Over the past several years, we have tracked and evaluated qualitatively the commentary of John P. Hussman, Ph.D., president of Hussman Investment Trust, with respect to timing the U.S. stock market in the context of Guru Grades. He describes his market timing approach as follows: “The key elements in evaluating securities and market conditions are ‘valuations’ and ‘market action.’ Each unique combination of these conditions results in a distinct Market Climate, with its own profile of expected return and risk.” His investment approach is to “align our investment position with the prevailing Market Climate and shift that position when sufficient evidence of a Climate shift emerges.” Qualitative evaluation of this approach is difficult because of the fairly frequent and often fine adjustments he makes to his investment stance (degree of hedging) as referenced to the Hussman Strategic Growth (HSGFX). We therefore use a quantitative review to measure the market timing effectiveness demonstrated by HSGFX. Using weekly adjusted return data for HSGFX during 11/21/00 (the earliest available) through 8/27/10 (509 weeks), along with contemporaneous weekly return data for several benchmarks, we conclude that: More…
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Blogger Sentiment Analysis
September 1, 2010 - Sentiment Indicators
Are prominent stock market bloggers in aggregate able to predict the market’s direction? The Ticker Sense Blogger Sentiment Poll “is a survey of the web’s most prominent investment bloggers, asking ‘What is your outlook on the U.S. stock market for the next 30 days?’” (bullish, bearish or neutral) on a weekly basis. The site currently lists 16 active prognosticators. Participation has varied over time. Because Ticker Sense collects data weekly, we look at weekly measurements and changes in weekly measurements. Because the poll question asks for a 30-day outlook, we test the forecasts against stock market behavior four weeks into the future. Because polling takes place Thursday-Sunday, we use the coincident Friday close to represent the state of the stock market for each poll (except for the poll of 10/13/08, which took place on Monday and therefore relates to the Monday close). We use [% Bullish] minus [% Bearish] as the net sentiment measure for each poll. Using the 207 measurements from the poll from inception on 7/10/06 through 8/30/10 and contemporaneous weekly closes of the S&P 500 index as representative of the the broad stock market, we find that: More…
Outperformance Streaks and Mutual Fund Manager Skill
September 1, 2010 - Investing Expertise, Mutual/Hedge Funds
Do documented streaks of market outperformance occur more often than would be expected by chance, thereby supporting belief in investing skill? In their August 2010 paper entitled “Differentiating Skill and Luck in Financial Markets With Streaks”, Andrew Mauboussin and Samuel Arbesman compare actual streaks of mutual fund outperformance relative to the S&P 500 Index to results of 10,000 “no-skill” simulation trials to measure whether skill exists. The simulation assumes that both the number of fund-years per year and the probability that a fund would beat the S&P 500 Index during a year are the same as observed across a large sample of active mutual funds. Using monthly returns for 5,593 actively managed, large-capitalization U.S. mutual funds spanning 1962-2008 (50,693 fund-years), they find that: More…
Stock Returns Around Labor Day
August 31, 2010 - Calendar Effects
Does the Labor Day holiday, marking the end of summer vacations, signal any unusual return effects by refocusing U.S. stock investors on managing their portfolios? By its definition, this holiday brings with it any effects from three-day weekends and the turn of the month. To investigate the possibility of short-term effects on stock market returns around Labor Day, we analyze the historical behavior of the stock market during the three trading days before and the three trading days after the holiday. Using daily closing levels of the S&P 500 Index for 1950-2009 (60 observations), we find that: More…
Exploiting Momentum While Avoiding Long-term Reversal
August 30, 2010 - Momentum Investing
Is there a way to enhance returns for a momentum strategy by avoiding stocks about to enter post-momentum, long-term reversals? In the August 2010 version of his paper entitled “Momentum – Reversal Strategy”, Hsin-Yi Yu investigates two similar momentum-reversal trading strategies hypothesized to avoid the past winning and losing stocks most likely to reverse. The comparison method compares the geometric mean returns over the past 11 months and n<11 months, hypothesizing that both past winner and past loser stocks with accelerating momentum are more likely to reverse. The alternative convex-concave method graphs geometric mean returns over the past 1 to 11 months versus number of months, hypothesizing that a concave (convex) profile indicates a low (high) probability of reversal for past winners and high (low) probability of reversal for past losers. Using monthly returns for all NYSE/AMEX and NASDAQ stocks during 1965-2009, he finds that: More…
Hedging Crashes: Volatility Futures vs. Index Puts
August 27, 2010 - Volatility Effects
How do stock index volatility and variance futures contracts compare with stock index put options as hedges against market crashes? In their August 2010 paper entitled “Using Volatility Instruments as Extreme Downside Hedges”, Bernard Lee and Yueh-Neng Lin investigate the effectiveness of stock index volatility and variance futures contracts as extreme downside hedges and compare this effectiveness to that of out-of-the-money index put options. Specifically, they compare the outcomes of hedging a long Standard & Poor’s Depository Receipts (SPY) position via 1-month and 3-month rolling positions in S&P 500 Volatility Index (VIX) futures contracts, S&P 500 3-month Variance Futures (VT) contracts and 10% out-of-the-money (OTM) S&P 500 Index put options with reasonable hedge trading frictions. Using price data for SPY, VIX and VT futures contracts and index put options spanning 6/10/04-10/14/09 for 1-month rolling hedges and 7/19/04-9/9/09 for 3-month rolling hedges, they find that: More…
CFA or MBA or School of Hard Knocks?
August 26, 2010 - Investing Expertise, Mutual/Hedge Funds
Are a CFA designation, an MBA degree and experience critical success factors for fund managers? In their July 2010 paper entitled “Are You Smarter than a CFA’er? Manager Qualifications and Portfolio Performance”, Oguzhan Dincer, Russell Gregory-Allen and Hany Shawky examine the impact of having an MBA, a CFA and/or investment experience on investment manager performance. They control for market conditions and investing style and seek robustness of results by using five portfolio performance and two risk measures. Using fund performance data and manager characteristics for a sample of 890 managed equity and fixed income portfolios free of survivorship bias over the relatively calm period of 2005-2007, they find that: More…
