Blog - Investing Notes

Moving Averages and REIT Indexes

May 16, 2012 - Real Estate, Technical Trading

Does timing based on simple moving averages (SMA) work for U.S. Real Estate Investment Trust (REIT) indexes? If so, which moving average is best? In his March 2012 paper entitled “The Market Timing Power of Moving Averages: Evidence from US REIT Indexes”, Paskalis Glabadanidis tests the effectiveness of SMAs for timing ten value-weighted and ten similar equal-weighted U.S. REIT indexes. A monthly close above (below) its SMA signals investment in the REIT index (cash, estimated as the 30-day U.S. Treasury bill yield) the next month. He focuses on a 24-month SMA, but includes robustness tests based on 6-month, 12-month, 36-month, 48-month and 60-month SMAs. He applies baseline one-way trading frictions of 0.5% for entering and exiting a REIT index. Using monthly value-weighted and equal-weighted levels of ten U.S. REIT indexes during 1980 through 2010 (31 years), he finds that: More…

Inflation Forecast Update

May 15, 2012 - Economic Indicators

The Inflation Forecast now incorporates actual total and core Consumer Price Index data for April 2012. The actual total (core) inflation rate for April is slightly lower than (slightly higher than) forecasted.

The new actual and forecasted inflation rates will flow into Real Earnings Yield Model projections about the end of May.

Simple Tests of DBV as Diversifier

May 15, 2012 - Currency Trading, Strategic Allocation

Does adding a proxy for the currency carry trade among developed economies (long futures on three currencies with the highest interest rates and short futures on three currencies with the lowest interest rates) to a diversified portfolio improve its performance? To check, we add PowerShares DB G10 Currency Harvest (DBV) to the following mix of asset class proxies (the same used in “Simple Asset Class ETF Momentum Strategy”):

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)

First, per the findings of “Asset Class Diversification Effectiveness Factors”, we measure the average monthly return for DBV and the average pairwise correlation of DBV monthly returns with the monthly returns of the above assets. Then, we compare cumulative returns and basic monthly return statistics for equally weighted (EW), monthly rebalanced portfolios with and without DBV. We ignore rebalancing frictions, which would be about the same for the alternative portfolios. Using adjusted monthly returns for DBV and the above nine asset class proxies from September 2006 (first return available for DBV) through April 2012 (68 monthly returns), we find that: More…

New “Currency Trading” Category

May 14, 2012 - Currency Trading

There is a new “Currency Trading” category in the list of blog categories above collecting related entries.

Enhancing the Currency Carry Trade

May 14, 2012 - Currency Trading, Volatility Effects

Are there ways to enhance the currency carry trade (long currencies offering high interest rates and short those offering low rates)? In the May 2012 version of their paper entitled “Average Variance, Average Correlation and Currency Returns”, Gino Cenedese, Lucio Sarno and Ilias Tsiakas investigate the ability of components of the currency exchange market risk (variance of the average return for all exchange rates) to predict carry trade returns. Their baseline carry trade portfolio involves U.S. dollar nominal exchange rates, rebalanced monthly. They decompose the market variance into two components: average variance of individual exchange rate returns, and average correlation of exchange rate returns. They examine the effects of changes in these risk components on the entire future distribution of currency trade returns (via quantile breakdowns), focusing on the large losses in the left tail and large gains in the right tail. Using daily spot and forward exchange rates for 33 currencies relative to the U.S. dollar as available during 1976 through February 2009 (15 active exchange rates at the beginning and 22 at the end), they find that: More…

Dueling Consensus Forecasts of Economic Indicators

May 11, 2012 - Economic Indicators, Investing Expertise

Which consensus forecast of U.S. economic indicators is best? How does the U.S. equity market react to consensus forecast errors? In their April 2012 paper entitled “Market Reaction to Information Shocks: Does the Bloomberg and Briefing.com Survey Matter?”, Linda Chen, George Jiang and Qin Wang investigate the accuracy of, and equity futures market reactions to, competing Bloomberg and Briefing.com survey-based forecasts for the values of scheduled weekly, biweekly, monthly and quarterly economic announcements. They focus on 14 announcements commonly treated as important: Building Permits, Capacity Utilization, Case-Shiller 20-city Index, Consumer Confidence, Consumer Price Index, Durable Goods Orders, Existing Home Sales, GDP Advance, Leading Indicators, Non-farm Payrolls, Personal Spending, Producer Price Index, Retail Sales and Unemployment Rate. They introduce standardization to compare errors across different indicator scales. Using consensus forecasts and announced values of 59 economic indicators, along with contemporaneous high-frequency price and volume data for the nearest S&P 500 futures contract (as available), over the period January 1998 through August 2010, they find that: More…

Simple Tests of Sy Harding’s Seasonal Timing Strategy

May 10, 2012 - Calendar Effects, Technical Trading

Several readers have inquired about the performance of Sy Harding’s Street Smart Report Online, which includes the Seasonal Timing Strategy. This strategy combines “the market’s best average calendar entry [October 16] and exit [April 20] days with a technical indicator, the Moving Average Convergence Divergence (MACD).” According to Street Smart Report Online, applying this strategy to a Dow Jones Industrial Average (DJIA) index fund generated a cumulative return of 190.6% during 1999 through 2011, compared to 64.4% for the DJIA itself. As a robustness test, we apply this strategy to the SPDR S&P 500 (SPY) exchange-traded fund since its inception. Using daily dividend-adjusted closing prices for SPY and the daily 13-week Treasury bill (T-bill) yield from 1/29/93 (the earliest available for SPY) through 5/7/12, we find that: More…

Alternative Asset Class ETF Momentum Allocations

May 9, 2012 - Momentum Investing

A subscriber suggested an alternative to the ”Simple Asset Class ETF Momentum Strategy” that weights asset class ETFs according to six-month lagged return ranking (such as 35-25-20-10-4-3-2-1) rather than allocating all funds to the winner. Do the diversification benefits of this alternative outweigh the loss of momentum purity? To investigate, we return to the following eight asset class exchange-traded funds (ETF), plus cash:

As one benchmark, we allocate all funds at the end of each month to the asset class ETF or cash with the highest total return over the past six months (6-1). As another benchmark, we maintain an equal-weighted (EW), monthly rebalanced portfolio of all nine asset classes. As alternatives, we test two momentum rank-weighted (RW), linearly-scaled combinations of all nine classes, one steep across ranks and one shallow. We also test EW combinations of the Top 5, Top 4, Top 3 and Top 2 momentum ranks. Using monthly adjusted closing prices for the asset class proxies and the yield for Cash over the period February 2006 (the earliest all ETFs are available) through April 2012 (75 months), we find that: More…

Simple Asset Class ETF Momentum Strategy Robustness/Sensitivity Tests

May 9, 2012 - Momentum Investing

How sensitive is the performance of the “Simple Asset Class ETF Momentum Strategy” to selecting ranks other than winners and to choosing a momentum ranking interval other than six months? This strategy each month ranks the following eight asset class exchange-traded funds (ETF), plus cash, on past return and rotates to the strongest class:

Available data are so limited that sensitivity test results may mislead. With that reservation, we perform two robustness/sensitivity tests: (1) comparison of returns for all nine ranks of winner through loser based on a ranking interval of six months and a holding interval of one month (6-1); and, (2) comparison of winner returns for ranking intervals ranging from one to 12 months (1-1 through 12-1) and for a six-month lagged six-month ranking interval (12:7-1) per “Isolating the Decisive Momentum (Echo?)”, all with one-month holding intervals. Using monthly adjusted closing prices for the asset class proxies and the yield for Cash over the period July 2002 (or inception if not available then) through April 2012 (118 months), we find that: More…

Simple Asset Class ETF Momentum Strategy

May 9, 2012 - Momentum Investing

Does a simple momentum strategy applied to tradable asset class proxies produce attractive results? To investigate, we test a simple strategy on the following eight asset class exchange-traded funds (ETF), plus cash:

We allocate all funds at the end of each month to the asset class ETF or cash with the highest total return over the past six months (6-1). A six-month ranking period is intuitively large enough to gauge class momentum but small enough to react to changes in economic conditions that might favor one class over others. Using monthly adjusted closing prices for the asset class proxies and the yield for Cash over the period July 2002 (or inception if not available then) through April 2012 (118 months), we find that: More…

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