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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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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 12.48%.
  • 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 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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The Long Leading Recession Indicator DAGS is signaling an oncoming Recession.

On January 20, 2017, our long leading recession indicator DAGS signaled an oncoming recession.

Based on past history a recession could start at the earliest in 6 months (July-2017), but not later than 28 months from now (May-2019). The average lead time to previous recessions provided by DAGS would have been 15 months.

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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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The iM Gold-Timer – Rev1

We have revised the iM Gold-Timer. The timer endeavors to signal long-term investment periods for Gold. It uses the SPDR® Gold Shares ETF: GLD. When not invested in GLD the model goes to 100% cash.

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Timing the Stock Market with the Shiller CAPE

  • The Shiller CAPE (cyclically adjusted price-earnings ratio) is typically regarded as a stock market valuation measure. When the CAPE is high stocks are supposed to be expensive, and vice-versa.
  • The CAPE itself is not a good stock market timer. However, the CAPE can indirectly be used for market timing by determining a Cycle-ID as formulated by Theodore Wong.
  • Our 1950-2016 backtest of the CAPE-Cycle-ID model, when switching between the S&P500 with dividends and the money market, showed an annualized return of 11.9%, versus 10.4% for buy-and-hold.

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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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