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Avoiding Stock Market Crashes with the Hi-Lo Index of the S&P500

  • This daily indicator is calculated as the ratio of the number of S&P500 stocks that have reached new 3-month-highs minus those that have reached new 3-month-lows, divided 500.
  • Exiting and entering the stock market according the indicator’s signals would have avoided major drawdowns of the market during the backtest period from Jan-2000 to Aug-2015.
  • Switching according to the signals between stock ETFs and the Intermediate Treasury Bond ETF IEF would have produced much higher returns and lower drawdowns than buy-and-hold of the stock ETFs.

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The Unemployment Rate is Not Signaling a Recession: Update August 7, 2015

A reliable source for recession forecasting is the unemployment rate, which can provide signals for the beginnings and ends of recessions. The unemployment rate model (article link), updated with the July figure of 5.3%, does not signal a recession now.
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Best2x4(S&P500 Min-Volatility) Variable Asset System with Minimum Volatility Stocks of the S&P 500

  • This model can hold 2 to 8 stocks, at variable weightings, selected by a ranking system from a minimum volatility stock universe of the S&P500.
  • The model has 8 equally weighted slots; a very high ranked stock could occupy a maximum of 4 slots, that is a nominal 50% weighting of the model’s total assets.
  • When adverse stock market conditions exist, the model reduces stock holdings by 50% and invests the proceeds in the -2x leveraged ProShares UltraShort S&P500 ETF (SDS).
  • The backtest produced a simulated average annual return of about 42% from Jan-2000 to end of June-2015 with a maximum draw-down of minus 19%.

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Best(S&P1500) rev1

  • This model can hold 10 stocks selected by a ranking system from a minimum volatility stock universe of the S&P 1500.
  • When adverse stock market conditions exist, the model reduces stock holdings by 50% and invests the proceeds in the -2x leveraged ProShares UltraShort S&P500 ETF (SDS).
  • The backtest produced a simulated average annual return of about 42% from Jan-2000 to end of June-2015 with a maximum draw-down of minus 24%.

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Best3x4(S&P500 Min-Volatility) Variable Asset System with Minimum Volatility Stocks of the S&P 500

  • This model can hold 3 to 12 stocks, at variable weightings, selected by a ranking system from a minimum volatility stock universe of the S&P500.
  • The model has 12 equally weighted slots; a very high ranked stock could occupy a maximum of 4 slots, that is a nominal 33% weighting of the model’s total assets.
  • When adverse stock market conditions exist, the model reduces stock holdings by 35% and invests the proceeds in the -2x leveraged ProShares UltraShort S&P500 ETF (SDS).
  • The backtest produced a simulated average annual return of about 36% from Jan-2000 to end of June-2015 with a maximum draw-down of minus 22%.

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Estimating Market Direction and Long-Term Returns with a 35-Year Moving Average of Robert Shiller’s P/E10

  • The long-term mean of the Shiller Cyclically Adjusted Price to Earnings Ratio P/E10 incorporates time-inconsistent data, causing substantial underprediction of realized stock returns in recent decades.
  • Better prediction of market direction and returns can be achieved by using a 35-year moving-average of P/E10, instead of its long-term mean.
  • Stocks seem only overvalued after P/E10 becomes greater than its 35-year moving average plus 7.5 added to it, with major market declines starting one to five years thereafter.
  • An analysis shows that whenever P/E10 rose from below to above its 35-year moving average significant ten-year gains for stocks followed.
  • Both the historic market trend, and the current level of the Shiller CAPE P/E10, suggest probable real market gains of about 20% to 28% to the end of 2020.

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The Unemployment Rate is Not Signaling a Recession: Update July 3, 2015

A reliable source for recession forecasting is the unemployment rate, which can provide signals for the beginnings and ends of recessions. The unemployment rate model (article link), updated with the June figure of 5.3%, does not signal a recession now.
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Minimum Volatility Stocks: Does Frequent Trading Result in Better Returns?

  • Two trading models are compared which select periodically 8 large-cap minimum volatility stocks from the Health Care, Consumer Staples, and Utilities sectors of the S&P 500.
  • The models only differ from each other with regard to hedging, and sell rules which extend stock holding periods for one model to longer than one year.
  • Backtests over a 15.5 year period show similar average annualized returns of about 36% for both models, but the number of realized trades differ, 148 versus 618.
  • The analysis shows that in this case, and perhaps in general, frequently trading minimum volatility stocks does not necessarily produce better returns than for one year minimum holding periods.

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Best8(S&P500 Min-Volatility)-Tax Efficient Large-Cap Portfolio Management System With Minimum Volatility Stocks of the S&P 500

  • This model invests periodically in eight highly liquid large-cap stocks selected from those considered to be minimum volatility stocks of S&P 500 Index.
  • Most stock positions are held for longer than one year resulting in a Tax Efficiency ratio of 81.4%.
  • When adverse stock market conditions exist the model shorts the 3x leveraged Ultrapro S&P500 ETF (UPRO) – hedge/current holding ratio= 45%.
  • It produced a simulated average annual return of about 36% from Jan-2000 to end of June-2015.

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Minimum Volatility Stocks: 1 year Out-Of-Sample Performance of iM’s Best12(USMV) Models

  • Portfolios of the 12 top ranked stocks of the iShares MSCI USA Minimum Volatility ETF provided much higher 1-year returns than the ETF.
  • For the period 6/30/14 to 6/18/15, our Best12(USMV)Q3-Investor, a 1-year buy&hold portfolio, returned 26.0%,
  • The Best12(USMV)-Trader, re-balanced every 2 weeks, returned 29.3%,
  • iShares MSCI USA Minimum Volatility ETF USMV returned 13.3% for the same period..

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The Unemployment Rate is Not Signaling a Recession: Update June 5, 2015

A reliable source for recession forecasting is the unemployment rate, which can provide signals for the beginnings and ends of recessions. The unemployment rate model (article link), updated with the May figure of 5.5%, does not signal a recession now.
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The Forward Rate Ratio: Predictor Of An Ongoing Stock Bull- And Bond Bear-Market

  • Prior to recession the yield curve becomes inverted, as indicated by the Forward Rate Ratio between the 2-year and 10-year U.S. Treasury yields (FRR2-10) being less than 1.00.
  • The FRR2-10 has recently peaked at about 1.20 signifying that US economic activity is in the expansion phase of the business cycle, far away from the next recession, with ongoing gains for the stock market predicted.
  • Typically after peaks of FRR2-10 the yield of 10-year Treasuries rises, signaling a bond bear-market.
  • When FRR2-10 falls to near 1.00 the transition from expansion to boom occurs. The average lead time after FRR2-10 becomes less than 1.00 to the subsequent recession start was 14 months for the last seven recession.

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The Forward Rate Ratio: A Long Leading Recession Indicator

  • Prior to recession the yield curve becomes inverted, as indicated by the Forward Rate Ratio between the 2-year and 10-year U.S. Treasury yields (FRR2-10) being less than 1.00.
  • Currently the FRR2-10 is about 1.20 signifying that US economic activity is in the expansion phase of the business cycle, far away from the next recession.
  • When FRR2-10 falls to near 1.00 the transition from expansion to boom occurs. For the last seven recessions the average lead time after FRR2-10 becomes less than 1.00 was 14 months.

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The Unemployment Rate is Not Signaling a Recession: Update May 8, 2015

A reliable source for recession forecasting is the unemployment rate, which can provide signals for the beginnings and ends of recessions. The unemployment rate model (article link), updated with the April figure of 5.4%, does not signal a recession now.
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There is no reason why the Fed should increase the Federal Funds Rate any time soon – Update April 2015

  • The Trade Weighted US Dollar Index has been growing since Q4 2011. Its growth increasing over the last nine months.
  • The annual rise in CPI is below 2%, and the US economy remains relatively weak.
  • The US Market is attracting foreign capital that is fleeing their local currency devaluation.
  • There is no reason for the Fed to increase interest rates under these conditions.
  • Interest rates will probably rise only once the dollar reverses its gains.

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The Unemployment Rate is Not Signaling a Recession: Update April 4, 2015

A reliable source for recession forecasting is the unemployment rate, which can provide signals for the beginnings and ends of recessions. The unemployment rate model (article link), updated with the March figure of 5.5%, does not signal a recession now.
Read more >

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Timing the TIAA Real Estate Account

  • In order to maximize returns one has to know when to enter and exit the TIAA Real Estate Account.
  • Our analysis shows that a firm sell signal arises when its 1-year rolling return moves below 0%.
  • A subsequent buy signal would be given when its 1-year rolling return moves from below to above 0%.

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Vanguard Funds With Dynamic Asset Allocation: Three iM-Vanguard Systems

  • iM-Vanguard Systems use a combination of Vanguard bond- and stock-funds, and switch assets according to stock-market climate.
  • Backtests show that models using index funds produce better returns when a dynamic asset allocation strategy is employed (System1) than buy-and-hold.
  • Higher returns can be obtained from actively managed Vanguard funds with dynamic asset allocation (System2 and System3). System3 uses only two stock funds and one intermediate-term bond fund.

The dynamic asset allocation strategy requires that during up-market periods more money is allocated to stock funds than bond funds, and during down-market periods more money is allocated to bond funds than stock funds.
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The Unemployment Rate is Not Signaling a Recession: Update March 6, 2015

A reliable source for recession forecasting is the unemployment rate, which can provide signals for the beginnings and ends of recessions. The unemployment rate model (article link), updated with the February figure of 5.2%, does not signal a recession now.
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iM-USMV Investor Portfolio

The iM-USMV Investor Portfolio consists of the four quarterly displaced Best12(USMV)-Investor models at iMarketSignals. The purpose of the combination model is to check whether our hypothesis – ranking the holdings of USMV, the iShares MSCI USA Minimum Volatility ETF, and selecting a portfolio of the 12 top ranked stocks, provides higher returns for the portfolio than for the underlying ETF – is supported by the actual performances of the model over longer period of time.
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With reference to Section 202(a)(11)(D) of the Investment Advisers Act: We are Engineers and not Investment Advisers, read more ...
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