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

  • The average of S&P 500 for December 2020 is 3695. This is 1293 points higher than the long-term trend value of 2402.
  • The current percentage difference of S&P 500 level relative to the current long-term trend level is 54%, a value never exceeded in the recent past since 2002.
  • The Shiller Cyclically Adjusted Price to Earnings Ratio (CAPE) is at a level of 33.7. That is 37% higher than its 35-year moving average (MA35), currently at 24.7.
  • The CAPE-MA35 ratio is 1.37, forecasting a 10-year annualized real return of about 5.0%. Should the CAPE-MA35 ratio increase further, then 10-year forward returns will be even lower.
  • The long-term trend is forecasting a 10-year annualized real return of 2.1%. The most likely forecast 10-year forward return would be about 3.5%, the average of 5.0% and 2.1%.

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Stock – Gold Switch Signals From The Yield Curve And The Federal Funds Rate

  • The Yield Curve / Federal Funds Rate Timer signals the switches from stocks to gold and vice versa near or during recession periods.
  • Only three parameters are needed; the Effective Federal Funds Rate and the 2-year and 10-year U.S. Treasury yields to determine the periods when the yield curve is inverted.
  • The timing rules are based on the state of yield curve and on the trend of the Effective Federal Funds Rate.

This timer signals switches from stocks (S&P500 Total Return) to gold and vice versa near or during recession periods.
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iM-Trading Models: Links, Performance and Holdings as of 11/25/2020

Table of links to our trading models

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iM-Weekly Unemployment Monitor – Update 11/25/2020

  • A truer picture of the employment situation is extracted from the Unemployment Insurance Weekly Claims (UIWC) report.
  • Persons receiving some form of unemployment benefit account for 12.6% of the labor force.
  • Monitoring of the weekly insured unemployed could provide early indication of recovery from the COVID-19 crisis.
  • The current UIWC report shows that the economic recovery from the COVID-19 crisis seems to improve.

The 11/26/2020 DOL Unemployment Insurance indicates a continued improvement in the insured employment situation even though the initial claims remain high and have increased over last week, but seemingly trending towards the long-term average.
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A Stock Model That Profits From The Seasonal Performance Anomaly Of The S&P 500.

  • This strategy exploits the anomaly that equities perform best from November to April, and less so from May to October during most years.
  • ETFs (XLV, XLI, XLY, XLB) have historically performed best from November to April, and ETFs (XLK, XLP, XLU, QQQ) have done better than the first group from May to October.
  • The super-sector models termed “aggressive” and “defensive” combine, respectively, the Top5(Sector)Select models for ETFs (XLV, XLI, XLY, XLB) and ETFs (XLK, XLP, XLU, QQQ), all previously published on Seeking Alpha.
  • This strategy invests alternatingly in the aggressive- and defensive super-sector models during their respective “good” 6-month periods.
  • From Jan-2000 to Nov-2020 a backtest shows that this strategy would have outperformed the SPDR S&P 500 ETF Trust (SPY), producing an annualized return of 23.3% versus 6.1% for SPY.
  • NOTE: Elsewhere we refer to the “aggressive” season as the winter season, and conversely the “defensive” as the summer season. This model switches all holdings bi-annually end of April and end of October.

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Profiting From Trading The Stocks Of The Invesco QQQ Trust: (iM-Top5(QQQ)Select)

  • This 5-stock trading strategy with the stocks from Invesco QQQ Trust produces much higher returns than the ETF (QQQ).
  • The universe from which stocks are selected is the Nasdaq 100 Index which represents all the point-in-time holdings of QQQ.
  • The model ranks the stocks of the Nasdaq 100 Index and selects periodically the highest ranked stocks which also satisfy certain yield requirements.
  • From 1/2/2009 to 10/30/2020 this strategy would have produced an annualized return (CAGR) of 28.5%, more than the 21.2% CAGR of QQQ over this period.

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Profiting from a Seasonal Super-Sector Investment Strategy

In a previous article, I discussed the seasonal effect in equities and showed that they perform best from November to April, the “good” period, and that replacing equities with fixed income during the “bad” period of May thru October is a winning strategy over the longer term.

Since future returns from fixed income are uncertain, the strategy proposed here is to always invest in sector equity ETFs. I defined two super-sector groups, classified as aggressive and defensive, each with four sector ETFs which have historically performed best from November to April and relatively well from May to October, respectively.

This simple strategy invests alternately in the aggressive and defensive super sectors during their respective six-month periods, switching from aggressive to defensive at the end of April, and vice versa at the end of October.

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Profiting From Trading Stocks Of The S&P 500 Consumer Discretionary Sector: (iM-Top5(XLY)Select)

  • This 5-stock trading strategy with the Consumer Discretionary Sector stocks of the S&P 500 produces much higher returns than the Consumer Discretionary Select Sector SPDR Fund (XLY).
  • The universe from which stocks are selected emulates as close as possible the point-in-time holdings of XLY.
  • The model ranks the stocks of this custom universe and selects periodically the highest ranked stocks which also satisfy stipulated yield requirements.
  • From 1/2/2009 to 10/23/2020 this strategy would have produced an annualized return (CAGR) of 22.7%, more than the 19.3% CAGR of XLY over this period.

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