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Latest Market Research Articles

Net Performance of SMA and Intrinsic Momentum Timing Strategies

Does stock market timing based on simple moving average (SMA) and time-series (intrinsic or absolute) momentum strategies really work? In the November 2013 version of his paper entitled “The Real-Life Performance of Market Timing with Moving Average and Time-Series Momentum Rules”, Valeriy Zakamulin tests realistic long-only implementations of these strategies with estimated trading frictions. The SMA strategy enters (exits) an index when its unadjusted monthly close is above (below) the average over the last 2 to 24 months. The intrinsic momentum strategy enters (exits) an index when its unadjusted return over the last 2 to 24 months is positive (negative). Unadjusted means excluding dividends. He applies the strategies separately to four indexes: the S&P Composite Index, the Dow Jones Industrial Average, long-term U.S. government bonds and intermediate-term U.S. government bonds. When not in an index, both strategies earn the U.S. Treasury bill (T-bill) yield. He considers two test methodologies: (1) straightforward inception-to-date in-sample rule optimization followed by out-of-sample performance measurement, with various break points between in-sample and out-of-sample subperiods; and, (2) average performance across two sets of bootstrap simulations that preserve relevant statistical features of historical data (including serial return correlation for one set)He focuses on Sharpe ratio (including dividends) as the critical performance metric, but also considers terminal value of an initial investment. He assumes the investor is an institutional paying negligible broker fees and trading in small orders that do not move prices, such that one-way trading friction is the average bid-ask half-spread. He ignore tax impacts of trading. With these assumptions, he estimates a constant one-way trading friction of 0.5% (0.1%) for stock (bond) indexes. Using monthly closes and dividends/coupons for the four specified indexes and contemporaneous T-bill yields during January 1926 through December 2012 (87 years), he finds that: Keep Reading

Usefulness of Morningstar’s Qualitative Fund Ratings

Do Morningstar’s analyst ratings predict which mutual funds will do best? In their January 2014 paper entitled “Going for Gold: An Analysis of Morningstar Analyst Ratings”, Will Armstrong. Egemen Genc and Marno Verbeek examine the performance of mutual funds after Morningstar assigns analyst ratings to them. Morningstar initiated these substantially qualitative ratings (Gold, Silver, Bronze, Neutral and Negative) in September 2011, as a supplement to star ratingsto convey expected risk-adjusted performance of funds with respect to peers over a full market cycle of at least five years. Ratings take into account past performance, fees and trading costs, quality of investment team, parent organization and investment process.  The study considers both raw returns and four-factor (market, size, book-to-market, momentum) alphas during intervals of one, three and six months after each rating initiation. It also takes into account differences in time frame, fund investment style and fund star rating. Using analyst ratings initiated during September 2011 through December 2012, associated fund characteristics and associated fund returns through June 2013, they find that:

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CFOs Project the Equity Risk Premium

How do the corporate experts most responsible for assessing the cost of equity currently feel about future U.S stock market returns? In their April 2014 paper entitled “The Equity Risk Premium in 2014″, John Graham and Campbell Harvey update their report on the views of U.S. Chief Financial Officers (CFOs) and equivalent corporate officers on the prospective U.S. equity risk premium (ERP) relative to the 10-year U.S. Treasury note (T-note) yield, assuming a 10-year investment horizon. Based on 56 quarterly surveys over the period June 2000 through March 2014 (an average 349 responses per survey), they find that: Keep Reading

Weekly Summary of Research Findings: 4/14/14 – 4/17/14

Below is a weekly summary of our research findings for 4/14/14 through 4/17/14. These summaries give you a quick snapshot of our content the past week so that you can quickly decide what’s relevant to your investing needs.

Subscribers: To receive these weekly digests via email, click here to sign up for our mailing list. Keep Reading

Utilities Sector as Stock Market Tell

Does the utilities sector exhibit a useful lead-lag relationship with the broad stock market? In their January 2014 paper entitled “An Intermarket Approach to Beta Rotation: The Strategy, Signal and Power of Utilities”, Charles Bilello and Michael Gayed test a simple strategy that holds either the U.S. utilities sector or the broad U.S. stock market based on their past relative strength. Specifically, when utilities are relatively stronger (weaker) than the market based on total return over the last four weeks, hold utilities (the market) the following week. They call this strategy the Beta Rotation Strategy (BRS) because it seeks to rotate into utilities (the market) when the investing environment favors low-beta (high-beta) stocks. They perform both an ideal (frictionless) long-term test and a short-term net performance test using exchange-traded funds (ETF). Using weekly total returns for the Fama-French utilities sector and broad market since July 1926 and for the Utilities Select Sector SPDR (XLU) and Vanguard Total Stock Market (VTI) since July 2001, all through July 2013, they find that: Keep Reading

Assessing Active Investment Managers

Do active investment managers beat the market? In their January 2014 paper entitled “Active Manager Performance: Alpha and Persistence”, Frank Benham and Edmund Walsh assess the performance of active investment managers relative to appropriate benchmarks across asset classes over long periods. They consider six basic investment classes: core bonds; high-yield bonds; domestic large capitalization stocks; domestic small capitalization stocks; foreign large capitalization stocks; and, emerging markets stocks. They focus on whether investment managers beat benchmarks in the past and whether past outperformers become future outperformers. They take steps to avoid survivorship bias, selection bias and fund classification errors. Using a sample of 5,379 live and dead funds assembled from Morningstar Direct by filtering to avoid classification errors and to eliminate redundant funds run by the same manager from benchmark inceptions (ranging from January 1979 for domestic stocks to January 1988 for emerging markets stocks) through 2012, they find that: Keep Reading

Inflation Forecast Update

The Inflation Forecast now incorporates actual total and core Consumer Price Index (CPI) data for March 2014. The actual total (core) inflation rate for March is slightly higher than (slightly higher than) forecasted.

The new actual and forecasted inflation rates will flow into Real Earnings Yield Model projections at the end of the month.

Why Analysts Miss Targets?

Do professional analysts systematically miss target prices for individual stocks? In the November 2013 draft of their paper entitled “Understanding and Predicting Target Price Valuation Errors”, Patricia Dechow and Haifeng You measure the errors in returns implied by professional stock analyst consensus price targets and examine the sources of these errors. They further investigate whether investors can anticipate and exploit consensus target price errors. They construct consensus target prices at the end of each month as the simple average of the most recent target price forecasts issued by following analysts within the last 90 days. Using analyst stock price targets, actual monthly returns and trading volumes, firm accounting data and institutional ownership data spanning April 1999 through December 2011 (227,127 firm-month observations), they find that: Keep Reading

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Editor Archive Picks

Random Walk, or Not?

A reader asked: “Do the equity markets still follow a random walk? Has CXO Advisory Group LLC completed an autocorrelation test of S&P 500 Index returns recently? It would be informative to discover if randomness still dominates daily, weekly, monthly, quarterly and annual equity returns.” CXOadvisory.com has no original tests focused on autocorrelation of financial market returns. However, you might find “…

Simple Asset Class ETF Momentum Strategy vs. Luck

…vailable starting April 2003. GLD is available starting November 2004. DBC is available starting February 2006. Random selections are only from those ETFs/Cash available for each month. The following scatter plot relates net terminal value of a $100,000 initial investment to average gross monthly return for the basic 5-1 momentum strategy and for the 1,000 random trials. Calculations derive from the following assumptions: Reallocate/rebalance a…

Performance and Risk of Equity Strategy Indexes

…d on both gross terminal values of equal initial investments and Sharpe ratios, the vast majority of ten million randomly selected/weighted stock portfolios beat the market capitalization-weighted benchmark. The average random portfolio also beats half the alternative indexes (see the chart below). Applying to each index a rule specifying that funds are in the index (U.S. Treasury bills) when the prior-month index close is above (below) its 10-mo…

Purifying Stock Market Sentiment Indicators

…are the profit factors for 50 long and 50 short trading signals based on raw VIX and purified VIX (and benchmark random signals). Profit factor values appear above the bars, with significance at the 0.05 level relative to the random signal benchmark indicated by asterisks and boxes. Results show that: (1) most profit factors for raw VIX signals are not significantly different from those for random signals; and, (2) profit factors for purified VIX…

Google Trends Predict the Stock Market?

Does Google search activity anticipate stock market action? In their paper entitled “Quantifying Trading Behavior in Financial Markets Using Google Trends”, Tobias Preis, Helen Susannah Moat and Eugene Stanley analyze the power of changes in Google search intensity (term search volume relative to total Google search volume) for 98 terms to predict the behavior of the Dow Jones Industrial Average (DJIA). They apply Google Trends to me…

Popular Articles

    Models, Trading Calendar and Momentum Strategy Updates

    We have updated the S&P 500 Market Models summary as follows: Extended Market Models regressions/rolled projections by one month based on data available through March 2014. Updated Market Models backtest charts and the market valuation metrics map based on data available through March 2014. We have updated the Trading Calendar to incorporate data for March 2014. More

    Inflation Forecast Update

    The Inflation Forecast now incorporates actual total and core Consumer Price Index (CPI) data for March 2014. The actual total (core) inflation rate for March is slightly higher than (slightly higher than) forecasted. The new actual and forecasted inflation rates will flow into Real Earnings Yield Model projections at the end of the month.

    Preliminary Momentum Strategy Update

    The home page and “Momentum Strategy” now show preliminary asset class momentum strategy positions for April 2014. Differences in past returns across the first, second and third places are relatively large and unlikely to change by the close. The difference between the third and fourth places is small enough that they might switch order by More

    A Few Notes on Investing with the Trend

    In the preface to his 2014 book entitled Investing with the Trend: A Rules-Based Approach to Money Management, author Greg Morris, Chairman of the Investment Committee and Chief Technical Analyst for Stadion Money Management LLC, states: “This book is a collection of almost 40 years of being involved in the markets, sharing some things I have More

    Stock Market Valuation Ratio Trends

    To determine whether the stock market is expensive or cheap, some experts use aggregate valuation ratios, either trailing or forward-looking, such as earnings-price ratio (E/P) and dividend yield. Operating under a belief that such ratios are mean-reverting, most imminently due to movement of stock prices, these experts expect high (low) future stock market returns when More

    Sector Performance by Calendar Month

    The Trading Calendar presents full-year and monthly cumulative performance profiles for the overall stock market (S&P 500 Index) based on its average daily behavior since 1950. How much do the corresponding monthly behaviors of the various stock market sectors deviate from an overall market profile? To investigate, we consider the nine sectors defined by the More

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Current Momentum Winners

ETF Momentum Signal
for April 2014 (Final)

Momentum ETF Winner

Second Place ETF

Third Place ETF

Gross Momentum Portfolio Gains
(Since August 2006)
Top 1 ETF Top 2 ETFs
217% 197%
Top 3 ETFs SPY
197% 68%
Strategy Overview
Stock Market Projection

Projected change in S&P 500 Index as of market close on 4/22/14…

4-22-14

For elaboration, go to Market Models or the detailed descriptions of the Real Earnings Yield (REY) Model and the Reversion-to-Value (RTV) Model.

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