Blog Archives

Better Returns From Seasonal Investing In The S&P 500 (1950-2018)

  • From 1950 to 2018 the S&P 500 performed best from November to April, and significantly worse from May to October during most years.
  • From 1950-2018 the real annualized return for the S&P 500 was 6.71%. Had one only invested from November to April each year the return would have been 6.60%, almost the same.
  • Investing in a money-market fund from May to October each year and the remaining time in the S&P 500 would have provided a higher real annualized return of 7.17%.
  • For the 32 year period of rising interest rates (1950-1982) the real return of the S&P 500 was only 5.40%, much less than for following 36 years of falling interest rates.

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The iM Seasonal ETF Switching Strategy

  • This strategy exploits the anomaly that Cyclical Sectors and Small Caps perform best from November to April, and Defensive Sectors do better from May to October during most years.
  • In this analysis only one ETF is periodically selected by a simple ranking system from the cyclical and defensive groups, respectively, and held for six months.
  • Out of the 37 six-month periods, 36 periods showed gains ranging from 0.1% to 28.1%, while only one six-month period produced a loss of -9.3%.
  • For the approximately 18.5 year period from end of Oct-1999 to May-2018 the backtest showed an annualized return of 19.8% with a maximum drawdown of -30%.
  • For an “inverted” switching strategy, when cyclicals ETFs are used for the May-October period and defensive ETFs during November-April period, the annualized return was 3.2% and maximum drawdown was -60%.

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Deja Vu 2007 — Is the Stock Market Overvalued? Estimating Returns to 2020 and Beyond, Update Jan-2018

  • Based on its historic trend, the stock market appears to be overvalued.
  • The Shiller Cyclically Adjusted Price to Earnings Ratio P/E10 is at high level of 33.5 (and P/E5 of 28.0), and a market correction is possible.
  • Similar conditions for the P/E5, and S&P-real’s position relative to the long-time trend, were observed only 3-times in the past: in 1937, 1998 and 2006.
  • The historic trend suggests a total probable real loss of about 15% over the next two years.
  • Analysts’ long-term forecasts of stock returns made 7 years ago appear to have been unrealistically low.

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How to Avoid the Coming Bear Market Indicated by Shiller’s CAPE Ratio: Update December 2017

  • The Cyclically Adjusted Price to Earnings Ratio (CAPE ratio) is at 32.1, a very high level which signals overvaluation of stocks and low forward returns, according to Shiller.
  • This level was only exceeded twice in the last 136 years, in Sep-1929 and from Jul-1997 to Jul-2001, with market declines of 77% and 45% then recorded.
  • The Moving Average CAPE Ratio Methodology used here references stock market valuation to a 35-year moving average of the Shiller CAPE ratio instead of the 1881-2017 long-term average.
  • Based on the 35-year moving average methodology, historic market performance points towards continuing up-market conditions, possibly for a number of years.
  • To avoid the bear market, exit stocks when the spread between the 5-month and 25-month moving averages of S&P-real becomes negative and simultaneously the CAPE-Cycle-ID score is 0 or -2.

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Improve on Vanguard LifeStrategy Growth Funds with a Dynamic Strategy

  • The founder of Vanguard, Jack Bogle, says that over the next decade a conservative portfolio of bonds will only return about 3% a year and stocks about 4% a year.
  • However, returns can be improved with a dynamic asset-allocation strategy that adjusts stock- and bond-fund holdings in a retirement account according to market climate.
  • The Vanguard LifeStrategy Moderate Growth Fund (VSMGX) holds static investments of 60% equity and 40% bond funds and is compared to our dynamic strategy model.
  • Our iM-DMAC(60:40) model, designed for retirement saving and withdrawal management, holds identical assets as VSMGX in up-market conditions but switches to 100% bond funds during equity down-market periods.
  • The result, the iM-DMAC(60:40) vastly outperforms VSMGX.

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How to Avoid the Coming Bear Market Indicated by Shiller’s CAPE Ratio

  • The Cyclically Adjusted Price to Earnings Ratio (CAPE ratio) is at 30.2, a very high level which signals overvaluation of stocks and low forward returns, according to Shiller.
  • This level was only exceeded twice in the last 136 years, from Aug-1929 to Sep-1929 and from Jun-1997 to Jan-2002, with market declines of 77% and 45% then recorded.
  • The Moving Average CAPE Ratio Methodology used here references stock market valuation to a 35-year moving average of the Shiller CAPE ratio instead of the 1881-2017 long-term average.  
  • Based on the 35-year moving average methodology, historic market performance points towards continuing up-market conditions, possibly for a number of years.
  • To avoid the bear market, exit stocks when the spread between the 5-month and 25-month moving averages of S&P-real becomes negative and simultaneously the CAPE-Cycle-ID score is 0 or -2.

Shiller warns in his recent commentary The Coming Bear Market? :
Read more >

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The 3ETF-Trader plus

  • This system holds three ETFs according to stock market climate.
  • Typically, during good-equity markets it holds equity- and leveraged-equity ETFs SPY, SSO, and UPRO.
  • During bad-equity markets it holds leveraged short equity, short equity, and gold-ETFs SDS, SH, and GLD.
  • It never holds fixed income ETFs, so we don’t have to worry about rising rates.

The model was backtested on the on-line simulation platform Portfolio 123 which also provides extended price data for ETFs prior to their inception dates calculated from their proxies. Trading costs, including slippage, were assumed as 0.1% of the trade amounts using closing prices.
Read more >

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Profiting from Market Volatility with the “Anti-VIX” ETN ZIV

  • The “Anti-VIX” ETN ZIV is designed to increase in value when the volatility of the S&P 500 decreases, as measured by the prices of VIX futures contracts.
  • The model buys ZIV only during up-markets when the VIX > 17 and rising, otherwise during up-markets it buys either QLD or DDM, or IEF when upmarket conditions are absent.
  • A backtest of the model from Jan-2011 to Jul-2017 produced a high 60% annualized return with a maximum drawdown of -16% with only 41realized trades.

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Profiting from Market Volatility with the “Anti-VIX” ETF SVXY

  • The “Anti-VIX” ETF SVXY is designed to increase in value when the volatility of the S&P 500 decreases, as measured by the prices of VIX futures contracts.
  • Extended data of SVXY, the ProShares Short VIX Short-Term Futures ETF, from Jan-2006 to the fund’s inception date was calculated from its proxy, the S&P 500 VIX Short-Term Futures Index.
  • SVXY is intended for short-term use. Using the extended price data, a buy-and-hold strategy of the hypothetical SVXY resulted in a huge loss of over 90% from 2007 to 2009.
  • The model buys SVXY only during up-markets when the VIX > 17 and rising, otherwise during up-markets it buys either QLD or DDM, or IEF when upmarket conditions are absent.
  • A backtest of the model from Jan-2007 to Jul-2017 produced a high 70% annualized return with a maximum drawdown of -27% with only 76 realized trades.

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The iM-Capital Strength 20-Stock Universe of the Russell 1000: Performance

  • This Universe holds well capitalized companies with strong market positions, which pay good dividends, have price appreciation potential, and provide a degree of downside protection during bear markets.
  • The Universe is reconstituted weekly, and consists of 20 large-cap stocks with Capital Strength type characteristics from the Russell 1000 Index.
  • A backtest, without any buy- and sell-rules, from Jan-2000 to end of Jun-2017 showed a 10.0% annualized return with a maximum drawdown of -41.5%.
  • A comparison with Vanguard’s large-cap ETFs older than 10 years shows that for periods 1-year and longer the Universe would have produced higher returns than any of the five ETFs.

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