Biotech + Gold (Updated)

In this article I wrote about an index I follow that combines the biotech sector with the gold stock sector. I also wrote about “one way” to trade that index.  This article builds on that piece and adds a new “rule” to create more trading opportunities.
The BIOGOLD Index
Figure 1 displays the index that I created using AIQ TradingExpert.  It combines ticker FBIOX (Fidelity Select Biotech) with ticker FSAGX (Fidelity Select Gold).
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Figure 1 – Jay’s BIOGOLD Index (Courtesy AIQ TradingExpert)
Also included in the lower clip is an indicator referred to as RSI32, which is the 2-day average of the standard 3-day RSI.
The Old System
In the original article I tested an approach that works as follows using monthly data:
*When the RSI32 drops to 32 or below, buy BOTH FBIOX and FSAGX
*After a buy signal, sell both funds when RSI32 rises to 64 or higher
For results, please see the original article.
The New System
The “new rules” are as follows:
A “buy signal” occurs when either:
*The RSI32 drops to 32 or below
*The RSI32 drops below 50 (but not as low as 32) and then reverses to the upside for one month
After either of the buy signals above occurs, buy BOTH FBIOX and FSAGX
*After a buy signal, sell both funds when RSI32 rises to 64 or higher
Figure 2 displays the BIOGOLD Index with various buy and sell signals marked.
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Figure 2 – Jay’s BIOGOLD Index with RSI32 signals (Courtesy AIQ TradingExpert)
To test results we will:
*Assume that after a buy signal both FBIOX and FSAGX are bought in equal amounts
*We will assume that both funds are held until RSI32 reaches 64 or higher (i.e., there is no stop-loss provision in this test)
For testing purposes we will not assume any interest earned while out of the market, in order to highlight only the performance during active buy signals. Figure 3 displays the hypothetical growth of $1,000 (using monthly total return data) using the “system”.
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Figure 3 – Hypothetical Growth of $1,000 using Jay’s BIOGOLD System (1986-present)
Summary
For the record, I am not “recommending” that anyone go out and initiate trading biotech and gold based on what I have written here.  Before trading using any approach it is essential for a trader to do their own homework and carefully consider all of the pro’s and con’s associated with any specific approach.  For example, while the trade-by-trade results for the above look reasonably good, it should be noted that there have been 4 separate drawdown’s in excess of -19% along the way, including a maximum drawdown of -37% in 2008.  In considering any approach to trading it is essential to first think long and hard about how well one would “weather the storms”, BEFORE focusing on potential profitability.
To put it more succinctly is the simple phrase “Don’t cross the river if you can’t swim the tide.”
Jay Kaeppel
Disclaimer:  The data presented herein were obtained from various third-party sources.  While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information.  The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.

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