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.
January 30, 2015
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.
January 30, 2015
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.
January 30, 2015
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.
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
January 29, 2015
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
January 28, 2015
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
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: