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Our ETF momentum trading strategy and analysis.

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Our ETF value trading strategy and analysis.

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Latest Market Research Articles

Momentum Strategy, Value Strategy and Trading Calendar Updates

We have updated the the monthly asset class momentum winners and associated performance data at Momentum Strategy.

We have updated the quarterly asset class value allocations and associated performance data at Value Strategy.

We have updated the Trading Calendar to incorporate data for March 2015.

 

Preliminary Momentum Strategy and Value Strategy Updates

The home page and “Momentum Strategy” now show preliminary asset class momentum strategy positions for April 2015. Differences in past returns among the top places are large enough that they are unlikely to change by the close.

The home page and “Value Strategy” now show preliminary asset class value strategy allocations for the second quarter of 2015. These allocations may shift slightly before final, but the Best Value is very unlikely to change.

SACEMS-SACEVS Mutual Diversification

Are the “Simple Asset Class ETF Value Strategy” (SACEVS) and the “Simple Asset Class ETF Momentum Strategy” (SACEMS) mutually diversifying. To check, we relate quarterly returns for the SACEVS Best Value and the SACEMS Top 1 exchange-traded fund (ETF) selections and look at the performance of an equally weighted portfolio of these two strategies (50-50). Using quarterly gross returns for SACEVS Best Value and SACEMS Top 1 during January 2003 through December 2014, we find that: Keep Reading

Stock Returns Around Easter

Does the seasonal change marked by the Easter holiday, with the U.S. stock market closed on the preceding Good Friday, tend to produce anomalous returns? To investigate, we analyze the historical behavior of the S&P 500 Index before and after the holiday. Using daily closing levels of the S&P 500 index for 1950-2014 (65 events), we find that: Keep Reading

Simple Asset Class Value Strategy Applied to Mutual Funds

“Simple Asset Class ETF Value Strategy” finds that investors may be able to exploit relative valuation of the term risk premium, the credit (default) risk premium and the equity risk premium via exchange-traded funds (ETF). However, the backtesting period is limited by available histories for ETFs and for the series used to estimate risk premiums. To construct a longer test, we make the following substitutions for potential holdings (selected for length of available samples):

To enable estimation of risk premiums over a longer history, we also substitute:

We retain quarterly average yields for Moody’s Seasoned Baa Corporate Bonds for calculation of the credit risk premium. As with ETFs, we consider two alternative strategies for exploiting premium undervaluation: Best Value, which picks the most undervalued premium; and, Weighted, which weights all undervalued premiums according to degree of undervaluation. Based on the assets considered, the principal benchmark is a quarterly rebalanced portfolio of 60% stocks and 40% U.S. Treasuries (60-40 VWUSX-VFIIX). Using quarterly risk premium calculation data during January 1934 through December 2014 (limited by availability of Moody’s Baa data), and quarterly dividend-adjusted closing prices for the three asset class mutual funds during June 1980 through December 2014 (139 quarters), we find that:

Keep Reading

Site Changes

We have made the following changes to CXOadvisory.com:

We added a new Value Strategy to the main menu to track the performance of the strategy described in “Simple Asset Class ETF Value Strategy” on a quarterly basis. We intend this new strategy to complement Momentum Strategy.

We retired the Real Earnings Yield (REY) and the Reversion to Value (RTV) models of the U.S. stock market. The new Value Strategy, to a degree, subsumes these models. Archived pages for these models remain available via these links and via Market Models. With these retirements, we will no longer present a daily “Stock Market Projection” on the home page.

Since its only purpose is to feed the REY and RTV models, we also retired Earnings Forecast. An archived page for this forecast remains available via the link.

The overall intent of the changes is to nudge content toward greater concrete applicability.

 

Weekly Summary of Research Findings: 3/23/15 – 3/27/15

Below is a weekly summary of our research findings for 3/23/15 through 3/27/15. 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

Simple Asset Class ETF Value Strategy

Does a simple relative value strategy applied to tradable asset class proxies produce attractive results? To investigate, we test a simple strategy on the following three asset class exchange-traded funds (ETF), plus cash:

3-month Treasury bills (Cash)
iShares 7-10 Year Treasury Bond (IEF)
iShares iBoxx $ Investment Grade Corporate Bond (LQD)
SPDR S&P 500 (SPY)

This set of ETFs relates to three factor risk premiums: (1) the difference in yields between Treasury bills and Treasury note/bonds indicates the term risk premium; (2) the difference in yields between corporate bonds and Treasury notes/bonds indicates the credit (default) risk premium; and, (3) the difference in yields between equities and Treasury notes/bonds indicates the equity risk premium. We consider two alternative strategies for exploiting premium undervaluation: Best Value, which picks the most undervalued premium; and, Weighted, which weights all undervalued premiums according to degree of undervaluation. Based on the assets considered, the principal benchmark is a quarterly rebalanced portfolio of 60% stocks and 40% U.S. Treasury notes (60-40 SPY-IEF). Using quarterly S&P 500 Index levels and earnings, quarterly average yields for 3-month Constant Maturity U.S. Treasury bills (T-bills), quarterly average yields for 10-year Constant Maturity U.S. Treasury notes (T-notes), quarterly average yields for Moody’s Seasoned Baa Corporate Bonds during March 1989 through December 2014 (limited by availability of earnings data), and quarterly dividend-adjusted closing prices for the above three asset class ETFs during September 2002 through December 2014 (45 quarters, limited by availability of IEF and LQD), we find that: Keep Reading

Continue to archive for older articles

Editor Archive Picks

Investment Factor Diversification

Is diversification across stock and bond factors superior to diversification across asset classes? In their August 2013 report entitled “Investing in Systematic Factor Premiums”, Kees Koedijk, Alfred Slager and Philip Stork measure the gross performances of widely used stock and bond factors and pit portfolios diversified across those factors against portfolios diversified across asset classes. For equities, they examine market, size…

Alternative Global Equity Diversification Approaches

What approaches to global diversification work best? In their July 2011 paper entitled “What Matters in International Equity Diversification? “, Chun-hung Chen, Tom Goodwin, and Wenling Lin use mean-variance spanning and optimization tests of indexes to compare benefits of alternative approaches to global diversification of the equity portion of an investor’s portfolio. Specifically, they investigate potential contributions to global…

Best Global Equity Diversification Approach?

…f eight possible approaches for grouping of stocks by geography and industry/sector. He compares feasibility of diversification grouping approaches based on a requirement that each group has at least 15 stocks, such that groups exhibit reasonably reliable behavior. He compares optimality of  diversification grouping approaches based on ability to explain the variation in returns across groups (effectiveness in grouping similar stocks). Using mont…

A Few Notes on Jackass Investing

…ee Lunch.’ In fact there is a free lunch, a veritable free threecourse buffet. It’s called true portfolio diversification…a systematic process that results in a truly balanced diversified portfolio whose returns are derived from a multitude of return drivers.” Using anecdotes and references to some relevant research in describing and refuting financial market myths, he concludes that: From Chapter 1, “Stocks Provide an In…

Global Diversification: By Country or Industry?

…still get good risk reduction by diversifying their portfolios across country markets? Or, have other kinds of diversification become more important? In their paper entitled “The Changing Roles of Industry and Country Effects in the Global Equity Markets”, Kate Phylaktis and Lichuan Xia examine the evolution of country and industry effects on stock returns and diversification. Using weekly returns from the Dow Jones Global Indexes (D…

Popular Articles

    Momentum Strategy, Value Strategy and Trading Calendar Updates

    We have updated the the monthly asset class momentum winners and associated performance data at Momentum Strategy. We have updated the quarterly asset class value allocations and associated performance data at Value Strategy. We have updated the Trading Calendar to incorporate data for March 2015.  

    Preliminary Momentum Strategy and Value Strategy Updates

    The home page and “Momentum Strategy” now show preliminary asset class momentum strategy positions for April 2015. Differences in past returns among the top places are large enough that they are unlikely to change by the close. The home page and “Value Strategy” now show preliminary asset class value strategy allocations for the second quarter of 2015. These allocations More

    Inflation Forecast Update

    The Inflation Forecast now incorporates actual total and core Consumer Price Index (CPI) data for February 2015. The actual total (core) inflation rate for February about the same as (the same as) forecasted.

    A Few Notes on A Random Walk Down Wall Street

    In the preface to the eleventh (2015) edition of his book entitled A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing, author Burton Malkiel states: “The message of the original edition was a very simple one: Investors would be far better off buying and holding an index fund than attempting to buy and sell individual securities 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

    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

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Current Momentum Winners

ETF Momentum Signal
for April 2015 (Final)

Winner ETF

Second Place ETF

Third Place ETF

Gross Compound Annual Growth Rates
(Since August 2006)
Top 1 ETF Top 2 ETFs
15.1% 15.8%
Top 3 ETFs SPY
15.3% 7.7%
Strategy Overview
Current Value Allocations

ETF Value Signal
for 2nd Quarter 2015 (Final)

Cash

IEF

LQD

SPY

The asset with the highest allocation is the holding of the Best Value strategy.
Gross Compound Annual Growth Rates
(Since September 2002)
Best Value Weighted 60-40
13.7% 9.6% 8.6%
Strategy Overview
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