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Latest Market Research Articles

Short-term VIX Calendar Effects

Does the S&P 500 implied volatility index (VIX) exhibit systematic behaviors by day of the week, around turn-of-the-month (TOTM) or around options expiration (OE)? If so, are the behaviors exploitable? Using daily closing levels of VIX since January 1990, daily opening levels of VIX since January 1992 and daily reverse split-adjusted opening and closing levels of iPath S&P 500 VIX Short-Term Futures ETN (VXX) since February 2009, all through early July 2015, we find that: Keep Reading

Research on Gold as an Investment

What is the scope of research on gold as an investment? In their July 2015 paper entitled “The Financial Economics of Gold – A Survey”, Fergal O’Connor, Brian Lucey, Jonathan Batten and Dirk Baur review the body of formal research on gold from the perspective of an investor. They start with the following background topics: how gold markets operate; physical gold demand and supply; and, gold mine economics. They then address gold as an investment as follows: portfolio diversification with gold; gold as a safe haven; gold in comparison to other precious metals; relationships between gold and currencies; mining stocks and exchange-traded funds (ETF) as gold substitutes; interaction of gold and oil; gold market efficiency; gold price bubbles, interactions of gold with inflation and interest rates; and, behavioral aspects of gold investing. They note consistencies and inconsistencies of research findings within topics. In reviewing this body of research, they note that: Keep Reading

Weekly Summary of Research Findings: 7/20/15 – 7/24/15

Below is a weekly summary of our research findings for 7/20/15 through 7/24/15. 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

SACEVS Input Risk Premiums and FFR

The “Simple Asset Class ETF Value Strategy” seeks diversification across a small set of asset class exchanged-traded funds (ETF), plus a monthly tactical edge from potential undervaluation of three risk premiums:

  1. Term – monthly difference between the 10-year Constant Maturity U.S. Treasury note (T-note) yield and the 3-month Constant Maturity U.S. Treasury bill (T-bill) yield.
  2. Credit – monthly difference between the Moody’s Seasoned Baa Corporate Bonds yield and the T-note yield.
  3. Equity – monthly difference between S&P 500 operating earnings yield and the T-note yield.

Premium valuations are relative to historical averages. How might this strategy react to increases in the Federal Funds Rate (FFR)? Using end-of-month values of the three risk premiums, FFR, total 12-month U.S. inflation and core 12-month U.S. inflation during January 1990 (limited by availability of specific FFR targets) through June 2015 (306 months), we find that: Keep Reading

P/E10s Worldwide in 2015

What are current implications of cyclically adjusted price-earnings ratios (CAPE, P/E10 or Shiller PE), stock index level divided by average real earnings over the past ten years, across country equity markets worldwide? In his July 2015 paper entitled “CAPE around the World: Update 2015 – Return Differences and Exchange Rate Movements”, Joachim Klement analyzes expected returns in local currencies for equity markets around the world based on an adjusted P/E10. His adjustment accounts for economic conditions in each country via regression of local P/E10 versus real GDP growth, real per capita GDP growth, real interest rate and inflation. He also examines interactions among exchange rate movements, adjusted P/E10s and expected returns. Using stock index level, P/E10, economic data and exchange rate versus the U.S. dollar for 20 developed and 18 emerging equity markets as available through June 2015, he finds that: Keep Reading

Equity Factor Investing Update

Has (hypothetical) equity factor investing worked as well in recent years as indicated in past studies? In his July 2015 paper entitled “Factor Investing Revisited”, David Blitz updates his prior study quantifying the performance of allocations to U.S. stocks based on three factor premiums: (1) value (high book-to-market ratio); (2) momentum (high return from 12 months ago to one month ago); and, (3) low-volatility (low standard deviation of total returns over the last 36 months). He considers two additional factor allocations: (4) operating profitability (high return on equity); and, (5) investment (low asset growth). He specifies each factor portfolio as the 30% of U.S. stocks with market capitalizations above the NYSE median that have the highest expected returns, reformed monthly for momentum and low-volatility and annually for the other factors. He considers both equal-weighted and value-weighted portfolios for each factor. He also summarizes recent research on the role of small-capitalization stocks, factor timing, long-only versus long-short portfolios, applicability to international stocks and applicability to other asset classes. Using value, momentum, profitability and investment factor portfolio returns from Kenneth French’s library and low-volatility portfolio returns as constructed from a broad sample of U.S. stocks during July 1963 through December 2014, he finds that: Keep Reading

Exploiting VIX Futures Predictability with VIX Options

Can traders use S&P 500 Implied Volatility Index (VIX) options to exploit predictability in behaviors of underlying VIX futures. In his June 2015 paper entitled “Trading the VIX Futures Roll and Volatility Premiums with VIX Options”, David Simon examines VIX option trading strategies that:

  1. Buy VIX calls when VIX futures are in backwardation (difference between the front VIX futures and VIX, divided by the number of business days until expiration of the VIX futures, is greater than +0.1 VIX futures point).
  2. Buy VIX puts when VIX futures are in contango (difference between the front VIX futures and VIX, divided by the number of business days until expiration of the VIX futures, is less than -0.1 VIX futures point).
  3. Buy VIX puts when the VIX options-futures volatility premium (spread between VIX option implied volatility and lagged 10-trading day VIX futures volatility adjusted for number of trading days to expiration) is greater than 10%.

He measures trade returns for a holding period of five trading days, with entry and exit at bid-ask midpoints. An ancillary analysis relevant to strategy profitability looks at hedged returns on VIX options to determine whether they are overpriced: (1) generally; and, (2) for the top 25% of VIX options-futures volatility premiums. Using daily data for VIX options data and for VIX futures (nearest contract with at least 10 trading days to expiration) during January 2007 through March 2014, he finds that: Keep Reading

Effects of Execution Delay on SACEVS

“Effects of Execution Delay on Simple Asset Class ETF Momentum Strategy” investigates how delaying signal execution affects strategy performance. How does execution delay affect the performance of the Best Value and Weighted versions of the “Simple Asset Class ETF Value Strategy” (SACEVS)? These strategies each month allocate funds to the following asset class exchange-traded funds (ETF) according to valuations of term, credit and equity risk premiums, or to cash if no premiums are undervalued:

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

To investigate, we compare 21 variations of each strategy that all use end-of-month (EOM) to determine the asset allocations but shift execution from the baseline EOM+1 close to subsequent closes up to EOM+21. For example, an EOM+5 variation uses an EOM cycle to determine allocations but delays execution until the close five trading days after EOM. Using daily dividend-adjusted closes for the above ETFs and daily yields for Cash during August 2002 through June 2015 (154 months), we find that:

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Editor Archive Picks

Federal Funds Rate and the Stock Market

Media commentators and expert advisors sometimes cite cuts and hikes in the Federal Funds Rate (FFR) as an indicator of U.S. stock market prospects, with decreases (increases) in FFR acting as a stimulant (depressant). Does the overall U.S. stock market respond systematically to loosening and tightening of credit as measured by cuts and hikes in FFR? Using FFR target changes and daily S&P 500 Index levels over the period January 1990 through…

SACEVS Input Risk Premiums and FFR

…ions are relative to historical averages. How might this strategy react to increases in the Federal Funds Rate (FFR)? Using end-of-month values of the three risk premiums, FFR, total 12-month U.S. inflation and core 12-month U.S. inflation during January 1990 (limited by availability of specific FFR targets) through June 2015 (306 months), we find that: In analyses employing inflation rates, we insert a delay in availability of inflation data bas…

Lead-lag Relationships for Stocks, FFR and Treasuries

Are there reliable lead-lag relationships among stock market returns, changes in the Federal Funds Rate (FFR) and changes in Treasury bond yields? In their February 2011 paper entitled “The US Stock Market Leads the Federal Funds Rate and Treasury Bond Yields”, Kun Guo, Wei-Xing Zhou, Si-Wei Cheng and Didier Sornette apply a new “thermal optimal path” method to test whether: (1) U.S. stock market returns and changes in U….

Federal Funds Rate Size Effect?

…8220;I have seen on the net that it is better to be in large capitalization stocks when the Federal Funds Rate (FFR) target is increasing and small capitalization stocks when the FFR target is decreasing. Is there any serious study about this belief?” An argument supporting this proposition is that investors view small firms as more sensitive to changes in interest rates than large firms. Using FFR target actions and daily closes of the S&a…

Reliable Intraday Trades on Federal Funds Rate Decisions?

Can traders reliably exploit the reaction of stocks to scheduled Federal Funds Rate (FFR) decisions? In their October 2007 paper entitled “The Effects of Federal Funds Target Rate Changes on S&P100 Stock Returns, Volatilities, and Correlations”, Helena Chulia-Soler, Martin Martens and Dick van Dijk study the impact of Federal Open Market Committee scheduled announcements of FFR decisions on individual stocks at the intraday level…

Popular Articles

    Momentum Strategy, Value Strategy and Trading Calendar Updates

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

    Preliminary Momentum and Value Strategy Updates

    The home page and “Momentum Strategy” now show preliminary asset class ETF momentum strategy positions for July 2015. The differences in past returns among the top four places are fairly large, and the past returns for the top three positions are sufficiently above the Cash return, that selections are unlikely to change by the close. However, markets are volatile. The More

    Inflation Forecast Update

    The Inflation Forecast now incorporates actual total and core Consumer Price Index (CPI) data for June 2015. The actual total (core) inflation rate for June is a little higher than (about the same as) forecasted.

    A Few Notes on Invest with the Fed

    In the introduction to their 2015 book entitled Invest with the Fed: Maximizing Portfolio Performance by Following Federal Reserve Policy, authors Robert Johnson, Gerald Jensen and Luis Garcia-Feijoo state: “Our purpose in writing this book is to provide a general overview of the Fed’s role in the financial markets, but, more important, to offer investors a road More

    The Decision Moose Asset Allocation Framework

    A reader suggested a review of the Decision Moose asset allocation framework of William Dirlam. “Decision Moose is an automated framework for making intermediate-term investment decisions.” Decision Moose focuses on asset class momentum, as augmented by monetary policy, exchange rate and interest rate indicators. Its signals tell followers when to switch from one index fund More

    Stock Market Behavior Around Mid-year and 4th of July

    The middle of the year might be a time for funds to dress their windows and investors to review and revise portfolios. The 4th of July celebration might engender optimism among U.S. investors. Are there any reliable patterns to daily U.S. stock market returns around mid-year and the 4th of July? To check, we analyze More

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Current Momentum Winners

ETF Momentum Signal
for July 2015 (Final)

Winner ETF

Second Place ETF

Third Place ETF

Gross Compound Annual Growth Rates
(Since August 2006)
Top 1 ETF Top 2 ETFs
13.8% 14.1%
Top 3 ETFs SPY
14.0% 7.5%
Strategy Overview
Current Value Allocations

ETF Value Signal
for July 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
13.0% 10.0% 8.0%
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