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Latest Market Research Articles

Correction to Momentum Strategy Winners

We have corrected the Momentum Strategy winners list for January 2015 (to be held during February 2015). The third place winner was incorrect due to omission of a dividend.

Models, Trading Calendar and Momentum Strategy Updates

We have updated the Earnings Forecast to incorporate unusually immature earnings data for fourth quarter 2014 S&P 500 earnings (material revision may occur).

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 January 2015.
  • Updated Market Models backtest charts and the market valuation metrics map based on data available through January 2015.

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

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

Weekly Summary of Research Findings: 1/26/15 – 1/30/15

Below is a weekly summary of our research findings for 1/26/15 through 1/30/15. 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

Preliminary Momentum Strategy Update

The home page and “Momentum Strategy” now show preliminary asset class momentum strategy positions for February 2015. Differences in past returns between first and second place and among the third, fourth and fifth places are small enough that orders could change by the close. In particular a further downdraft in equities could flip first and second and bring the fifth place (Cash) to third.

At this point, four of nine asset classes have negative cumulative returns over the past five months.

Extended Simple Momentum Strategy Test of TSP Funds/Proxies

A subscriber asked about extending “Simple Momentum Strategy Applied to TSP Funds” back in time to 1988. That test employs the following five funds all available to U.S. federal government employees via the Thrift Savings Plan (TSP) starting in January 2001:

G Fund: Government Securities Investment Fund (G)
F Fund: Fixed Income Index Investment Fund (F)
C Fund: Common Stock Index Investment Fund (C)
S Fund: Small Cap Stock Index Investment Fund (S)
I Fund: International Stock Index Investment Fund (I)

S Fund and I Fund data limit the sample period. To extend the test back to first availability of G Fund, F Fund and C Fund data in February 1988 (January 1988 data is partial for TSP funds), we use Vanguard Small Cap Index Investors Fund (NAESX) as a proxy for the S Fund and Vanguard International Value Investors Fund (VTRIX) as a proxy for the I Fund prior to 2001. The subscriber requested first a sensitivity test of ranking intervals (one to 12 months), and then performance tests using the optimal ranking interval on portfolios consisting of the one fund with the highest past total return (Top 1), an equally weighted portfolio of the top two funds (EW top 2) and an equally weighted portfolio of the Top 3 funds (EW Top 3). Using monthly returns for the five TSP funds as available during February 1988 through December 2014 (323 months) and monthly returns for NAESX and VTRIX during February 1988 through December 2000, we find that: Keep Reading

Quality as Discriminator of Country Stock Markets

Can investors usefully apply stock quality metrics to entire country stock markets? In his December 2014 paper entitled “Country Selection Strategies Based on Quality”, Adam Zaremba investigates whether quality metrics effectively predict country stock market index performance. He also examines whether (1) quality-size and quality-value double sorts enhance country-level value and size strategies; and, (2) high-quality markets offer a hedge during times of market distress. He considers six quality metrics: accruals, cash (cash divided by total assets), profitability (return on assets), leverage (total assets divided by common equity), payout (dividends as a fraction of income) and turnover (dollar volume of trading divided by market capitalization). Firm metric aggregation weightings are those used in constructing respective country indexes. After lagging the time series by three months to avoid a look-ahead bias, he forms capitalization-weighted portfolios of country markets by ranking them into fifths (quintiles) based on quality metric sorts. He identifies times of market distress based on: the spread between U.S. LIBOR and U.S. Treasury bill yields; VIX; the spread between U.S. corporate BBB bond and 10-year U.S. Treasury note yields; and, the spread between U.S. Treasury 10-year and 2-year note yields. Using stock market index returns and accounting data in U.S. dollars across 77 country stock markets during February 1999 through September 2014 as available, and contemporaneous market distress indicator values, he finds that: Keep Reading

VIX Term Structure Slope and Variance Asset Future Returns

Does the term structure of the the option-implied expected volatility of the S&P 500 Index (VIX, normally measured at a one-month horizon) predict future returns of variance assets such as variance swaps, VIX futures and S&P 500 Index option straddles? In his January 2015 paper entitled “Risk Premia and the VIX Term Structure”, Travis Johnson investigates the relationship between the VIX term structure slope and the variance risk premium as measured by future returns of such assets. He constructs the VIX term structure by each day calculating six values of VIX from prices of S&P 500 Index options with maturities of one, two, three, six, nine and 12 months. He measures the variance risk premium from daily returns of S&P 500 Index variance swaps, VIX futures and S&P 500 Index option straddles of various maturities. Using daily closing quotes for the specified S&P 500 index options and daily returns for the specified variance assets as available during 1996 through 2013, he finds that: Keep Reading

Simple Asset Class ETF Momentum Strategy with SHY Return Filter

A subscriber suggested using iShares 1-3 Year Treasury Bond ETF (SHY) as a return filter for the“Simple Asset Class ETF Momentum Strategy” as a way to suppress maximum drawdown. The basic strategy each month allocates funds to the one, two or three of the following eight exchange-traded funds (ETF) plus cash, as proxied by U.S. Treasury bills (T-bills), with the highest returns over the past five months:

PowerShares DB Commodity Index Tracking (DBC)
iShares MSCI Emerging Markets Index (EEM)
iShares MSCI EAFE Index (EFA)
SPDR Gold Shares (GLD)
iShares Russell 1000 Index (IWB)
iShares Russell 2000 Index (IWM)
SPDR Dow Jones REIT (RWR)
iShares Barclays 20+ Year Treasury Bond (TLT)
3-month Treasury bills (Cash)

The T-bill yield is an approximation of the (non-negative) yield paid on cash by brokers. SHY can have negative returns in response to a rise in interest rates because it holds U.S. Treasury notes of terms 1-3 years. We investigate in two steps: (1) substitute SHY for T-bills in the basic strategy; and, (2) apply the SHY filter, substituting SHY for any winning ETF with a lower past return than SHY. Using monthly dividend-adjusted closing prices for the specified ETFs and the yield on T-bills during February 2006 (when all ETFs become available) through December 2014 (107 months), we find that:

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Continue to archive for older articles

Editor Archive Picks

Safe Retirement Withdrawal Rate?

In the current environment of low bond yields, what is a safe investment withdrawal rate during retirement? In their January 2013 paper entitled “The 4% Rule is Not Safe in a Low-Yield World”, Michael Finke, Wade Pfau and David Blanchett model the risk of exhausting wealth for different retirement durations, withdrawal rates, stocks-bonds portfolio mixes and assumptions about future market conditions (stock and bond returns). They mo…

Retirement Allocation Strategy Informed by P/E10

Does adjusting an asset allocation retirement glidepath according to a stock market valuation metric such as Shiller’s cyclically adjusted price-earnings ratio (CAPE ratio or P/E10) improve the outcome? In their September 2014 paper entitled “Retirement Risk, Rising Equity Glidepaths, and Valuation-Based Asset Allocation”, Michael Kitces and Wade Pfau investigate the interaction of pre-determined allocation glidepaths and P/E10…

Benefit of Tax-deferred Retirement Savings?

…even Schwartz and Joshua Spizman estimate the lifetime benefit of postponing federal income tax liability until retirement by contributing pre-tax dollars to individual or employer-sponsored retirement savings while working. They quantify the benefit as the reduction in average annual lifetime federal income tax rate. They assume a base case of 40 work years (ages 25-65) and a number of retirement years equal to life expectancy minus 65. Using th…

Allocating Assets for Retirement

What is the best way to deploy assets for retirement? In his September 2009 paper entitled “Life is Non-linear: Structuring Retirement Portfolios for the Long Haul”, Joachim Klement analyzes six common retirement portfolio strategies in terms of their longevity and income generation over a retiree’s expected lifetime. The study emphasizes that income requirements vary during retirement, first declining with age and then acceler…

Improving the Conventional Retirement Glidepath

…egies: 80–>20: the conventional linear glidepath from 80% stocks-20% bonds to 20% stocks-80% bonds at retirement, with market capitalization weighting. 20–>80: inverse of the conventional linear glidepath. 50-50: constant 50% stocks-50% bonds, with market capitalization weighting. Dynamic Bond Duration: the 50-50 strategy, but: (a) hold 20-year bonds for the first 21 years; (b) shift linearly to 10-year bonds during the next te…

Popular Articles

    Models, Trading Calendar and Momentum Strategy Updates

    We have updated the Earnings Forecast to incorporate unusually immature earnings data for fourth quarter 2014 S&P 500 earnings (material revision may occur). 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 January 2015. Updated Market Models backtest charts and the market More

    Preliminary Momentum Strategy Update

    The home page and “Momentum Strategy” now show preliminary asset class momentum strategy positions for February 2015. Differences in past returns between first and second place and among the third, fourth and fifth places are small enough that orders could change by the close. In particular a further downdraft in equities could flip first and More

    Inflation Forecast Update

    The Inflation Forecast now incorporates actual total and core Consumer Price Index (CPI) data for December 2014. The actual total (core) inflation rate for December is lower than (lower than) forecasted. The new actual and forecasted inflation rates will flow into Real Earnings Yield Model projections at the end of the month.

    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

    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

    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

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Current Momentum Winners

ETF Momentum Signal
for February 2015 (Final)

Momentum ETF Winner

Second Place ETF

Third Place ETF

Gross Momentum Portfolio Gains
(Since August 2006)
Top 1 ETF Top 2 ETFs
249% 265%
Top 3 ETFs SPY
239% 82%
Strategy Overview
Stock Market Projection

Projected change in S&P 500 Index as of market close on 1/30/15…

1-30-15

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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