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FFR Actions, Stock Market Returns and Bond Yields

A subscriber wondered whether U.S. stock market movements predict Federal Funds Rate (FFR) actions taken by the Federal Reserve open market operations committee. To investigate and evaluate usefulness of findings, we relate three series:

  1. FFR actions per the above source, along with recent and historical committee meeting dates.
  2. S&P 500 Index returns.
  3. Changes in yield for the 10-Year U.S. Constant Maturity Treasury note (T-note).

In constructing the first series, for Federal Reserve open market operations committee meeting dates which do not produce FFR changes, we quantify committee actions as 0%. We ignore committee conference calls that result in no changes in FFR. We calculate the second and third series between committee meeting dates because that irregular interval represents new information to the committee and potential exploitation points for investors. Using data for the three series during January 1990 through early August 2019, we find that:

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Weekly Summary of Research Findings: 8/26/19 – 8/30/19

Below is a weekly summary of our research findings for 8/26/19 through 8/30/19. 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

SACEMS-SACEVS Diversification with Mutual Funds

“SACEMS-SACEVS for Value-Momentum Diversification” finds that the “Simple Asset Class ETF Value Strategy” (SACEVS) and the “Simple Asset Class ETF Momentum Strategy” (SACEMS) are mutually diversifying. Do longer samples available from “SACEVS Applied to Mutual Funds” and “SACEMS Applied to Mutual Funds” confirm this finding? To check, we look at the following three equal-weighted (50-50) combinations of the two strategies, rebalanced monthly:

  1. SACEVS Best Value paired with SACEMS Top 1 (aggressive value and aggressive momentum).
  2. SACEVS Best Value paired with SACEMS Equally Weighted (EW) Top 3 (aggressive value and diversified momentum).
  3. SACEVS Weighted paired with SACEMS EW Top 3 (diversified value and diversified momentum).

Using monthly gross returns for SACEVS and SACEMS mutual fund portfolios during September 1997 through July 2019, we find that:

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SACEVS-SACEMS for Value-Momentum Diversification

Are the “Simple Asset Class ETF Value Strategy” (SACEVS) and the “Simple Asset Class ETF Momentum Strategy” (SACEMS) mutually diversifying. To check, we look at three equal-weighted (50-50) combinations of the two strategies, rebalanced monthly:

  1. SACEVS Best Value paired with SACEMS Top 1 (aggressive value and aggressive momentum).
  2. SACEVS Best Value paired with SACEMS Equally Weighted (EW) Top 3 (aggressive value and diversified momentum).
  3. SACEVS Weighted paired with SACEMS EW Top 3 (diversified value and diversified momentum).

We also test sensitivity of results to deviating from equal SACEVS-SACEMS weights. Using monthly gross returns for SACEVS and SACEMS portfolios since January 2003 for the first strategy and since June 2006 for the latter two, all through July 2019, we 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 2018 (69 observations), we find that: Keep Reading

Stock Returns Around Blockchain Investment Announcements

How does the market react when firms announce adoption of blockchain technology? In the May 2019 draft of their paper entitled “Bitcoin Speculation or Value Creation? Corporate Blockchain Investments and Stock Market Reactions”, Don Autore, Nicholas Clarke and Danling Jiang study stock price reactions to initial public announcements of investments in blockchain technology by listed U.S. firms. Their key metric is buy-and-hold abnormal return (BHAR) relative to each of five benchmarks: (1) portfolios of stocks matched on size and book-to-market (BM); (2) portfolios of stocks matched on market beta; 3) a broad value-weighted market index; (4) iShares Global Financials ETF (IXG); and, (5) iShares Global Tech ETF (IXN). Their announcement event windows is five trading days before initial public announcement of an investment in blockchain technology (-5) to 65 trading days after (65). Using dates of initial public announcements of investments in blockchain technology and contemporaneous daily returns for 207 stocks listed on NYSE and NASDAQ during October 2008 through March 2018, they find that:

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SMA10 vs. OFR FSI for Stock Market Timing

In response to “OFR FSI as Stock Market Return Predictor”, a subscriber suggested overlaying a 10-month simple moving average (SMA10) technical indicator on the Office of Financial Research Financial Stress Index (OFR FSI) fundamental indicator for timing SPDR S&P 500 (SPY). The intent of the suggested overlay is to expand risk-on opportunities safely. To test the overlay, we add four strategies (4 through 7) to the prior three, each evaluated since January 2000 and since January 2009:

  1. SPY – buy and hold SPY.
  2. OFR FSI-Cash – hold SPY (cash as proxied by 3-month U.S. Treasury bills) when OFR FSI at the end of the prior month is negative or zero (positive).
  3. OFR-FSI-VFITX – hold SPY (Vanguard Intermediate-Term Treasury Fund Investor Shares, VFITX, as a more aggressive risk-off asset than cash) when OFR FSI at the end of the prior month is negative or zero (positive).
  4. SMA10-Cash – hold SPY (cash) when the S&P 500 Index is above (at or below) its SMA10 at the end of the prior month.
  5. SMA10-VFITX – hold SPY (VFITX) when the S&P 500 Index is above (at or below) its SMA10 at the end of the prior month.
  6. OFR-FSI-SMA10-Cash – hold SPY (cash) when either signal 2 or signal 4 specifies SPY. Otherwise, hold cash.
  7. OFR-FSI-SMA10-VFITX – hold SPY (cash) when either signal 3 or signal 5 specifies SPY. Otherwise, hold VFITX.

Using end-of-month values of OFR FSI, SPY total return and level of the S&P 500 Index during January 2000 (OFR FSI inception) through June 2019, we find that:

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Weekly Summary of Research Findings: 8/19/19 – 8/23/19

Below is a weekly summary of our research findings for 8/19/19 through 8/23/19. 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

SACEVS Applied to Mutual Funds

“Simple Asset Class ETF Value Strategy” (SACEVS) finds that investors may be able to exploit relative valuation of the term risk premium, the credit (default) risk premium and the equity risk premium via exchange-traded funds (ETF). However, the backtesting period is limited by available histories for ETFs and for series used to estimate risk premiums. To construct a longer test, we make the following substitutions for potential holdings (selected for length of available samples):

To enable estimation of risk premiums over a longer history, we also substitute:

As with ETFs, we consider two alternatives for exploiting premium undervaluation: Best Value, which picks the most undervalued premium; and, Weighted, which weights all undervalued premiums according to degree of undervaluation. Based on the assets considered, the principal benchmark is a monthly rebalanced portfolio of 60% VFINX and 40% VFIIX. Using monthly risk premium calculation data during March 1934 through July 2019 (limited by availability of T-bill data), and monthly dividend-adjusted closing prices for the three asset class mutual funds during June 1980 through July 2019 (39 years, limited by VFIIX), we find that:

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Contents of Investment Advisor Portfolios

What should investors expect to see in a typical investment advisor’s model portfolio? In their July 2019 paper entitled “Factors and Advisors Portfolios”, Brian Lawler, Andrew Ang, Brett Mossman and Patrick Nolan examine patterns and factor exposures in detailed holdings for a large number of model portfolios from many types of investment advisors. When holdings are funds, they examine contents of the funds. They assess exposures to economic growth, real interest rates and inflation. Within equity holdings, they assess exposures to size, value, momentum, quality and volatility factors. Using holdings of 9,940 model portfolios provided by investment advisors during October 2017 through September 2018, they find that: Keep Reading

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