Blog Archives

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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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.

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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.

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The iM-SuperTimer – Update No.2:
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, respectively.
  • The strategy was modeled in excel with weekly data, and performance includes trading costs of 0.1% of the total switch trade amounts.

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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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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.

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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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The iM-FlipSaver Models (Revised)

In order to simplify retirement investment we are replacing our iM-Vanguard/TIAA-CREF Systems (updated monthly) with three iM-FlipSaver Models (updated weekly).

Prudent investors have assets allocated to both bonds and stocks. This conservative strategy is found in the Vanguard LifeStrategy Funds that invest statically in bonds and stocks and also in Life-Cycle/Target-Date Retirement Funds.

Instead of a static bond/stock ratio, these models change allocation in accordance with stock market conditions; e.g. during up-market periods the models hold more stocks than bonds, and during down-market periods the allocation “flips” to holding less stocks than bonds. This should improve performance and reduce drawdowns.

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Countdown To The 34th S&P 500 Death Cross; Update 12/6/2018

  • The 34th occurrence (since 1950) of the 50-day moving average of the S&P 500 crossing its 200-day moving average to the downside is imminent.
  • With the S&P 500 closing at 2,700.07 on 12/4/2018 the Death Cross is expected, with high probability, on Friday December 7.
  • Will the arrest of Huawei’s chief financial officer drive the S&P 500 below 2602 today for an earlier Death Cross?
  • The looming Death Cross could indicate the potential for a major selloff.

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