Getting Started with CXO

Research Articles

Our complete repository of free and premium investment research.

What Works Best?

What trading strategies work best for individual investors?

Momentum Strategy

Our ETF momentum trading strategy and analysis.

The Book

Our short eBook on avoiding investment strategy flame outs.

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

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

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

Weekly Summary of Research Findings: 8/25/14 – 8/29/14

Below is a weekly summary of our research findings for 8/25/14 through 8/29/14. 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

Preliminary Momentum Strategy Update

The home page and “Momentum Strategy” now show preliminary asset class momentum strategy positions for September 2014. The differences in past returns among the top three places are very small, and they may change order by the close. However, the gap between the third and fourth places is large enough that the top three are unlikely to change.

Mutual Fund Hot Hand Diversification

As a follow-up to “Mutual Fund Hot Hand Performance Robustness Test”, a subscriber suggested testing a portfolio that each year holds the top two Fidelity diversified equity funds plus the top two Vanguard diversified equity funds from “Mutual Fund Hot Hand Performance” (four funds total). Such a portfolio should suppress volatility, particularly the effects of any outlier returns, while maintaining tax-friendly capital gains treatment. We extend that suggestion to consider the top three funds from each of the Fidelity and Vanguard sets. We use June-to-June annual returns starting 1993 with availability of SPDR S&P 500 (SPY) as a widely used and easily investable benchmark. The number of Fidelity (Vanguard) funds available for the initial ranking in 1993 is 23 (10), growing to 61 (49) by 2013. Using monthly total returns for SPY and the Fidelity and Vanguard diversified equity mutual funds as available from Yahoo!Finance during June 1993 through June 2014 (21 years), we find that: Keep Reading

Evaluating Systematic Trading Programs

How should investors assess systematic trading programs? In his August 2014 paper entitled “Evaluation of Systematic Trading Programs”, Mikhail Munenzon offers a non-technical overview of issues involved  in evaluating systematic trading programs. He defines such programs as automated processes that generate signals, manage positions and execute orders for  exchange-listed instruments or spot currency rates with little or no human intervention. He states that the topics he covers are not exhaustive but should be sufficient for an investor to initiate  successful relationships with systematic trading managers. Based on his years of experience as a systematic trader and as a large institutional investor who has evaluated many diverse systematic trading managers on a global scale, he concludes that: Keep Reading

Cash Flow the Best Practical Stock Return Predictor?

Which firm accounting measures best predict future stock returns? In the August 2014 version of their paper entitled “Are Cash Flows Better Stock Return Predictors than Profits?”, Stephen Foerster, John Tsagarelis and Grant Wang investigate the power of enhanced cash flow measures to predict stock returns. They first devise procedures for transforming indirect cash flow and income statements into estimates of cash flow directly available to stockholders (see the table below). They then compare the ability of these measures and of alternative cash flow/profit/income measures to predict stock returns via hedge portfolios that are each month long (short) the tenth of stocks with the best (worst) values of each measure. They scale all measures either by total assets or by market value of equity. They consider both value-weighted and equal-weighted hedge portfolios. They use the real-time S&P 1500 (excluding financial firms) as their stock universe to ensure investability. Using monthly accounting data lagged by four months and monthly stock returns for the specified set of firms during October 1994 through December 2013, they find that: Keep Reading

Stock Returns Around Labor Day

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 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 through 2013 (64 observations), we find that: Keep Reading

Simple Asset Class Leveraged ETF Momentum Strategy

Subscribers have asked whether substituting leveraged exchange-traded funds (ETF) in the “Simple Asset Class ETF Momentum Strategy” might enhance performance. To investigate, we execute the strategy with the following eight 2X leveraged ETFs, plus cash:

ProShares Ultra DJ-UBS Commodity (UCD)
ProShares Ultra MSCI Emerging Markets (EET)
ProShares Ultra MSCI EAFE (EFO)
ProShares Ultra Gold (UGL)
ProShares Ultra S&P500 (SSO)
ProShares Ultra Russell 2000 (UWM)
ProShares Ultra Real Estate (URE)
ProShares Ultra 20+ Year Treasury (UBT)
3-month Treasury bills (Cash)

We allocate all funds at the end of each month to the asset class leveraged ETF or cash with the highest total return over the past five months (5-1). Using monthly adjusted closing prices for the specified ETFs and the yield for Cash over the period January 2010 (the earliest month prices for all eight ETFs are available) through July 2014 (only 55 months), we find that: Keep Reading

Continue to archive for older articles

Editor Archive Picks

Equity Risk Premium Model Consensus

…titled “The Equity Risk Premium: A Consensus of Models”, Fernando Duarte and Carlo Rosa estimate the ERP by combining outputs of 20 models prominently used by practitioners and featured in the academic literature. They define the ERP as the compensation investors require to make them indifferent between holding the equity market portfolio (proxied by the S&P 500 Index) and a risk-free bond (proxied by nominal or real U.S. Treasury…

Long-term Equity Risk Premium Erosion?

…e assets (bills, notes and bonds) during 1925 through 2013, he finds that: Based on a best-fit straight line, ERP declines over the sample period. Extrapolation of this line suggests a zero ERP by 2050 (see the chart below). The trend may explain the long-term decline in the equity share of the global market portfolio. Based on a yield of 1.6% for 5-year U.S. Treasury notes, ERP at the end of 2013 is a little above trend at about 5%. The ga…

Predicting the Equity Risk Premium

…he Federal Reserve Bank of Cleveland. They apply simple inception-to-date linear regression to relate forecasted ERP to actual ERP. Using monthly S&P 500 Index total returns, Shiller’s P/E10 data, Treasury yields (10-year, 5-year and 2-year notes and bills) and the Cleveland Federal Reserve’s Index of Inflation (limiting the start of the sample period) during 1982 through April 2012, they find that: Based on conventional statistical m…

CFOs Project the Equity Risk Premium

…00 Index over the coming decade (see the chart below). With a T-note yield of 2.70%, this expectation implies an ERP of 3.73%, slightly higher than the 3.54% average for the entire series of surveys. The standard deviation of individual responses in the most recent survey is 2.63%, a level of disagreement slightly below the series average of 2.74%. Associated personal interviews indicate that CFOs follow the stock market closely. They interpret E…

2014 Country Equity Risk Premiums from Academia and Practitioners

What are the current academic and practitioner estimates of annual premiums over the risk-free rate demanded in each country by equity investors? In their June 2014 paper entitled “Market Risk Premium Used in 88 Countries in 2014: A Survey with 8,228 Answers”, Pablo Fernandez, Pablo Linares and Isabel Fernandez Acin summarize the results of a May-June 2014 email survey “about the Market Risk Premium (MRP or Equity Premium) that…

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

    Inflation Forecast Update

    The Inflation Forecast now incorporates actual total and core Consumer Price Index (CPI) data for July 2014. The actual total (core) inflation rate for July is slightly lower than (slightly lower 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 September 2014. The differences in past returns among the top three places are very small, and they may change order by the close. However, the gap between the third and fourth places is large enough that the top three are unlikely to change.

    The Decision Moose Asset Allocation Framework

    A reader suggested a review of the Decision Moose asset allocation framework of William Dirlam. “Decision Moose is an automated framework for making intermediate-term investment decisions.” Decision Moose focuses on asset class momentum, as augmented by monetary policy, exchange rate and interest rate indicators. Its signals tell followers when to switch from one index fund More

    Stock Market Behavior Around Mid-year and 4th of July

    The middle of the year might be a time for funds to dress their windows and investors to review and revise portfolios. The 4th of July celebration might engender optimism among U.S. investors. Are there any reliable patterns to daily stock market returns around mid-year and the 4th of July? To check, we analyze the More

    Stock Returns Around Labor Day

    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 the turn of the month. To investigate the possibility of short-term effects on stock market returns around Labor Day, More

Avoiding Investment Strategy Flame-outs eBook
Login
Current Momentum Winners

ETF Momentum Signal
for September 2014 (Final)

Momentum ETF Winner

Second Place ETF

Third Place ETF

Gross Momentum Portfolio Gains
(Since August 2006)
Top 1 ETF Top 2 ETFs
222% 229%
Top 3 ETFs SPY
221% 81%
Strategy Overview
Stock Market Projection

Projected change in S&P 500 Index as of market close on 8/29/14…

8-29-14

For elaboration, go to Market Models or the detailed descriptions of the Real Earnings Yield (REY) Model and the Reversion-to-Value (RTV) Model.

Popular Subscriber-Only Posts
Guru Final Report Card

Accuracy

68%

David Nassar: Is He Market-wise?

Last Updated: May 26, 2006

Accuracy

66%

Ken Fisher Chronicles

Last Updated: September 5, 2012

Accuracy

66%

Jack Schannep’s Sweepstakes

Last Updated: November 9, 2012

Accuracy

64%

David Dreman: About Value

Last Updated: March 21, 2012

Accuracy

63%

James Oberweis: Thinking Octagonally

Last Updated: December 27, 2010

Accuracy

62%

Steve Sjuggerud’s Sentiment

Last Updated: November 23, 2012

Accuracy

60%

Jason Kelly: The Neatest Little Market Advice?

Last Updated: January 30, 2012

Accuracy

60%

Louis Navellier: Calculating the Market’s Moves

Last Updated: October 29, 2012

Accuracy

60%

Cabot Market Letter Outlooks

Last Updated: August 30, 2012

Accuracy

59%

John Buckingham’s Prudent Speculations?

Last Updated: September 2, 2011

See More Gurus