- The Vanguard Market Neutral Fund Investor Shares (VMNFX) aims to “neutralize”, or limit the effect of stock market movement on returns.
- We calculate 26-week rolling returns for VMNFX and for benchmark SPY (the ETF tracking the S&P500), which provide a measure of over- or under performance of VMNFX relative to SPY.
- Predictive information comes from the relationship between the fund and the benchmark rolling returns. If VMNFX performs better than the stock market then one should be out of the market.
- Conversely, if VMNFX under performs SPY then it should be relatively safe to be invested in stocks.
- Our analysis generated a sell signal for the stock market on Nov-2-2015.
The VMNFX Market Timing System
Figure-1 shows the smoothed weekly relative performance from 1999 to 2016. The exit- and entry triggers for the stock market were set at +2.5% and +5.0% relative performance, respectively. These levels were chosen to provide the least number of signals and early exit- and entry dates.
Thus, when relative performance becomes greater than 2.5% a sell signal for the stock market arises. Conversely, when relative performance becomes less than 5.0% a market entry signal is generated.
The historic out-of-market periods signaled by this model were:
03/26/2001 – 05/05/2003
01/07/2008 – 06/15/2009
08/29/2011 – 02/06/2012 (false positive)
11/02/2015 – ???
The total buy-and-hold return for SPY from the beginning of Jan-1999 to beginning of Feb-2016 was 111.3%, which is an annualized return of 4.47%, and the maximum drawdown was -55.2%.
An investment in SPY with the out-of-market periods in Cash would have provided from the beginning of Jan-1999 to beginning of Feb-2016 a total return of 266.5%, which is an annualized return of 7.89%, and the maximum drawdown would have been -26.9%.
Figure 2 shows graphically the performance of SPY (blue graph) and of SPY with VMNFX signals (red graph), calculated on the web-based simulation platform Portfolio 123.
It appears that the performance of the Vanguard Market Neutral Fund VMNFX relative to SPY is a good indicator for major stock market movements. The last exit signal occurred on Nov-2-2015. The most recent relative performance is at 8.15%, which is near the Dec-2011 peak level of 9.17%. Should the relative performance continue much above the current level, then further market declines are possible.
This technical timing model is simple and can be reproduced without much difficulty. However, those not wanting to replicate it can visit our website imarketsignals.com where it will be updated weekly.