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 October 2014.
- Updated Market Models backtest charts and the market valuation metrics map based on data available through October 2014.
We have updated the Trading Calendar to incorporate data for October 2014.
We have updated the the monthly asset class momentum winners and associated performance data at Momentum Strategy.
Below is a weekly summary of our research findings for 10/27/14 through 10/31/14. 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
The home page and “Momentum Strategy” now show preliminary asset class momentum strategy positions for November 2014. The difference in past returns between the top two places is large enough that the top place is unlikely to change by the close. The gap between the second and third places is small enough that they could switch places by the close. The gap between the third and fourth places is large enough that the top three places are unlikely to change by the close.
At this point, three of nine asset classes have negative cumulative returns over the past five months.
What happens after extreme up days and extreme down days for the U.S. stock market? To investigate, we define extreme up and extreme down days as those with daily returns at least X standard deviations above or below the mean (average) return over the past four years (the U.S. political cycle, about 1,000 trading days). Focusing on three standard deviations, we then look at average returns the next day (close-to-close and open-to-close), the next five trading days, the next 21 trading days (about a month) and the next 63 trading days (about a quarter). We also look at correlations between extreme day returns and future returns. Using daily closes for the S&P 500 Index since January 1950 and daily opens since January 1962, both through mid-October 2014, we find that: Keep Reading
Are the widely used Fama-French three-factor model (market, size, book-to-market ratio) and the Carhart four-factor model (adding momentum) the best factor models of stock returns? In their September 2014 paper entitled “Digesting Anomalies: An Investment Approach”, Kewei Hou, Chen Xue and Lu Zhang construct the q-factor model comprised of market , size, investment and profitability factors and test its ability to predict stock returns. They also test its ability to account for 80 stock return anomalies (16 momentum-related, 12 value-related, 14 investment-related, 14 profitability-related, 11 related to intangibles and 13 related to trading frictions). Specifically, the q-factor model describes the excess return (relative to the risk-free rate) of a stock via its dependence on:
- The market excess return.
- The difference in returns between small and big stocks.
- The difference in returns between stocks with low and high investment-to-assets ratios (change in total assets divided by lagged total assets).
- The difference in returns between high-return on equity (ROE) stocks and low-ROE stocks.
They estimate the q-factors from a triple 2-by-3-by-3 sort on size, investment-to-assets and ROE. They compare the predictive power of this model with the those of the Fama-French and Carhart models. Using returns, market capitalizations and firm accounting data for a broad sample of U.S. stocks during January 1972 through December 2012, they find that: Keep Reading
Does the Capital Asset Pricing Model (CAPM) make predictions useful to investors? In his October 2014 paper entitled “CAPM: an Absurd Model”, Pablo Fernandez argues that the assumptions and predictions of CAPM have no basis in the real world. A key implication of CAPM for investors is that an asset’s expected return relates positively to its expected beta (regression coefficient relative to the expected market risk premium). Based on a survey of related research, he concludes that: Keep Reading
Can the U.S. stock market continue to deliver its historical return? In the preliminary draft of his paper entitled “A Pragmatist’s Guide to Long-run Equity Returns, Market Valuation, and the CAPE”, John Golob poses two questions:
- What long-run real return should investors expect from U.S. equities?
- Do popular metrics reliably indicate when the U.S. equity market is overvalued?
He notes that the body of relevant research presents no consensus on the answers to these questions, which both relate to long-term growth in corporate earnings per share. Recent forecasts for real stock market returns range from as low as 2% to about 6% (close to the 6.5% average since 1871), reflecting disagreements about how slow GDP growth, low dividends, share buybacks and the profitability of retained earnings affect earnings per share growth. The author introduces Federal Reserve Flow of Funds (U.S. Financial Accounts) and S&P 500 aggregate book value to gauge effects of stock buybacks. He also assesses the logic of using Shiller’s cyclically adjusted price-earnings ratio (CAPE or P/E10) as a stock market valuation metric. Using S&P 500 Index price and dividend data, related earnings data and U.S. financial and economic data as available during 1871 through 2013, he concludes that: Keep Reading
The deadline for submission of papers for the 2015 Wagner Award, presented by the National Association for Active Investment Management (NAAIM), is March 2, 2015. Per the “Call for Papers”:
“The competition is open to all investment practitioners, academic faculty and doctoral candidates in the field. …All submitted papers should be recent, unpublished and of a quality appropriate for publication in a peer-reviewed academic journal. …Papers must be of practical significance to practitioners of active investing. The prize will be awarded to a paper resulting from research into active investment management, which NAAIM broadly defines as investment strategies and techniques that improve upon the risk-adjusted return obtainable from a passive, buy-and-hold, investment strategy. …Three prizes will be awarded. The best paper will receive the Wagner Award valued at $10,000; second place will receive $3,000 and third will receive $1,000. …the grand prizewinner will be invited to present his / her paper at the NAAIM annual conference: ‘Uncommon Knowledge 2015,’ May 3-6 at the Newport Beach Marriott Resort and Spa in Newport Beach, California. Free conference attendance, U.S. air travel and lodging will be provided.”
See “Generating Parameter Sensitivity Distributions to Mitigate Snooping Bias”, “Exploitation of Stock Deviations from Statistical Equilibrium” and “Relative Strength of 10-year and 30-year Treasuries as Regime Indicator” for summaries of the 2014 Wagner Award first, second and third place papers, respectively.
See “Equity Sector Selection Based on Credit Risk”, “Volatility Trading Strategies” and “Taking the Noise Out of Technical Trading” for summaries of the 2013 Wagner Award first, second and third place papers, respectively.
See “Melding Momentum, Diversification and Absolute Return”, “Mutual Fund Alpha Momentum” and “Active Asset Allocation via Drawdown Control” for summaries of the 2012 Wagner Award first, second and third place papers, respectively.
See “Capital Management with Clustered Signals”, “Which Kind of (ETF) Momentum Is Best?” and “Enhancing/Streamlining Asset Rotation” for summaries of the 2011 Wagner Award first, second and third place papers, respectively.
See “Exploiting the Predictability of Volatility” and “Selling Calls or Puts According to Trend” for summaries of the 2010 Wagner Award first and second place papers, respectively.
The editor of CXOadvisory.com will be a judge for the 2015 Wagner Award. CXOadvisory.com has no other affiliation with NAAIM.
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