Blog Archives

The Almost Risk-Free Investment When The Yield Curve Inverts

  • 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 0.998 and the smoothed FRR2-10 is 1.016 signifying that US economic activity is near the end of the expansion phase of this business cycle.
  • When FRR2-10 falls to near 1.00 the transition from expansion to boom occurs, as during boom times the Federal Funds Rate (FFR) is increased to slow the economy.
  • After the boom period comes the recession, on average 14 months after the FRR2-10 becomes less than 1.00, and concurrently the FFR is lowered.
  • An almost risk-free investment is to buy 2-year Treasury bonds when the FRR2-10 is close to 1.0 and to sell when the FFR is at its lowest after recessions.
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    Good Returns From Switching Between High Yield Bonds And Treasuries According To Stock Market Conditions.

    • The iM-Bond Market Trader exploits the fact that, generally, when equity returns are good high yield bonds outperform investment grade bonds.
    • When equity performs well the model invests in one of the high yield bond ETFs HYG, JNK, or EMB.
    • If stock market climate deteriorates the model switches to Treasury Bond ETF IEF.
    • Backtesting over the preceding 20 years the model showed a simulated annualized return of 14.6% with a maximum drawdown of -9.6%, versus 5.0% and -9.3% for benchmark ETF BND, respectively.
    • Simulations also show that the model’s returns over any calendar year are positive and exceeded those of BND.

    This model uses only four fixed income ETFs:
    Read more >

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    Profiting from Seeking Alpha’s Undercovered Stocks

    • Seeking Alpha publishes a dynamic list of 250 popular tickers that haven’t had recent coverage, mainly small-caps. Ranking and periodically selecting 50 of these undercovered stocks should provide good returns.
    • A trading strategy, backtested over the preceding three years, showed a simulated annualized return of 48% with a maximum drawdown of -18%..
    • Although the portfolio is relatively large, the annual turnover is only 140%.

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    The iM Minimum Volatility (USMV) – Investor

    • Since the launch of IM-Best12(USMV)Qx (x=1,2,3,or 4) in 2014, these models converged to a combined holding of 18 stocks, thus future performance of each of the models is expected to be very similar.
    • There is not much to be gained by following four similar models and these are now replaced by the iM Min Volatility(USMV)-Investor.
    • This model holds 10 equal weighted stocks and the simulated performance since 1/3/2013 shows an annualized return of 22.0% versus 14.3% for SPY and an annual turnover ratio of 60%
    • As from Sunday 7 July we will disseminate to Gold Subscribers any buy/sell signals this model generates.

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    Is the Stock Market Overvalued? – Update July 2019, and 10-Year Real Forward Return Estimate

    • The average of S&P 500 for Jun-2019 was 2,890. A 20% decline from this level would bring it to the Jan-2020 level of the long-term trend line.
    • The Shiller Cyclically Adjusted Price to Earnings Ratio (CAPE) is at a relatively high level of 28.9, and the CAPE’s 35-year moving average (MA35) is at 23.9.
    • The CAPE-MA35 ratio is 1.21, forecasting a 10-year annualized real return of 6.2%. This would indicate that for long-term investors the S&P 500 is currently not overvalued.
    • Investing in equities for the long-haul when the CAPE-MA35 ratio is below 1.30 should produce reasonable returns as this level of the ratio does not signifies overvaluation of the market.

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    The iM-SuperTimer – Simulated on Portfolio 123

    • For a detailed model description of the system please read the original description, update No.1 and update No.2
    • We have transferred the excel data onto Portfolio 123 and will in future be providing signals and performance for the weekly, monthly and 3-month models running on Portfolio 123, all updated weekly.
    • The models’ holdings alternate between ETF (SPY) and ETF (IEF), being proxies for investments during up- and down stock market periods.

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    A Winning Strategy to Profit from the Seasonal Effect in Equities

    • The seasonal effect that equities do better from November through April is well-known. Here we provide a rigorous statistical test of this and a trading strategy to profits from it.
    • From 1960 the S&P 500 with dividends returned on average 1.92% for the six months May to October, the “bad-periods”, while the “good-periods”, November to April, returned 8.47% on average.
    • Statistics provide a 65% probability that good-periods will produce higher returns than the average of all good- and bad-periods, and a similar probability that the bad-periods will produce lower returns.
    • This anomaly can be exploited by tactically shifting from more aggressive “good-period portfolios” to lower risk portfolios at the end of every April, and reversing the process end of October.
    • Switching accordingly between the S&P 500 and 10-Year Treasuries would have provided an annualized return of 12.1% from 1960 to 2019 versus 9.4% for buy-and-hold the S&P 500.

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    The iM-SuperTimer – Update March 2019: Timing the Market with the iM-Stock Market Confidence Level

    • The system uses a composite model consisting of several market timers. It should deliver more reliable signals for profitable investment and saving plans than single market timing models.
    • Component timers are allocated a 100% stock holding percentage when the timer signals investment in the stock market, or 0% when the timer it is out of the stock market.
    • A weekly Stock Market Confidence Level (SMC level), which can range from 0% to 100%, is obtained by considering the percentage allocated to each component timer and the timer’s weight in the system.
    • A backtest of a combination model of 15 iMarketSignals timers signaled avoidance of the stock market for SMC levels <=50%, while SMC levels >50% suggest better stock market investment climates.

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    Estimating Forward 10-Year Stock Market Returns using the Shiller CAPE Ratio and its 35-Year Moving Average. (Update Dec-2018)

    • The Dec-2018 Shiller Cyclically Adjusted Price to Earnings Ratio (CAPE-ratio) stands at 27.9, which is 11.0 above its long-term mean of 16.9, signifying overvaluation of stocks and low forward returns.
    • The MA35-CAPE-Ratio methodology references stock market valuation to a 35-year moving-average of the Shiller CAPE-ratio (MA35) instead of the 1881-2018 long-term mean which the standard forecasting method is based on.
    • The MA35-CAPE-Ratio method should be superior to the standard CAPE-ratio method as only the percentage difference between the CAPE-ratio and its MA35 is considered, and not the absolute difference.
    • The MA35-CAPE-Ratio method and the falling trend of the CAPE-ratio currently signal a forward 10-year annualized real return for stocks of about 5.8%, while the historic long-term trend forecasts 5.0%.
    • Only the ratio between the prevailing CAPE-ratio and its 35-year moving average (CAPE-ratio / MA35) is needed to easily obtain the expected 10-year forward returns from the charts in this article.

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    The iM-SuperTimer: Timing the Market with the iM-Stock Market Confidence Level

    • The system uses a composite model consisting of several market timers. It should deliver more reliable signals for profitable stock market investment than single market timing models.
    • Component timers are allocated a 100% stock holding percentage when the timer signals investment in the stock market, or 0% when the timer it is out of the stock market.
    • A weekly Stock Market Confidence Level (SMC level), which can range from 0% to 100%, is obtained by considering the percentage allocated to each component timer and the timer’s weight in the system.
    • The optimal SMC level for stock market investment is found by optimizing a stock-bond model for various SMC levels considering returns and drawdowns relative to buy-and-hold the S&P 500 index.
    • A backtest of a combination model of thirteen iMarketSignals timers signaled avoidance of the stock market for SMC levels <=50%, while SMC levels >50% suggest better stock market investment climates.

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