Blog Archives

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%.

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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.

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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.
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    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 >

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    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.

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    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.

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    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.

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    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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    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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