Backstop Funds for Dual DefenseTM

Setting a Performance Floor in Momentum Strategies 

 

The Backstop Concept: MDY

Originally, we recommended including a "Backstop fund," such as MDY, among a Strategy's set of 12 candidate funds so that if there ever was a period when none of the other candidate funds were doing better than MDY, then the broad-market Mid Cap MDY fund would be the best one to own. For example, a strategy containing only a variety of healthcare funds would have lackluster performance when healthcare is out of favor — unless the strategy employs a broad Backstop (like MDY) to fill the gap. Better than investing in the best-performing healthcare fund would be to invest in the best-performing healthcare fund that can beat MDY — and otherwise own MDY as the performance floor Backstop.    
 

The Improved Backstop: TRM

Of course, using a broad-market fund such as SPY or MDY as a Backstop carries unwelcomed baggage: they experience bear market losses. The TRM Tactical Risk Mitigation Index developed in 2022 (see below) as a portfolio suitable for conservative investors turns out to be an even better Backstop than MDY and SPY because TRM largely neutralizes the bear market loss problem that hampers MDY and SPY. We have created the ticker symbol TRM to represent the equity curve of the Index so that TRM can be used as one of the 12 candidate funds or the integrated Bear Market Strategy. When TRM is selected, it means that you must own each of the four underlying funds selected by its Index in equal weights.
 

More Aggressive Backstops: BSTOP, SSTOP

Momentum algorithms in general perform better when their candidate funds are of similar volatility because it aids orderly momentum-leadership handoff between the candidate funds and the Backstop fund. Thus, more aggressive Backstop designs are more effective for strategies employing sectors, subsectors, countries, stocks, and leveraged funds. Conversely, it's not sensible to employ a sector-based Backstop in a rather tame stylebox class Strategy because the Backstop would dominate the other candidate funds of the Strategy. Thus, we've created two additional Backstop funds (tickers BSTOP and STOP) to cover the wide range of volatility common among ETFs and stocks.

   

TRM: Tactical Risk Mitigation Index

The TRM Tactical Risk Mitigation Index is a portfolio of four underlying Strategies, each of which consists of a classic 60/40 backbone that is challenged for momentum leadership by 11 defensive ETFs and is further defended by an integrated Bear Market Strategy when StormGuard is triggered. We've created ticker symbol TRM to represent the equity curve of the Index in a Strategy. Thus, TRM can be used as one of the 12 candidate funds or the integrated Bear Market Strategy. When TRM is selected, it means that one must own each of the four underlying funds selected by its Index in equal weights.

TRM Funds


   

BSTOP: Stylebox Backstop

The Stylebox Backstop is more aggressive than TRM. It consists of a single momentum strategy with a backbone composed of large, mid, value, and growth-style ETFs that are challenged for momentum leadership by an ultra-short-term bond fund and a broad commodity fund, which is further defended by an integrated Bear Market Strategy when StormGuard is triggered.

BSTOP is well suited for use with sector and global momentum strategies. We've created ticker symbol BSTOP to represent the equity curve of the Index in a Strategy. Thus, BSTOP can be used as one of the 12 candidate funds or the integrated Bear Market Strategy. When BSTOP is selected, it will report which of its underlying funds was selected by the momentum algorithm.

 

SSTOP: Sector Backstop

The Sector Backstop is more aggressive than BSTOP and TRM. It consists of a single momentum strategy with a backbone composed of key market sector ETFs that are challenged for momentum leadership by short-term and ultra-short-term bond funds, a gold fund, and a broad commodity fund and is further defended by its integrated Bear Market Strategy when StormGuard is triggered.

SSTOP is well suited for use with 2x leveraged strategies and stock strategies. We've created ticker symbol SSTOP to represent the equity curve of SSTOP in a Strategy. Thus, SSTOP can be used as one of the 12 candidate funds or the integrated Bear Market Strategy. When SSTOP is selected, it will report which of its underlying funds was selected.

 
  

Dual Defense:  StormGuard  + TrendGuard
In the aftermath of the COVID-Crash, investors wanted better ways to more safely navigate the policy-induced market perturbations related to periodic pandemic lockdowns, inflationary money supply growth, painful interest rate hikes, and the devastation of bond markets. The value of Warren Buffet's Two Rules for being doubly cautious about losing money became inspirational in the development of our Dual Defense methodology. When a bear market comes knocking (1) StormGuard acts like a first guard dog positioned at your front door evaluating a set of 16 market metrics to assess overall market safety while (2) TrendGuard acts like a second guard dog at your back door that employs a defensive Backstop fund to directly compete for momentum leadership with the Strategy's own candidate funds seeking to provide a performance floor in the event that all of the candidate funds begin performing poorly separate from the broader market performance monitored by StormGuard.



Application Notes:

  1. Although the Backstop funds generally help most strategies avoid serious drawdowns not well addressed by StormGuard, like BBQ sauce, there are some kinds of meat that are just not conducive to improvement with a dash of the sauce. For example, to be effective, the Backstop fund must be able to take leadership in fairly short order, making the Bias Toward Shorter Trends option generally helpful. However, some fund combinations will naturally perform better with longer trends to avoid whipsaws in trading during volatile markets.

  2. As previously noted, there are three Backstop funds for a reason. The best choice is generally the one that is a bit less aggressive than the Strategy candidate funds. Thus BSTOP (stylebox based) is a great match for sector Strategies and SSTOP(sector based) is a great match for subsector, stock, and leveraged ETF Strategies. If you choose too aggressively, the Backstop fund may be selected most of the time. If you choose too cautiously, the Backstop fund may not be very helpful at all.  

Example 1:
This 2019-2023 animated chart of the Worldwide Dual Defense Strategy shows the value of adding the TRM Backstop as one of its candidate funds.

For example, TRM was selected in early 2022 when all of the other candidate funds were trending lower, but StormGuard had not yet triggered based on its broader market criteria. Note that each selection of the TRM Backstop does not guarantee a superior result, but it will improve the odds of catching a ride on a better wave.  

 


 

Example 2:

This 2014-2023 animated chart of the SPDR-Man Essentials Strategy shows (1) the value of adding the BSTOP Backstop as one of its candidate funds, and (2) the value of adding both  the TRM and BSTOP Backstops as candidate funds.

For example, BSTOP stepped in early in 2022 when all of the other candidate funds of this Strategy were trending lower, but StormGuard had not yet triggered based on its broader market criteria. Note that selection of a Backstop fund does not guarantee a superior result, but it will improve the odds of catching a ride on a better wave.

 


 

Example 3:

This 1999-2023 animated chart of the SPDR Man Evolved Strategy teaches the value of including SSTOP among the Strategy's other candidate funds.
 

In this example, SSTOP stepped in early in 2022 when all of the other candidate funds were trending lower, but StormGuard had not yet triggered based on its broader market criteria.
 

Note:  This Strategy was purposely designed to excluded funds that did well in 2022 (like energy, consumer staples, and value) in order to create a deficiency for SSTOP to fix. Selection of a Backstop fund is no guarantee of a superior result, but it will improve the odds of catching a ride on a better wave.

 



 

Dual Defense Video

This video quickly demonstrates Dual Defense principles and how to import ready-made strategies to your page.
 

Dual Defense Video

How to Find Dual Defense and Backstop Strategies

On the Strategies page click the blue S icon to open the "Select A Strategy to Import" window. Enter "Dual" in the upper left text box, and Strategies with "Dual" in their name will be displayed. Search also for "DD" to find other ready-made Dual Defense Strategies. To find the Backstop Strategies, search for "Tactical," "BSTOP," or "SSTOP." 


Find a strategy

 

 

  

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