman2/quotes/208575548/composite QQQ +2.56% , iShares US Technology /zigman2/quotes/210107636/composite IYW +2.78% and iShares Semiconductor /zigman2/quotes/209255350/composite SOXX +6.54% .
He likes small-caps via the Vanguard Small-Cap Growth Index Fund /zigman2/quotes/201855114/composite VBK +1.03% . And convertible bonds via SPDR Bloomberg Barclays Convertible Securities /zigman2/quotes/207322350/composite CWB +0.47% and iShares Convertible Bond /zigman2/quotes/202755909/composite ICVT +0.50% .
As for individual names, he singles out Microsoft /zigman2/quotes/207732364/composite MSFT +2.14% and Apple /zigman2/quotes/202934861/composite AAPL +1.41% in tech, as well as Amazon.com /zigman2/quotes/210331248/composite AMZN +4.44% and Tesla /zigman2/quotes/203558040/lastsale TSLA +4.72% .
Also consider Howard’s two ETFs: The HCM Defender 100 Index /zigman2/quotes/214582657/composite QQH +3.40% and HCM Defender 500 Index /zigman2/quotes/214582668/composite LGH +1.75% .
He prefers to add to holdings on 1%-3% dips.
A few drawbacks
His HCM Tactical Growth fund has a history of posting two-year stretches of underperformance of 1.5% to 8.8%, since it was launched in 2015. The fund then came roaring back to net the very positive five-year outperformance cited above. Investing in his system can require patience.
Every manager, including Warren Buffett, can have a stretch of underperformance, says Howard.
“We are in the odds game,” he says. “Even in the odds game, you can have a bad hand or two thrown at you.”
Another challenge is the high turnover, which is 140% a year for Tactical Growth. This means Uncle Sam takes a big cut in the good years. So if you buy Howard’s funds, you may want to do so in a tax-protected account.
Michael Brush is a columnist for MarketWatch. At the time of publication, he had no positions in any stocks mentioned in this column. Brush has suggested MSFT, AMZN, in his stock newsletter, Brush Up on Stocks. Follow him on Twitter @mbrushstocks.