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Weekly Summary of Research Findings: 11/24/14 – 11/28/14

Below is a weekly summary of our research findings for 11/24/14 through 11/28/14. 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

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 November 2014.
  • Updated Market Models backtest charts and the market valuation metrics map based on data available through November 2014.

We have updated the Trading Calendar to incorporate data for November 2014.

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

Preliminary Momentum Strategy Update

The home page and “Momentum Strategy” now show preliminary asset class momentum strategy positions for December 2014. Differences in past returns among assets are large enough that there is very little chance that the top three will change by the (early) close. There is a slim possibility that the top two could switch places.

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

Factor Model of Country Stock Market Returns?

Do predictive powers of the size, value and momentum factors observed for individual stocks translate to the country level? In the November 2014 version of his paper entitled “Country Selection Strategies Based on Value, Size and Momentum”, Adam Zaremba investigates country-level value, size and momentum premiums, tests whether the value and momentum premiums are equally strong across markets of different sizes and evaluates a country-level multi-factor asset pricing model. He measures factors at the country level as:

  • Value: aggregate book-to-market ratio, with aggregate 12-month earnings-to-price-ratio, cash flow-to-price ratio and dividend yield as alternatives where available.
  • Size: total market capitalization of country stocks.
  • Momentum: cumulative return over preceding 12, 9, 6 or 3 months excluding the last month to avoid short-term reversal.

He relies on capitalization-weighted, U.S. dollar-denominated gross total return MSCI equity indexes as available, with Dow Jones and STOXX indexes as fallbacks (an average 56 indexes per month over time). He includes discontinued country indexes. He uses one-month LIBOR as the risk-free rate. Each month, he ranks countries by value, size and momentum into value-weighted or equal-weighted fifths (quintiles). He also performs double-sorts first on size and then on value or momentum. Using monthly firm/stock data for listed stockswithin 78 country indexes as available during February 1999 through September 2014 (147 months), he finds that: Keep Reading

Overview of Master Limited Partnerships

Are publicly traded Master Limited Partnerships attractive investments? In their June 2014 paper entitled “Master Limited Partnerships (MLPs)”, Frank Benham, Steven Hartt, Chris Tehranian and Edmund Walsh describe and summarize the aggregate performance and characteristics of publicly traded MLPs. These partnerships are predominantly owners of “toll road” energy infrastructure, U.S. oil and natural gas pipelines and resource shipping. Like real estate investment trusts (REIT), MLPs are pass-through entities for tax purposes. Their distributions to partners are not subject to double-taxation as are corporate dividends. Unlike REITs, MLPs may retain income to fund growth. The general (managing) partner of an MLP typically earns an incentive-based share of distributions larger than that of limited (passive) partners. MLPs involve tax, accounting and administrative complications associated with partnerships. Using monthly returns for the capitalization-weighted Alerian MLP Index and for other asset class indexes during January 2000 through April 2014, they conclude that: Keep Reading

Comprehensive, Long-term Test of Technical Currency Trading

Does quantitative technical analysis work reliably in currency trading? If so, where does it work best? In their May 2013 paper entitled “Forty Years, Thirty Currencies and 21,000 Trading Rules: A Large-Scale, Data-Snooping Robust Analysis of Technical Trading in the Foreign Exchange Market”, Po-Hsuan Hsu and Mark Taylor test the effectiveness of a broad set of quantitative technical trading rules as applied to exchange rates of 30 currencies with the U.S. dollar over extended periods. They consider 21,195 distinct technical trading rules: 2,835 filter rules; 12,870 moving average rules; 1,890 support-resistance signals; 3,000 channel breakout rules; and, 600 oscillator rules. They employ a test methodology designed to account for data snooping in identifying reliably profitable trading rules. They also test whether technical trading effectiveness weakens over time. In testing robustness to trading frictions, they assume a fixed one-way trading cost of 0.025%. Using daily U.S. dollar exchange rates for nine developed market currencies and 21 emerging market currencies during January 1971 through July 2011, they find that:

Keep Reading

Where Technical Trading Works

In which country stock markets is technical analysis likely to work best? In the October 2014 version of her paper entitled “Technical Analysis: A Cross-Country Analysis”, Jiali Fang investigates three potential cross-country determinants of technical trading profitability:

  1. An individualism index, measuring the degree to which individuals integrate via cultural groups.
  2. Market development and integrity metrics, including stock market size, stock market age, transaction costs and measures of investor protection, anti-director rights, ownership concentration and insider trading.
  3. Information uncertainty metrics, including aggregate market turnover, volatility of cash flow growth rate and book-to-market ratio.

She considers 26 previously studied trading rules employing only past prices, classified as: variable moving average (VMA) rules, fixed-length moving average (FMA) rules and trading range break-out (TRB) rules. VMA rules are long (short) an index when a short-term moving average is above (below) a long-term moving average. FMA rules are similar to VMA rules, but hold a newly signaled position a fixed interval of 10 days. TRB rules generate buy (sell) signals when price rises above (falls below) the resistance (support) defined by prices over a specified past interval. Tests include both regressions and model strategies that are long (short) the market index as signaled and invest in the risk-free asset when there is no signal. Using cultural metrics, daily stock market index data and economic/financial variables for 50 countries during March 1994 through March 2014, she finds that: Keep Reading

Weekly Summary of Research Findings: 11/17/14 – 11/21/14

Below is a weekly summary of our research findings for 11/17/14 through 11/21/14. 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

Continue to archive for older articles

Editor Archive Picks

Predicting Government Bond Term Premiums with Leading Economic Indicators

…;What Drives the International Bond Risk Premia?”, Guofu Zhou and Xiaoneng Zhu examine whether OECD-issued leading economic indicators predict government bond returns at a one-month horizon. They focus on a four-country (U.S., UK, Japan and Germany)  aggregate leading economic indicator (LEI4). They test whether LEI4 outperforms historical averages and individual country LEIs in predicting term premiums (relative to a one-year bond) for U.S…

Leading Economic Index and the Stock Market

The Conference Board “publishes leading, coincident, and lagging indexes designed to signal peaks and troughs in the business cycle for major economies around the world,” including the widely cited Leading Economic Index (LEI) for the U.S. Does the LEI predict stock market behavior? Using the as-released monthly change in LEI from archived Conference Board press releases and contemporaneous dividend-adjusted daily levels of SPDR S&a…

ECRI’s Weekly Leading Index and the Stock Market

Financial market commentators and media sometimes cite the Economic Cycle Research Institute’s (ECRI) U.S. Weekly Leading Index (WLI) as an important economic indicator, implying that it is predictive of future stock market performance. According to ECRI, WLI “has a moderate lead over cyclical turns in U.S. economic activity.” ECRI publicly releases a preliminary (revised) WLI value with a one-week (two-week) lag. Does this ind…

Market-Leading Industries

Do certain industries tend to lead or lag stock market cycles? In the November 2004 update of their paper entitled “Do Industries Lead the Stock Market?”, Harrison Hong, Walter Torous and Rossen Valkanov investigate whether returns from some industries predict future returns for the overall stock market. The authors hypothesize that the overall market only gradually recognizes valuable information contained in the returns of specific…

Do Ph.D. Holders Make Better Money Managers?

…tricting the sample of Ph.D. funds to those involving Ph.D. holders who have published at least one article in a leading economics or finance journal increases average next-year gross return outperformance to 1.1%. In summary, evidence suggests that a relevant Ph.D. credential (especially one corroborated by articles published in leading economics and finance journals) among key personnel may represent a slight edge for an investment fund. Cauti…

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

    Inflation Forecast Update

    The Inflation Forecast now incorporates actual total and core Consumer Price Index (CPI) data for October 2014. The actual total (core) inflation rate for October is lower than (a little higher than) 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 December 2014. Differences in past returns among assets are large enough that there is very little chance that the top three will change by the (early) close. There is a slim possibility that the top two could switch places. At this point, four of nine asset 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

    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… More

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Current Momentum Winners

ETF Momentum Signal
for December 2014 (Final)

Momentum ETF Winner

Second Place ETF

Third Place ETF

Gross Momentum Portfolio Gains
(Since August 2006)
Top 1 ETF Top 2 ETFs
212% 229%
Top 3 ETFs SPY
219% 88%
Strategy Overview
Stock Market Projection

Projected change in S&P 500 Index as of market close on 11/28/14…

11-28-14

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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