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On Track for 2.5% Inflation by December 2016; Update November 2016.

  • On September 19, we estimated an inflation rate of 2.5% for December 2016, and 1.4% for September 2016.
  • Actual September inflation came in at 1.5%, the December inflation estimate remains at 2.5%.
  • With inflation rising, and markets uncertain, Treasury Inflation Protected funds (TIPS) should remain a reasonably safe investment. Conventional bond funds are expected to perform worse than TIPS funds.

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On Track for 2.5% Inflation by December 2016; Update November 2016.

  • On September 19, we estimated an inflation rate of 2.5% for December 2016, and 1.4% for September 2016.
  • Actual September inflation came in at 1.5%, the December inflation estimate remains at 2.5%.
  • With inflation rising, and markets uncertain, Treasury Inflation Protected funds (TIPS) should remain a reasonably safe investment. Conventional bond funds are expected to perform worse than TIPS funds.

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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.

  • 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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Components for the iM Composite Timer

Instead of relying on just one market timer, many uncorrelated market timing strategies can be designed from the comprehensive and diverse financial data that is readily available, and then combining them in a robust composite market timing model. We designed six such component timers using following:

  1. Unemployment Rate (UNEMP),
  2. Performance of the Hi-Beta and Lo-Beta stocks of the S&P 500,
  3. TED Spread,
  4. Market Climate Score,
  5. iM Standard Timer,
  6. CBOE Volatility Index VIX.

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2.5% Inflation By December 2016; This Negative Inflation Surprise Favors TIPS Over Conventional Bonds!

  • If the FED does not change the Federal Funds Rate then the year-on-year inflation rate is set to rise, and we calculate it at 2.5% for December 2016.
  • The inflation rate for August was 1.1% and it is predicted rise to 2.5% by December. Accordingly, prices of Treasury Inflation-Protected Securities (TIPS) should rise as well.
  • With inflation rising, and markets uncertain, TIPS should be a reasonably safe investment for some time. Conventional bond funds are expected to perform worse than TIPS funds

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Improving on Target Date Funds: 14.5% Return from the iM Best4 MC-Score Vanguard ETF Investor System

  • An investor who is able to assess stock market climate, and able to adjust asset allocation accordingly, will have an advantage in the market.
  • Four different approaches are used to assess market climate which are based on economic, momentum and sentiment indicators. This results in five different market climate segments.
  • During up-markets the system is invested in long equity ETFs and then switches progressively to fixed-income ETFs when neutral or negative stock market climates exist.
  • This system invests simultaneously in four Vanguard ETFs (or their corresponding mutual funds), appropriately selected for the prevailing market climate, and typically holds them for longer than a year.
  • A backtest of the model from Jan-2000 to Aug-2016 shows an average annual return of 15% with a maximum drawdown of -12.6% and a low average annual turnover of 82%.

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ETF Investing According to Market Climate: With the iM Best2 MC-Score System

  • This system provides investment selections according to stock market climate. During up-markets it is long equity ETFs and switches to bond- and gold ETFs during neutral and negative markets.
  • It invests periodically in only two ETFs, appropriately selected for the prevailing market climate.
  • A backtest from Jan-2000 to Jul-2016 shows an average annual return of 16% with a maximum drawdown of -17% and only 61 realized trades during this 16.5 year long period.

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Trading the High-Yield, Low-Volatility Stocks of the S&P500 With the iM HiD-LoV-7 System

  • The system screens for S&P 500 stocks which yield significantly more than the average yield of the index and which also have a low 3-yr beta (low volatility).
  • It is shown that holding continuously all the screen-selected high-yielding, low-volatility stocks of the S&P500 would have provided an average annualized return of about 14% from Jan-2000 to Jun-2016.
  • Holding only the highest ranked seven stocks of this group and periodically rebalancing would have produced a higher annualized return of about 22% with a maximum drawdown of -34%.
  • The iM HiD-LoV-7 System shows much higher returns and less risk than the S&P 500 Low Volatility High Dividend Index.

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Franco-Nevada Better Than Gold: Evaluating Royalty Companies With iMarketSignals’ Fund Rating System

  • Royalty companies receive a stream, which is an agreed-upon amount of gold, silver, or other precious metal that a mining company is obligated to deliver in exchange for up-front cash.
  • From 2008 to 2016, Franco-Nevada produced the best returns of all royalty companies, and better returns than GLD or SPY.
  • When compared to GLD as the benchmark, the iM-Rating for FNV is A(A), indicating that the most recent one- and five-year Rolling Returns for the company were higher than for
  • Additionally, the one- and five-year rolling return graphs for FNV are sloping upwards near the end, indicating possible further excess gains over the benchmark ETFs, GLD and SPY.

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TIAA-CREF Actively Managed Equity Funds Did Not Add Value For Investors!

The iM Fund Rating System rates a fund’s return relative to a benchmark fund by comparing the terminal values from periodic $1.00 monthly contributions to both funds over the same period. Ratings can range from a grossly underperforming ‘E’ to a good outperforming ‘A’. The ratings are derived from the most recent past 1-yr and 5-yr Rolling Performances, shown as ‘1yr(5yr)’ e.g. A((B)).
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The Dynamic Linearly Detrended Enhanced Aggregate Spread: A Long Leading Recession Indicator

  • The DAGS, short for Dynamic Linearly Detrended Enhanced Aggregate Spread, is a derivative of the Enhanced Aggregate Spread (EAS) recession indicator which comes from Robert Dieli.
  • The DAGS can signal, as much as nine months ahead when a cycle peak (recession start) is likely to take place.
  • Armed with that information, investors can make appropriate plans. As of writing (May 2016), it signals, at least to the end of January 2017, a continuation of the expansion phase of this business cycle.

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The Dieli Enhanced Aggregate Spread: A Long Leading Recession Indicator

  • The Enhanced Aggregate Spread (EAS) comes from Robert Dieli, and most of the following description of this indicator, and why it works, is from personal communications.
  • The EAS can signal, as much as nine months ahead, when either a cycle peak (recession start) or a cycle trough (recession end) is likely to take place.
  • Armed with that information, decision makers can make appropriate plans. As of this writing (May 2016), it signals that it is highly unlikely for a recession to begin before the end of 2016.

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A 0.3% Rise in the Unemployment Rate Will Signal an Oncoming Recession.

  • A reliable source for recession forecasting is the unemployment rate (UER), which can provide signals for the beginnings and ends of recessions.
  • Recently Gundlach warned if the UER moves up a couple of tenths in the next couple of months, “we will be on recession watch.”
  • The latest UER (March 2016) is at 5.0%, signifying that no recession is imminent. However, should the UER increase to 5.3% then a recession will be signaled.
  • Investors should carefully monitor the unemployment rate, because if it moves up a few tenths of a percent from where it is now, then high recession probabilities prevail.

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iM-BestogaX-5(SDS) System (Long Hedging Strategy)

This model is similar to our iM-BestogaX-5 System which is partially hedged by shortening SSO. But the underlying component models of the iM-BestogaX-5(SDS) System use a long SDS hedge instead of short SSO.

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The iM-BestogaX Index of the Russell1000 and related Trading Systems

  • The iM-BestogaX Index of the Russell1000 holds the so called “Vice” stocks (excluding Gaming stocks), plus the stocks from the GICS-sub-industries: Restaurants, Soft Drinks, and Internet Retail.
  • This capitalization weighted index outperformed SPY by about 4.5-times from Jan-2000 to Mar-2016.
  • Over down-market periods the iM-BestogaX Index lost on average 87% less than SPY, and over up-market periods gained on average 24% more than SPY.
  • Trading systems which periodically select a small number of highest ranked stocks from the Index produced simulated annualized return as high as 34.4% with maximum drawdowns of about -20%.

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iM-BestogaX-5 System

  • The BestogaX universe of the Russell1000 consists of the so called “Vice” stocks (excluding Gaming stocks), plus the stocks from the GICS-sub-industries: Restaurants, Soft Drinks, and Internet Retail.
  • A discussion on the merits of investing in the stocks of the BestogaX universe is available here.
  • The iM-BestogaX5-System is a combination of the partially hedged BestogaX-5 Investor and Trader models, each of which periodically select five of the highest ranked stocks from the Russell1000 BestogaX universe.
  • No market timing in the stock buy- and sell rules. During adverse market conditions it is hedged short SSO, with hedge ratios varying from 20% to 50% of current holdings.
  • This system has a low turnover, because the specified minimum holding periods are one year, and three months for the Investor and Trader component models, respectively.  

Please refer to the relevant model descriptions for performance curves of the two equal weight component models BestogaX-5 Investor partially hedged and BestogaX-5 Trader partially hedged.
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iM-BestogaX-5 Trader

  • The BestogaX universe of the Russell1000 consists of the so called “Vice” stocks (excluding Gaming stocks), plus the stocks from the GICS-sub-industries: Restaurants, Soft Drinks, and Internet Retail.
  • A discussion on the merits of investing in the stocks of the BestogaX universe is available here.
  • The iM-BestogaX5-Trader model periodically selects only five of the highest ranked stocks from the Russell1000 BestogaX universe, and holds them for at least three months.
  • There is no market timing in the buy- and sell rules. The model is rebalanced weekly, resulting in small weight adjustments, and dividends are re-invested when available.
  • Backtesting was done on the web-based trading simulation platform Portfolio 123.

In the Figure-1 below, the red graph represents the performance of the model and the blue graph shows the performance of the benchmark SPY.
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