Blog

Why Vanguard Should Retire The U.S. Momentum Factor ETF (VFMO)

  • In February 2018 Vanguard released a set of five actively managed sector ETF’s and one multi-factor ETF. Here we report on the performance of the Momentum Factor ETF (VFMO).
  • Shortly after the inception of VFMO we published “Why Not To Invest In Vanguard’s New U.S. Momentum Factor ETF” which demonstrated that Vanguard’s selection criteria for this fund was flawed.
  • In the referenced article we stated that it was unlikely that VFMO would show a higher return than the SPDR S&P 500 ETF (SPY) over the year following inception.
  • In April 2019 in a follow up article we showed that the actual performance of VFMO since inception was 6.8% lower than that of SPY, confirming the conclusion in the bullet-point above.
  • Again, VFMO has underperformed SPY, and we come to the same conclusion for the following year, namely that the one-year return to Feb-2021 will be less than that of SPY.

Posted in blogs, featured | Leave a comment

The iM-SuperTimer – Update No.2a:
Timing the Market with the iM-Stock Market Confidence Level

  • For a detailed model description of the system please read the original description and previous update.
  • To make this model more user-friendly we will be providing signals for three different version of this model, all updated weekly.
  • The models’ holdings alternate between ETF (SPY) and ETF (IEF), being proxies for investments during up- and down stock market periods, repectively.
  • The iM-1wk-SuperTimer (SPY-IEF) would have produced an annualized return of 19.9% with a max drawdown of about -10%.
  • Appendix 2 shows that a (50%SPY+50%VCIT)-(IEF) strategy reduces drawdowns to -6.2% but still achieves annualized returns of 14%
Posted in blogs, featured | 99 Comments

Robust Recession Forecasting With The FED’s Brave-Butters-Kelley Indexes ─ Update February 4, 2020

  • The new Federal Reserve Bank of Chicago Brave-Butters-Kelley Indexes ( BBK ) provide useful input for recession forecasting.
  • In the past, low estimates of BBK GDP growth related to the respective recessions, this allow the extraction of a recession warning signal from this growth series.
  • We combine two BBK indexes with the Conference Board LEI and iMarketSignals’ Business Cycle Index BCIg to derive our Long Leading Index (iM-LLI) for the US economy.
  • Currently neither index signals a recession warning.

Posted in blogs, featured | Leave a comment

Robust Recession Forecasting With Our New Long Leading Index For The US Economy

  • The new Federal Reserve Bank of Chicago Brave-Butters-Kelley Indexes (BBK) provide useful input for recession forecasting.
  • We combine two BBK indexes with the Conference Board LEI and our Business Cycle Index BCIg to derive iMarketSignals’ new Long Leading Index (iM-LLI) for the US economy.
  • Our analysis shows that the iM-LLI would have provided an average warning signal about eight months before the start of recessions, as observed for the last seven recessions since 1967.
  • We are replacing the iM-Composite Index (COMP) with the new iM-LLI.
  • Currently this Leading Index is not yet warning of an oncoming recession.

Posted in blogs, featured | 5 Comments

Recession Forecasting With the Federal Reserve Bank of Chicago’s Newly Released Brave-Butters-Kelley Indexes

  • From November 2019 onward, the Federal Reserve Bank of Chicago is releasing new measures of monthly real GDP growth and its components, the Brave-Butters-Kelley Indexes.
  • The data release is for four indicators constructed from a panel of 500 monthly macroeconomic time series and quarterly real gross domestic product growth.
  • Our analysis shows that apart from the Leading Index, the other three indicators would have been extremely accurate identifying recessions were it not for the publication time-lag.
  • This time-lag makes, on average, these indicators about two month late to signal the start and end of recessions in real-time, as observed for the last seven recessions since 1967.
  • Currently none of the Brave-Butters-Kelley Index models are warning of a recession.

Posted in blogs, featured | Leave a comment

Estimating 10-Year Forward Returns For Stocks With The Shiller CAPE Ratio And The Long-Term Trend – Update January 2020 

  • The average of S&P 500 for Dec-2019 was 3166; that is 852 (i.e. 27% of 3166) above 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 30.1, and the 35-year moving average (MA35) of the CAPE is at 24.2.
  • The CAPE-MA35 ratio is 1.25, forecasting a 10-year annualized real return of 5.9%.
  • 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 indicate an abnormally overvalued market.

Posted in 2020, blogs, featured | 1 Comment

The iM Tax-Efficient 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.
  • Three identical models starting 6 months apart are used. Each model holds only one ETF for 18 months selected by a simple ranking system from the cyclical and defensive groups.
  • The effect of this is that the combination model always has 66% of the portfolio in the “correct” direction, defensive or cyclical, and 33% in the “wrong” direction.
  • The combination model trades only twice a year, switching only one position at the end of April and end of October.
  • For the approximately 18.5 year period from end of Apr-2000 to Sep-2019 the backtest showed an annualized return of 12.3% with a maximum drawdown of -24%.

Posted in blogs, featured | 3 Comments

A Profitable Investment Strategy When The Yield Curve Inverts

  • An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the same credit quality is considered to be a predictor of recessions.
  • Prior to recession it is advisable to exit the stock market and invest in U.S. Treasuries instead; in this strategy using as proxies ETFs (SPY) and (IEF), respectively.
  • This model uses the 2-year and 10-year U.S. Treasury yields as measures of short-term and long-term rates, respectively, and calculates the Forward Rate Ratio (FRR2-10) between the two rates.
  • FRR2-10 is the ratio of the rate at which one can lock in borrowing for the eight year period starting two years from now and the current ten-year rate itself.
  • Currently the FRR2-10 is near 1.0 signifying that US economic activity is near the end of the expansion phase of this business cycle.

Posted in blogs, featured | 5 Comments

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.
  • Posted in blogs, featured | 20 Comments

    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 >

    Posted in blogs, featured | 17 Comments

    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%.

    Posted in blogs | 8 Comments

    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.

    Posted in blogs, featured | 26 Comments

    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.

    Posted in blogs, featured | 9 Comments

    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.

    Posted in blogs, featured | 7 Comments

    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.

    Posted in blogs, featured | 4 Comments

    Why Not To Invest In Vanguard’s U.S. Momentum Factor ETF (VFMO) – 1-Year On

    • In February 2018 Vanguard released a set of five actively managed sector ETF’s and one multi-factor ETF. Here we report on the performance of the Momentum Factor ETF (VFMO).
    • Shortly after the inception of VFMO we published this article “Why Not To Invest In Vanguard’s New U.S. Momentum Factor ETF” which demonstrated that Vanguard’s selection criteria was flawed.
    • In the referenced article we stated that it was unlikely that VFMO will show a higher return than the SPDR S&P 500 ETF (SPY) over the year following inception.

    Posted in blogs | Leave a comment

    How Good Are Target-Date Glidepath Savings Programs During the Accumulation Phase Towards Retirement?

    • This study analyzes Yale’s Qualified Default Investment Alternative, a retirement plan with a target-date strategy. The findings also apply in principle to target-date strategy models from Vanguard, Fidelity, and others.
    • Yale University’s new retirement plan provides a “Glidepath” Target-Date Plus Service and also allows participants to opt out from it to pick their own investments from a few select funds.
    • Backtests (1999-2019) show that Yale’s Glidepath strategy would not have performed particularly well; one would have done better selecting one’s own funds, or by following the traditional 60%Stock-40%Bond constant allocation.
    • Retirement savings were calculated for a hypothetical individual making contributions to a retirement fund from Jan-2000 onwards using various allocation strategies, including Yale’s Glidepath and also a reverse glide-path strategy.
    • Much higher savings with relatively low risks can be obtained by employing a dynamic investment strategy using models which have moderately different allocations for up- and down-market conditions.

    Posted in blogs, featured | Leave a comment

    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.

    Posted in blogs, featured | 19 Comments

    Beyond Buy-and-Hold: Improving Returns on Long-Term Investments Using the Shiller CAPE-MA35 Ratio

    • Forward 10-year annualized real returns of the S&P 500 Index can be determined by regression analysis using the ratio of the Shiller CAPE-ratio and its 35-year moving average (CMA-ratio).
    • Currently this ratio stands at 1.21 and forecasts a 10-year annualized real return of 6.2%, which would indicate that the market as represented by the S&P 500 is not overvalued.
    • Since 1979, when the CMA-ratio was within +/-5% of the current value the 10-year annualized real returns for the S&P500 that followed ranged from 4.7% to 14.6%, averaging 9.8%.
    • Investing in equities for the long-haul when the CMA-ratio is at 1.50 or higher produces poor returns, as this level of the ratio signifies overvaluation of the market.

    Posted in blogs, featured | 5 Comments

    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.

    Posted in blogs, featured | Leave a comment
    With reference to Section 202(a)(11)(D) of the Investment Advisers Act: We are Engineers and not Investment Advisers, read more ...
    By the mere act of reading this page and navigating this site you acknowledge, agree to, and abide by the Terms of Use / Disclaimer