Blog Archives

The iM-Minimum Drawdown Combo

In our continued effort to satisfy request for low drawdowns models with reasonable turnover and good returns we provide this model, which combines:

The combo showed a simulated 22.2% annualized return with a maximum drawdown of -7.7% when backtested from Jan-2000 to Apr-2017.

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The iM-Low Turnover Composite Timer Combo

In an effort to satisfy request for low turnover models with low drawdowns and reasonable returns we provide this model, which combines:

  • the iM-Comp Mkt Timer Stocks/Bonds (VOE-BIV) based on the iM-Composite Timer (SPY-IEF) which holds only one ETF at any time (33% weight in the combo),
  • and the iM-Composite Mkt Timer(GLD&SCHP+VTV&VOE+BIV&LQD) based on the iM-Composite (Gold-Stocks-Bond) Timer which holds two ETFs concurrently (67% weight in the combo).
  • This combination model always holds two or three ETFs at any time for a minimum period of six weeks before any of them can be sold.

The combo showed a 17.6% annualized return with a maximum drawdown of -11.2% when backtested from Jan-2000 to Mar-2017 on the simulation platform Portfolio 123.

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Updated: Timing the Stock Market with the Inflation Rate

  • Stocks usually perform poorly when inflation is on the rise. Using the inflation rate, we developed a market timer according to two simple rules.
  • Switching according to the Timer signals between the S&P500 with dividends and a money-market fund would have provided from Aug-1953 to end of Jan-2016 and annualized return of 12.69%.
  • Over the same period buy-and-hold of the S&P500 with dividends showed an annualized return of 10.08%, producing about a quarter of the total return of the Timer model.

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The MAC-US Timer – a Moving Average Crossover System of the S&P 500

  • Switching between stocks and bonds as signaled by a simple moving average crossover system of the S&P 500 – the MAC-US Timer – produces significantly higher returns than buy-and-hold stocks.
  • The model has been updated from Aug-1965 to Jan-2017, conservatively assuming that funds are placed in the money market when not in the stock market.

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The iM Composite Timer Gold-Stocks-Bonds

  • This model uses the rules of the iM-Gold Timer and the iM-Composite Market Timer to signal periodic investments in gold, stocks and bonds.
  • From Jan-2000 to Jan-2017 the Gold Timer signaled eight gold investment periods totaling only 9.3 years, while for the remaining periods totaling 7.7 years the model would have been in cash.
  • During the “cash periods” the Composite Market Timer provides the signals when to invest in stock and/or bond ETFs. Bond ETFs include the ETF (XLU) are also selected according to the prevailing Market Climate Score (MC-Score) and a ranking system.

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Forecasting Stock Market Returns with Shiller’s CAPE Ratio and its 35-Year Moving Average

  • Shiller’s Cyclically Adjusted Price to Earnings Ratio (CAPE ratio) is at 27.8, which is 11.1 above its long-term mean of 16.7, signifying overvaluation of stocks and low forward returns.
  • The alternative CAPE ratio methodology offered in this article references stock market valuation to a 35-year moving-average of the Shiller CAPE ratio instead of to the 1881-2016 fixed long-term mean.
  • The latest CAPE ratio predicts a 10-year annualized real return of only 1.5%, whereas the presented methodology forecasts 5.8%, similar to the long-term market trend expected real return of 5.4%.

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Market Timing with ETFs SH and RSP: Using the iM-Composite & Standard Market Timers’ Rules

  • This market timing model integrates the iM-Standard Market Timer and the iM-Composite Market Timer.
  • This model switches between ETFs SH and RSP providing signals when to be short or long the stock market.
  • The model does not utilize Bond ETFs, and is therefore not directly affected by the potential risk of rising interest rates.
  • From 2001 to 2016 switching between SH and RSP provided significant benefits. This strategy would have produced an average annual return of 26.2% versus only 8.5% for buy&hold RSP.

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Profitable Market Timing Using Performance of the Hi-Beta and Lo-Beta Stocks of the S&P 500

  • This market timing model compares the performance of two different types of stock groups over time and provides signals when to invest or not to invest in the stock market.
  • When the performance of the Hi-Beta stocks becomes lower than, or equal to Lo-Beta stocks the model exits the stock market and enters the bond market.
  • It re-enters the market when the performance of the Hi-Beta stocks becomes higher than Lo-Beta stocks.
  • From 2001 to 2016 switching between bonds and stocks provided significant benefits. This strategy would have produced an average annual return of 12.5% versus only 5.2% for buy&hold stocks.

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Composite Market Timing Increases Returns And Reduces Drawdown.

  • Reliance on a single market timer could be risky. The risk can be reduced with a composite timer who’s component timers use different, uncorrelated, financial and economic data.
  • From 2001 to 2016 switching between bonds and stocks using a composite timer would have produced an average annual return of 19.7% versus only 5.2% for buy & hold stocks.

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Profitable Market Timing with the Unemployment Rate, Backtested to 1974.

fig-2-bond-stocks-unemp-im
  • If the unemployment rate is higher than three months ago the model exits the stock market and enters the bond market, and re-enters the market when the unemployment rate is equal or lower than where it was three months ago.
  • From 2001 to 2016 switching between bonds and stocks provided significant benefits. This strategy would have produced an average annual return of 13.0% versus only 5.2% for buy&hold stocks.
  • Using long-term data from 1973 to 2016 for stocks and bonds confirms the unemployment rate (UNEMP) as a profitable stock market timer.

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