- The Market Climate Grader divides the environment for investment returns into four market climate zones.
- For better returns one should adjust asset allocation according to market climate. As an example, three models were analyzed to highlight the better performance when investing according to market climate.
- Performance for three models which use ETFs with varying risk characteristics are shown. Interestingly, risk measurements for the models are very similar, better than for the benchmarks and component ETFs.
- The simulated performance for all models is much higher than for buy-and-hold of the S&P500 or for the Vanguard LifeStrategy Moderate Growth Fund which holds 60% stocks and 40% bonds.
Blog Archives
Better Returns from Exchange Traded Funds with iM’s Market Climate Grader
The Unemployment Rate is Not Signaling a Recession: Update September 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 August figure of 5.1%, does not signal a recession now.
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Assessing Market Climate with iM’s Market Climate Grader (Update 9/6/15)
- The market environment for investment returns is divided into four climate zones.
- Market climate zones were determined by combining fundamental and technical indicators.
- A performance analysis of SPY shows that the probability of stock market gains is highest for climate Zone-1 and lowest for Zone-4.
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.
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%.
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%.
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%.
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.
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.
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.
With reference to Section 202(a)(11)(D) of the Investment Advisers Act:
We are Engineers and not Investment Advisers,
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