iM-Best(SPY-Cash) Market Timing System: Gains in Up Markets – Cash in Down Markets

This binary model uses the signals from the iM-Best(SPY-SH) Market Timing System, and switches between SPY (SPDR® S&P 500® ETF) and Cash instead of SH.  This model would have produced an average annual return of about 16.3% from January 2000 to the end of August 2013, versus 2.6% for a buy-and-hold investment of SPY over the same period, with maximum drawdowns of -15% and 55%, respectively. One would have been 66% of the time in SPY, which this model is holding at the time of writing.

 Performance

The trading performance of the system is shown in Figure 1 further down.  The annualized return from January 2000 to end of August 2013 was a 16.3%;  $100 grew to about $800 over this period. The maximum drawdown was -15.2% in October 2002.  All values are with dividends reinvested. Slippage was assumed at 0.05% of the transaction amounts.

The model assumes an initial investment of $20,000 on Jan-2-2000.  It either holds SPY or cash.  To Aug-30-2013 there were 31 trades completed, 26 of these were winners and 5 losers, as summarized in the tables below, and listed in Table 3 in the Appendix.  The amounts shown take account of transaction fees of $1,752 arising from brokerage fees and slippage.

(Click to enlarge)

In above chart, the upper green graph is the ratio of the Best(SPY-Cash) to SPY, the general rising trend of that graph indicates that the Best(SPY-SH) continuously outperformed SPY; it produced 5.5 times the value which one would have had from a buy-and-hold investment in SPY over the same period.  Even during the bull market periods from 2003-08 and 2009-13 did this model out-perform SPY.

Annual Returns

Annual performance from January to December ranged from a maximum of  38% for 2009 to a minimum of -3% for 2000, as can be seen in Figure 2.

Figure 3 shows the  rolling 1-year returns starting each trading day from 2000 to 2012. There was never a significant loss over any 1-year period. The minimum return over 12 months was -5% and the maximum was 56%.

Terminal Values

To simulate savings over time, terminal values were calculated to the end of May 2013 for annual hypothetical investments of $1. Starting with a dollar during each of the 13 years from 2000 to 2012, one would have invested a total of $13 cumulatively by the end. Summing the 13 terminal values, this strategy would have netted this dollar-per-year investor $60 at the end of 13 years.

Following a buy-and-hold strategy in SPY, one would have only $22, about one-third of what Best(SPY-Cash) provided. Furthermore, the lowest annualized return, for any of the 13 time periods was 17.8% and the average for all the periods was 23.7%. This is shown in Tables 1 and 2 in the Appendix.

Application to mutual funds

This market timing system could be used to time investments in stock index funds tracking the S&P 500.  Table 3 in the appendix lists the investment periods when the model was in SPY, i.e. invested in the S&P 500, which was 66% of the total time from Jan-2000 to Aug-2013.  For the remaining 34% of the time one would have had additional income from a bond fund or from cash in a money market account.

Appendix

Note 1: In Table 3 the buy and sell prices are the closing prices of SPY. Compounding the Percentage Return results in the overall return without dividends and fees. Accordingly, over the time period 1/2/2000 to 8/30/213, $100 would have grown to $695. The actual growth as shown in Figure 1 was $786, the difference of $91 is from the compounded value of dividends received, less transaction costs.

Note 2: Table 3 above varies from Table 4 of iM-Best(SPY-SH) Market Timing System due to minor improvements to the model’s algorithm since publication:

1. The price of the transaction is taken as the next day’s close instead of the average of next day’s Hi/Lo. This change reflects more accurately a 401(k) situation where the fund prices are calculated with the market’s closing prices.
2. The new stop-loss provisions in the model, percentage from highest close since position started, has been set at -8% for SPY and SH.