Below is a weekly summary of our research findings for 10/20/14 through 10/24/14. 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.
October 24, 2014
A subscriber inquired whether a longer test of the “Simple Asset Class ETF Momentum Strategy” is feasible using mutual funds rather than exchange-traded funds (ETF) as asset class proxies. To investigate, we consider the following set of mutual funds (partly adapted from the paper summarized in “Asset Allocation Combining Momentum, Volatility, Correlation and Crash Protection”):
Oppenheimer Commodity Strategy Total Return A (QRAAX)
Vanguard Emerging Markets Stock Index Investor Shares (VEIEX)
Fidelity Diversified International (FDIVX)
First Eagle Gold A (SGGDX)
Vanguard Total Stock Market Index Investor Shares (VTSMX)
Vanguard Small Capitalization Index Investor Shares (NAESX)
Vanguard REIT Index Investor Shares (VGSIX)
Vanguard Long-Term Treasury Investor Shares (VUSTX)
3-month Treasury bills (Cash)
The investigation includes basic tests performed in “Simple Asset Class ETF Momentum Strategy”, robustness tests performed in “Simple Asset Class ETF Momentum Strategy Robustness/Sensitivity Tests” and some of the extensions explored in “Alternative Asset Class ETF Momentum Allocations”. The selected mutual funds all have monthly prices available as of the end of March 1997. Monthly strategy returns, as limited by the kinds of tests performed, commence in April 1998. Using monthly dividend-adjusted closing prices for the above mutual funds and the yield for Cash during March 1997 through September 2014 (212 months), we find that: Keep Reading
What’s the latest research on portfolio construction and risk management? In the the introduction to the July 2014 version of his (book-length) paper entitled “Many Risks, One (Optimal) Portfolio”, Cristian Homescu states: “The main focus of this paper is to analyze how to obtain a portfolio which provides above average returns while remaining robust to most risk exposures. We place emphasis on risk management for both stages of asset allocation: a) portfolio construction and b) monitoring, given our belief that obtaining above average portfolio performance strongly depends on having an effective risk management process.” Based on a comprehensive review of recent research on portfolio construction and risk management, he reports on:
October 22, 2014
The Inflation Forecast now incorporates actual total and core Consumer Price Index (CPI) data for September 2014. The actual total (core) inflation rate for September is lower than (about the same as) forecasted.
The new actual and forecasted inflation rates will flow into Real Earnings Yield Model projections at the end of the month.
October 22, 2014
Does the U.S. stock market offer a predictable pattern of returns around the ends of calendar quarters? Do funds deploy cash to bid stocks up at quarter ends to boost portfolio values at the end of reporting periods (with subsequent reversals)? Or, do they sell stocks to raise cash for fund redemptions? Is the end-of-quarter effect the same as the Turn-of-the-Month (TOTM) effect? To investigate, we examine average daily stock market returns from 10 trading days before to 10 trading days after the ends of calendar quarters. We compare these returns to those for turns of calendar months. Using daily closes for the S&P 500 Index for January 1950 through September 2014 (259 quarters), we find that: Keep Reading
October 21, 2014
The business media and expert commentators sometimes cite the U.S. unemployment rate as an indicator of economic and stock market health, generally interpreting a jump (drop) in the unemployment rate as bad (good) for stocks. Conversely, investors may interpret a falling unemployment rate as a trigger for increases in the Federal Reserve target interest rate (and adverse stock market reactions). Is this indicator in fact predictive of U.S. stock market behavior in subsequent months, quarters and years? Using the monthly unemployment rate from the U.S. Bureau of Labor Statistics (BLS) and contemporaneous S&P 500 Index data for the period January 1950 through September 2014 (777 months), we find that: Keep Reading
October 21, 2014
U.S. job gains or losses are a prominent element of the monthly investment-related news cycle, with the the business media and expert commentators generally interpreting changes in employment as an indicator of future economic and stock market health. One line of reasoning is that jobs generate personal income, which spurs personal consumption, which boosts corporate earnings and lifts the stock market. Are employment trends in fact predictive of U.S. stock market behavior in subsequent months, quarters and years? Using monthly seasonally adjusted nonfarm employment data from the U.S. Bureau of Labor Statistics (BLS) and contemporaneous S&P 500 Index data for the period January 1950 through September 2014 (777 months), we find that: Keep Reading
October 20, 2014
A reader inquired about the validity of Martin Zweig’s Four Percent Model, which states (from pages 93-94 of the 1994 version of Martin Zweig’s Winning on Wall Street):
“The Four Percent Model for the stock market works as follows. First, It uses the Value Line Composite Index…an unweighted price index of approximately seventeen hundred stocks… All you need to construct this model is the weekly close of the Value Line Composite. You can ignore the daily numbers if you wish… This trend-following model gives a buy signal when the weekly Value Line Index rallies 4% or more from any weekly close. It then gives a sell signal when the weekly close of the Value Line Composite drops by 4% or more from any weekly peak. …That’s all there is to it. …The model is designed to force you to stay with the market trend.”
We execute this description as follows (after identifying the first signal):
- After a buy signal, generate the next sell signal upon a 4% or greater decline from a subsequent high water mark (including the buy signal level).
- After a sell signal, generate the next buy signal upon a 4% or greater advance from a subsequent low water mark (including the sell signal level).
We test the usefulness of the signals on the following exchange-traded funds (ETF) over their entire available histories: SPDR S&P 500 (SPY), PowerShares QQQ (QQQ), iShares Russell 2000 Index (IWM) and Guggenheim S&P 500 Equal Weight (RSP). Using weekly closes of the Value Line Geometric Index and the dividend-adjusted weekly opens of the selected ETFs from their respective inceptions through September 2014, we find that: