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The iM-Inflation Attuned Multi-Model Market Timer

  • Investment risk can be reduced by a multi-model market timer whose many components use different and uncorrelated financial and economic data, including inflation.
  • This model seeks to determine effective asset allocation for risk-on and risk-off periods for equities considering the effect of inflation.
  • Four risk scenarios are possible: risk-on & normal-inflation, risk-on & high-inflation, risk-off & normal-inflation, and risk-off & high-inflation. Different ETF groups apply to each risk scenario.
  • From 2000 to 2022, switching accordingly between risk-related ETF groups would have produced an annualized return of about 39% versus 6.5% for buy and hold SPY.

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Evaluating Popular Asset Classes for Inflation Protection

  • We tested nine asset classes which are supposed to provide protection against inflation according to an Investopedia article. The test period was from January 2005 to May 2022.
  • Investopedia provides no definition for inflationary environment, but this analysis uses the 6-month moving average of the inflation rate and the University of Michigan: Inflation Expectation© series to define it.
  • For this investigation we consider separately the inflationary periods which fall within the Risk-on and Risk-off phases for equities, as defined by the iM-Multi-Model Market Timer.
  • From the asset classes listed by Investopedia only the Vanguard Real Estate ETF (VNQ) provided some inflation protection relative to the SPDR S&P 500 ETF (SPY).
  • Better inflation protection is provided by energy sector ETFs XLE and PXE, but energy sector funds were not among the asset classes listed in the Investopedia article.

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The Stock Market Has Peaked, S&P 500 Death Cross For The Ides Of March: Update March 2022

  • The average of S&P 500 for February 2022 was 4436 (5% down from December 2021 average) and is still 1896 points higher than the corresponding long-term trend value of 2540.
  • A reversal to the long-trend would entail a 43% decline, possibly over a short period aggravated by the imminent S&P500 death cross.
  • The Shiller CAPE-ratio is at a level of 35.9 (down 7.2% from its recent peak of 38.7). That is 41% higher than its 35-year moving average (MA35), currently at 25.5.
  • The CAPE-MA35 ratio is 1.41 (down from the end of December 2021 level of 1.51), forecasting a 10-year annualized real return of about 4.6%.
  • The historic long-term trend indicates a 10-year forward real annualized return of only 0.8% (up from the end of December 2021 forecast of 0.2%).

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The iM-Multi-Model Market Timer – Not Your Daddy’s Old Moving Average Crossover System

  • Reliance on a single market timer is risky. The risk can be reduced by a multi-model market timer whose many components use different and uncorrelated financial and economic data.
  • This model seeks to determine reliable risk-on and risk-off periods for the stock market. When there is no definite signal for risk-on or risk-off then the investment is considered risk-neutral.
  • From 2000 to 2022, switching between ETFs RSP, VGT, SH, TIP, BIV and IEF would have produced an annualized return of 34.2% versus 7.0% for buy and hold SPY.
  • The model is not a binary indicator between risk-on and risk-off and does not rely on leveraged ETFs to produce such high returns.

Posted in 2020, blogs, featured | 26 Comments

The Stock Market Is Overpriced, Expect Very Low 10-Year Forward Returns And Zero Real Returns By 2028: Update December 2021

  • The average of S&P 500 for December 2021 was 4675 (previous month 4670). This is 2155 points higher than the long-term trend value of 2520.
  • The current percentage difference of S&P 500 level relative to the current long-term trend level is 85%, a value not exceeded in the recent past since 2001.
  • The Shiller Cyclically Adjusted Price to Earnings Ratio (CAPE) is at a level of 38.4. That is 51% higher than its 35-year moving average (MA35), currently at 25.4.
  • The CAPE-MA35 ratio is 1.51, forecasting a 10-year annualized real return of about 3.8%. Should the CAPE-MA35 ratio increase further, then 10-year forward returns will be even lower.
  • The historic long-term trend indicates a 10-year forward real annualized return of only 0.2%, and the current condition of overvaluation suggest zero returns by the end of 2028.

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Don’t Buy The 25 S&P 500 Stocks That Have Made The Largest Contribution To The Index’s YTD Return – Higher Ranked Is Not Better

  • Goldman Sachs reported that only 25 stocks accounted for 58% of the index’s 2021 gains, including reinvested dividends, through Dec-9-2021.
  • One can verify the accuracy of this list by ranking the S&P 500 stocks on the factor “Market Capitalization x 1-year Rate-of-Change”, with higher being better.
  • Backtesting to Jan-2000 shows that buying the 25 highest ranked stocks every year at the end of December would have approximately matched the performance of SPY over the backtest period.
  • However, investing similarly in the 25 highest ranked stocks of the lower two terciles of the ranked S&P 500 would have provided over 3-times the total return of SPY.
  • The list of 25 S&P 500 stocks to hold during 2022 is given in Appendix-2, which is expected to provide higher returns to Dec-2022 than the Goldman Sachs list.
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Consumer Sentiment And The Cyclically Adjusted Risk Premium Work Together As A Profitable Stock Market Timer

  • Consumer Sentiment, when expressed as the difference in return of the Consumer Staples- and the Consumer Discretionary sectors, can provide risk-on and risk-off signals for equity investment.
  • Also a reasonably reliable risk indicator is the Cyclically Adjusted Risk Premium (CARP), defined as the inverse of the Shiller CAPE Ratio (CAPE) in percent minus the 10-year note yield.
  • The Consumer Sentiment Timer can be improved by including the value of the CARP in its rules to provide more profitable risk-on and risk-off signals for equity investment.
  • From 5/1/1999 to 10/15/2021 the Consumer Sentiment & CARP Timer, when accordingly switching between ETFs SPY and IEF, would have produced 18.5% annualized return with a maximum drawdown of -27%.

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Consumer Staples/Discretionary Spending As A Reliable And Profitable Stock Market Timer

  • The difference in return of the Consumer Staples- and the Consumer Discretionary sectors can provide risk-on and risk-off signals for equity investment.
  • Four time series sets are used: ETFs XLP & XLY, Portfolio 123 Specialty SP1500 Consumer Staples & Consumer Discretion, Aggregate Series Non-Cyclical & Cyclicals, and ETFs RHS & RCD.
  • Investment in equities is signaled when the 15 week return of the discretionary sector outperformed the staples sector’s return.
  • From 5/1/1999 to 10/1/2021 this strategy, when accordingly switching between ETF SPY and ETF IEF, would have produced a 14.9% annualized return with a maximum drawdown of -17%.

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The iM-(3 pos SuperCombination+ModSum) Timer Combo for Positive Yearly Returns with Low Drawdown

  • This strategy combines the iM-3 Position SuperCombination Timer and the iM-ModSum/YieldCurve [(SPY-IEF) – GLD] Timer models equally weighted.
  • A 2000-2021 backtest shows that this combination strategy would have outperformed the SPDR S&P 500 ETF Trust (SPY), showing an annualized return of 23.9% versus 7.2% and with a maximum drawdown of 15.7% versus 55.2% for SPY, respectively.
  • The backtest also shows that this combination would have since 2000 produced only positive calendar year returns and would also have outperformed SPY over each calendar year.

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The Overvalued S&P 500 Signals Low 10-Year Forward Returns: Update 8/1/2021 

  • The average of S&P 500 for July 2021 was 4364 (previous month 4238). This is 1894 points higher than the long-term trend value of 2470.
  • The current percentage difference of S&P 500 level relative to the current long-term trend level is 77%, a value not exceeded in the recent past since 2001.
  • The Shiller Cyclically Adjusted Price to Earnings Ratio (CAPE) is at a level of 37.6. That is 50% higher than its 35-year moving average (MA35), currently at 25.1.
  • The CAPE-MA35 ratio is 1.50, forecasting a 10-year annualized real return of about 3.9%. Should the CAPE-MA35 ratio increase further, then 10-year forward returns will be even lower.
  • The historic long-term trend indicates a 10-year forward real annualized return of only 0.7%.

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Beating the S&P 500 with Fixed Income ETFs alone

  • This model only holds fixed income asset class ETFs, never equity. It significantly out-performs the S&P 500 ETF (SPY) over longer periods by strategically switching holdings for risk-on and risk-off situations.
  • It uses three previously published market timing algorithms, the ModSum Timer, the YieldCurve Timer, and the Cyclically Adjusted Risk Premium (CARP) to define risk-on, risk-off, and hedging periods.
  • During risk-on periods, as indicated by the ModSum Timer and the CARP, the model holds the SPDR Bloomberg Barclays Convertible Securities ETF (CWB).
  • During risk-off periods the model switches to iShares 20+ Year Treasury Bond ETF (TLT).
  • Near, or during recession periods, as indicated by the YieldCurve Timer, the model is hedged with the iShares 7-10 Year Treasury Bond ETF (IEF), irrespective of the risk situation.

The strategy described here demonstrates that contrary to the accepted believe investing in fixed income can produce superior returns to equity investments.  This model uses three previously published market timing algorithms to define risk-on, risk-off, and hedging periods.
Read more >

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The Cyclically Adjusted Risk Premium As An Indicator of Market Risk

  • The accepted thinking is that the additional risk inherent in stocks is reflected by a “Risk Premium”, being the difference of S&P expected earnings yield and the 10-year note yield.
  • An alternative measure of risk is the Cyclically Adjusted Risk Premium (CARP), defined as the inverse of the Shiller CAPE Ratio (CAPE) in percent minus the 10-year note yield.
  • The value of the CARP and directional trend of the CAPE can be used to profitably time investments in risk-off and risk-on assets and avoid major stock market losses.
  • Prior to the Financial Crisis of 2007-2008 the CARP indicated a “risk-off” asset allocation, in contrast to the S&P Risk Premium which signaled that stocks were undervalued.
  • More recently, at end of February 2021, the CARP has signaled the end of embracing risk-on assets and a switch to risk-off assets.

The S&P Risk Premium and below statement comes from Portfolio 123:
Read more >

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The iM-3 Position SuperCombination Timer

  • This Combination Timer seeks to find optimum investment periods for equities. It uses five market timing algorithms, previously described, to periodically invest in three ETFs from a possible 16 available.
  • It can hold equity, gold, and fixed income ETFs depending on stock market direction as indicated by a combination of market timers.
  • A backtest from January 2000 to July 2021 shows an annualized return of 24.5% with a maximum drawdown of -23% and low annual turnover of 140%.

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Earnings Point To A Continuing Bull Market, But Expect Low 10-Year Forward Returns: Update June 2021

  • The average of S&P 500 for May 2021 was 4168 (previous month 4141). This is 1718 points higher than the long-term trend value of 2450.
  • The current percentage difference of S&P 500 level relative to the current long-term trend level is 70%, a value not exceeded in the recent past since August 2001.
  • The Shiller Cyclically Adjusted Price to Earnings Ratio (CAPE) is at a level of 36.8. That is 47.5% higher than its 35-year moving average (MA35), currently at 25.0.
  • The CAPE-MA35 ratio is 1.48, forecasting a 10-year annualized real return of about 4.0%. Should the CAPE-MA35 ratio increase further, then 10-year forward returns will be even lower.
  • End of May the 12-mo As Reported Earnings per share for the S&P 500 was $138.96, up from February’s $88.10. Should this trend continue then stocks may show further gains.

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The Overvalued S&P 500 Signals Low 10-Year Forward Returns: Update May 2021 

  • The average of S&P 500 for April 2021 was 4141. This is 1701 points higher than the long-term trend value of 2440.
  • The current percentage difference of S&P 500 level relative to the current long-term trend level is 70%, a value never exceeded in the recent past since August 2001.
  • The Shiller Cyclically Adjusted Price to Earnings Ratio (CAPE) is at a level of 37.0. That is 49% higher than its 35-year moving average (MA35), currently at 24.9.
  • The CAPE-MA35 ratio is 1.49, forecasting a 10-year annualized real return of about 4.0%. Should the CAPE-MA35 ratio increase further, then 10-year forward returns will be even lower.

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The S&P 500 Is Overvalued, Expect Low 10-Year Forward Returns: Update Q1, 2021

  • The average of S&P 500 for March 2021 is 3914. This is 1484 point higher than the long-term trend value of 2430.
  • The current percentage difference of S&P 500 level relative to the current long-term trend level is 61%, a value never exceeded in the recent past since January 2002.
  • The Shiller Cyclically Adjusted Price to Earnings Ratio (CAPE) is at a level of 35.0. That is 41% higher than its 35-year moving average (MA35), currently at 24.9.
  • The CAPE-MA35 ratio is 1.41, forecasting a 10-year annualized real return of about 4.6%. Should the CAPE-MA35 ratio increase further, then 10-year forward returns will be even lower.

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Outperforming the S&P 500 by Trading the Top 10 Stocks from 40 Large Hedge Funds

  • Using the quarterly 13F filings we define a stock universe by extracting the 50 consensus stock from 40 large hedge funds, each fund with more than $3.5 billion Assets Under Management.
  • Instead of holding a portfolio of all 50 stocks, a rule based trading strategy periodically selects 10 stocks.
  • From 02/24/08 – 03/05/21 this trading strategy would have produced an annualized return (CAGR) of 22.3%, significantly more than the 10.5% CAGR of the S&P 500 ETF (SPY).

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The Covid Recession Probably Ended In October 2020

  • The Covid triggered recession probably ended in October 2020 according to two reliable recession indicator models.
  • Analyzing the series data of both the Conference Board’s Leading Economic Index and the American Chemistry Council’s Chemical Activity Barometer results this conclusion.
  • The National Bureau of Economic Research Business Cycle Dating Committee has yet to announce the end of the recession.

The start of the 2020 recession was reported on March 22, 2020 when we announced that the anticipated March 2020 Unemployment Rate would signal the start of a recession.
Read more >

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Outperforming the S&P 500 with 50 Consensus Stock Holdings of 40 Large Hedge Funds

  • This investment strategy holds a maximum of 50 consensus stock picks from 40 hedge funds with more than $3,500 million Assets Under Management.
  • Changes in the holdings occur only every three months when the end of the quarter 13F filings becomes public information; the latest date was February 15, 2021.
  • From 02/24/08 – 02/19/21 this strategy would have produced an annualized return (CAGR) of 18.7%, significantly more than the 10.7% CAGR of the S&P 500 ETF (SPY).
  • Here we report the most recent holdings, and also list the stocks removed and added as of the week ending 2/19/2021.

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The iM-ModSum/YieldCurve Timer Model

  • The ModSum/YieldCurve Timer seeks to find optimum investment periods for equities. It uses two market timing algorithms: The ModSum Timer (weighted sum of five market timers), and the YieldCurve Timer.
  • The ModSum Timer switches between SPY and IEF, and the YieldCurve Timer adds a hedge with GLD.
  • For the period 1/02/2000 to 1/27/20121 this strategy would have produced an annualized return of 22.4% with a maximum drawdown of -14.3%.

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