Blog Archives

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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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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With reference to Section 202(a)(11)(D) of the Investment Advisers Act: We are Engineers and not Investment Advisers, read more ...
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