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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 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.

Weekly Summary of Research Findings: 10/27/14 – 10/31/14

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

Preliminary Momentum Strategy Update

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.

Stock Market Returns after Extreme Up and Down Days

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

Better Four-factor Model of Stock Returns?

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:

  1. The market excess return.
  2. The difference in returns between small and big stocks.
  3. The difference in returns between stocks with low and high investment-to-assets ratios (change in total assets divided by lagged total assets).
  4. 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

Forget CAPM Beta?

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

Earnings per Share Growth in the Long Run

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:

  1. What long-run real return should investors expect from U.S. equities?
  2. 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

2015 Wagner Award Call for Papers

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.

Continue to archive for older articles

Editor Archive Picks

The 52-Week High as a Momentum Indicator for Individual Stocks

A reader notes and asks: “It is frequently said that stocks at 52-week highs are the most likely to outperform in the future. Is there any academic evidence to support this assertion?” In their October 2004 Journal of Finance article entitled “The 52-Week High and Momentum Investing”, Thomas George and Chuan-Yang Hwang examine the explanatory power of th…

How the 52-Week High and Low Affect Beta and Volatility

Do stocks exhibit predictable volatility behavior near their 52-week highs and lows? In their March 2010 paper entitled “How the 52-Week High and Low Affect Beta and Volatility”, Joost Driessen, Tse-Chun Lin and Otto Van Hemert analyze whether a stock’s beta, return volatility and implied volatility change as its price approaches a 52-week high or low and after its price breaches this high or low. Using price data for a broad s…

The Industry 52-week High Effect

Are 52-week highs and lows useful equity price momentum indicators at the industry level? In their March 2011 paper entitled “Industry Information and the 52-Week High Effect”, Xin Hong, Bradford Jordan and Mark Liu compare the 52-week high effect for industries to that for individual stocks. This effect consists of the future outperformance (underperformance) of stocks currently near their respective 52-week highs (lows). Using mont…

12-month High Effect for Sectors?

…Sample size is small (just 12 independent 12-month ranking intervals), and the poor performance of the 12-month high strategies may be anomalous. Nine sectors may not be sensitive enough to capture effects found for 20 industries in the cited research. However, it seems that the simplified approach should find some benefit. Measurement of highs relative to the previous 12 monthly closes (rather than the highest intraday value over the past 52 w…

Option Expiration Week Stock Return Drill-down

…t: The average weekly return of 28 large-cap stocks with actively traded options during option expiration week (other weeks) is 0.45% (0.12%) over the period 1996-2008, with average weekly return volatility 4.97% (4.57%) and weekly Sharpe ratio 0.57 (0.07). This anomalous option expiration week performance for these 28 stocks is larger for weeks with relatively high option trading volume. For the 7.5% (92.5%) of w…

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 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. More

    Inflation Forecast Update

    The Inflation Forecast now incorporates actual total and core Consumer Price Index (CPI) data for September 2014. The actual total (core) inflation rate for September is lower than (about the same as) 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 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. 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 November 2014 (Final)

Momentum ETF Winner

Second Place ETF

Third Place ETF

Gross Momentum Portfolio Gains
(Since August 2006)
Top 1 ETF Top 2 ETFs
206% 221%
Top 3 ETFs SPY
211% 83%
Strategy Overview
Stock Market Projection

Projected change in S&P 500 Index as of market close on 10/31/14…

10-31-14

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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