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Weekly Summary of Research Findings: 10/20/14 – 10/24/14

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.

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

Simple Asset Class Momentum Strategy Applied to Mutual Funds

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

Survey of Recent Research on Constructing and Monitoring Portfolios

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:

Keep Reading

Inflation Forecast Update

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.

End-of-Quarter Effect

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

Unemployment Rate and Stock Market Returns

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

Employment and Stocks Over the Intermediate Term

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

Martin Zweig’s Four Percent Model

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:

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Editor Archive Picks

Stock Market and the National Election Cycle

…mmediately after being elected and do everything in their power to create good news just before ensuing biennial elections. Are some presidential term cycle years reliably good or bad? If so, are these abnormal returns concentrated in certain quarters? Finally, what does the stock market do in the period immediately before and after a national election? Using S&P 500 Index data from January 1950 through April 2014 (over 64 years and 16 presid…

Election Season Stock Market VIX Drivers

Does political drama take over as the principal driver of U.S. stock market implied volatility during election seasons? In their March 2012 paper entitled “U.S. Presidential Elections and Implied Volatility: The Role of Political Uncertainty”, John Goodell and Sami Vähämaa compare the effects of political uncertainty to those of eight other sources of uncertainty on implied stock market volatility (as measured by VIX) during U.S. pre…

Monthly Returns During Presidential and Congressional Election Years

Do the hopes and fears of elections in the U.S. affect the “normal” seasonal variation in monthly stock market returns? To check, we compare average returns and volatilities (standard deviations of returns) by calendar month for the Dow Jones Industrial Average (DJIA) during years with and without quadrennial U.S. presidential elections and biennial congressional elections. Using monthly closes for the DJIA over the period October 19…

TOTM Interaction with National Elections

A subscriber asked how distinct the U.S. election rally (last chart in “Stock Market and the National Election Cycle”) is from the turn-of-the-month effect for October and November (fourth chart in “Turn-of-the-Month Effect Persistence and Robustness”). To investigate, we compare turn-of-the-month (TOTM) returns by calendar month for even (national election) years, odd years and presidential election years. Consistent wit…

Divided Government Risk Premium?

…stock market futures reactions to betting market predictions of divided versus undivided government during four election nights. Using monthly U.S. stock market returns, data for the four stock return predictors and U.S. Treasury bill yields during 1926 through 2011 (encompassing 43 elections resulting in 23 undivided and 20 divided governments), and high-frequency election outcome betting data (from Intrade) and U.S. stock market futures on bie…

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 September 2014. Updated Market Models backtest charts and the market valuation metrics map based on data available through September 2014. We have updated the Trading Calendar to incorporate data for September 2014. We have updated More

    Inflation Forecast Update

    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.

    Preliminary Momentum Strategy Update

    The home page and “Momentum Strategy” now show preliminary asset class momentum strategy positions for October 2014. The differences in past returns among the top three places are large enough that they are unlikely to change order by the close. However, the gap between the third and fourth places is small enough that third place could change. At this point, four More

    A Few Notes on Dual Momentum Investing

    In the preface to his 2015 book entitled Dual Momentum Investing: An Innovative Strategy for Higher Returns with Lower Risk, author Gary Antonacci states: “We need a way to earn long-term above-market returns while limiting our downside exposure. This book shows how momentum investing can make that desirable outcome a reality. …the academic community now accepts momentum as 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

    Simple Tests of Sy Harding’s Seasonal Timing Strategy

    Several readers have inquired about the performance of Sy Harding’s Street Smart Report Online, which includes the Seasonal Timing Strategy. This strategy combines “the market’s best average calendar entry [October 16] and exit [April 20] days with a technical indicator, the Moving Average Convergence Divergence (MACD).” According to Street Smart Report Online, applying this strategy More

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Current Momentum Winners

ETF Momentum Signal
for October 2014 (Final)

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Third Place ETF

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Stock Market Projection

Projected change in S&P 500 Index as of market close on 10/24/14…

10-24-14

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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