- The iM-Best12(USMV)-Trader periodically invests in the 12 highest ranked stocks of USMV which currently holds 208 large-cap stocks.
- This strategy, postulated in 2014, has produced from the end of Jun-2014 to end of Feb-2018 an annualized return of 16.1% versus 11.9% for USMV, and 11.5% for SPY.
- We have now changed the trading rules and ranking system which we believe will provide improved returns with low turnover in the future.
In this 2014 article we showed that better returns than those from the ETF could be obtained by applying a ranking system to the stock holding of USMV (the universe), and investing periodically only in the 12 highest ranked stocks, bought and sold according to certain rules.
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- The Cyclically Adjusted Price to Earnings Ratio (CAPE ratio) is at 30.2, a very high level which signals overvaluation of stocks and low forward returns, according to Shiller.
- This level was only exceeded twice in the last 136 years, from Aug-1929 to Sep-1929 and from Jun-1997 to Jan-2002, with market declines of 77% and 45% then recorded.
- The Moving Average CAPE Ratio Methodology used here references stock market valuation to a 35-year moving average of the Shiller CAPE ratio instead of the 1881-2017 long-term average.
- Based on the 35-year moving average methodology, historic market performance points towards continuing up-market conditions, possibly for a number of years.
- To avoid the bear market, exit stocks when the spread between the 5-month and 25-month moving averages of S&P-real becomes negative and simultaneously the CAPE-Cycle-ID score is 0 or -2.
Shiller warns in his recent commentary The Coming Bear Market? :
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- This system holds three ETFs according to stock market climate.
- Typically, during good-equity markets it holds equity- and leveraged-equity ETFs SPY, SSO, and UPRO.
- During bad-equity markets it holds leveraged short equity, short equity, and gold-ETFs SDS, SH, and GLD.
- It never holds fixed income ETFs, so we don’t have to worry about rising rates.
The model was backtested on the on-line simulation platform Portfolio 123 which also provides extended price data for ETFs prior to their inception dates calculated from their proxies. Trading costs, including slippage, were assumed as 0.1% of the trade amounts using closing prices.
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