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Consumer Credit and Stock Returns

Does expansion (contraction) of consumer credit indicate growing (shrinking) corporate sales, earnings and ultimately stock prices? The Federal Reserve collects and publishes U.S. consumer credit data on a monthly basis with a delay of about five weeks. Using monthly seasonally adjusted total U.S. consumer credit for January 1943 through July 2019 and monthly Dow Jones Industrial Average (DJIA) closes for January 1943 through August 2019 (almost 77 years), we find that: Keep Reading

Active Investment Managers and Market Timing

Do active investment managers as a group successfully time the stock market? The National Association of Active Investment Managers (NAAIM) is an association of registered investment advisors. “NAAIM member firms who are active money managers are asked each week to provide a number which represents their overall equity exposure at the market close on a specific day of the week, currently Wednesdays. Responses can vary widely [200% Leveraged Short; 100% Fully Short; 0% (100% Cash or Hedged to Market Neutral); 100% Fully Invested; 200% Leveraged Long]. Responses are tallied and averaged to provide the average long (or short) position or all NAAIM managers, as a group [NAAIM Exposure Index].” Using historical weekly survey data and weekly Wednesday-to-Wednesday dividend-adjusted returns for SPDR S&P 500 (SPY) over the period July 2006 through early September 2019 (685 surveys), we find that: Keep Reading

Long-only Stock Momentum with Volatility Timing

What is the best way to avoid stock momentum portfolio crashes? In her July 2019 paper entitled “Momentum with Volatility Timing”, Yulia Malitskaia tests a long-only volatility-timed stock momentum strategy that exits holdings when strategy volatility over a past interval exceeds a specified threshold. She focuses on a recent U.S. sample that includes the 2008-2009 market crash and its aftermath. She considers the following momentum portfolios:

  • WML10 – each month long (short) the tenth, or decile, of stocks with the highest (lowest) returns from 12 months ago to one month ago.
  • W10 and L10 – WML10 winner and loser sides separately.
  • WML10-Scaled – adjusts WML10 exposure according to the ratio of a volatility target to actual WML10 annualized daily volatility over the past six months. This approach seeks to mitigate poor returns when WML10 volatility is unusually high.
  • W10-Timed – holds W10 (cash, with zero return) when W10 volatility over the past six months is below (at or above) a specified threshold. This approach seeks to avoid poor post-crash, loser-driven WML10 performance and poor W10  performance during crashes.

She performs robustness tests on  MSCI developed and emerging markets risk-adjusted momentum indexes. Using daily and monthly returns for W10 and L10 portfolios since 1980 and for MSCI momentum indexes since 2000, all through 2018, she finds that:

Keep Reading

Weekly Summary of Research Findings: 9/23/19 – 9/27/19

Below is a weekly summary of our research findings for 9/23/19 through 9/27/19. 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

Are Equity Put-Write ETFs Working?

Is systematically selling equity put options, as implemented by exchange-traded funds (ETF), attractive? To investigate, we consider four equity put-write ETFs, two dead and two living:

  1. US Equity High Volatility Put Write (HVPW) – oriented toward individual stocks (dead).
  2. ALPS Enhanced Put Write Strategy (PUTX) – index-oriented (dead).
  3. WisdomTree CBOE S&P500 PutWriteStrat (PUTW) – index-oriented (living).
  4. BMO US Put Write (ZPW.TO) – oriented toward individual stocks (living).

Because available samples are short, we focus on daily return correlation with SPY, average daily return, standard deviation of daily returns and sample period cumulative return. For the living ETFs, we include maximum drawdowns (MaxDD) based on daily data. We consider SPDR S&P 500 (SPY) and CBOE S&P 500 PutWrite Index (PUT) as benchmarks. Using daily returns for the four ETFs as available through early September 2019, and contemporaneous daily returns for SPY and PUT, we find that: Keep Reading

National Election Cycle and Stocks Over the Long Run

“Stock Market and the National Election Cycle” examines the behavior of the U.S. stock market across the U.S. presidential term cycle (years 1, 2, 3 or 4) starting in 1950. Is a longer sample informative? To extend the sample period, we use the long run S&P Composite Index of Robert Shiller. The value of this index each month is the average daily level during that month. It is therefore “blurry” compared to a month-end series, but the blurriness is not of much concern over a 4-year cycle. Using monthly S&P Composite Index levels from the end of December 1872 through August 2019 (about 37.5 presidential terms), we find that:

Keep Reading

Exploiting Stocks that Incorporate News Slowly

Can investors identify stocks that incorporate news slowly enough to allow exploitation? In their August 2019 paper entitled “Tomorrow’s Fish and Chip Paper? Slowly Incorporated News and the Cross-Section of Stock Returns”, Ran Tao, Chris Brooks and Adrian Bell classify stocks incorporating news quickly (QI) or slowly (SI) into prices and investigate implications for associated future returns. Specifically, they each month:

  1. Assign a sentiment score to each current-month news article about each stock based on words in the article.
  2. Double-sort stocks by thirds based first on current-month abnormal (adjusted for size, industry value and industry momentum) returns and then on news sentiment scores, yielding nine groups.
  3. Classify stocks that are: (a) high return/low sentiment (HRLS) or low return/high sentiment (LRHS) as SI; and, (b) high return/high sentiment (HRHS) or low return/low sentiment (LRLS) as QI.
  4. Measure average next-month returns of equally-weighted SI and QI portfolios that are, respectively: (a) long LRHS stocks and short HRLS stocks; and, (b) long HRHS stocks and short LRLS stocks.
  5. Measure average next-month return of an equally weighted portfolio that is long the SI portfolio and short the QI portfolio (Slow-Minus-Quick, SMQ).

They then examine whether limited investor attention or differences in news complexity and informativeness better explain results. Using firm-level news data, firm characteristics and associated stock returns for a broad sample of U.S. common stocks during 1979 through 2016, they find that: Keep Reading

Value Investing Dead?

Why has value investing (long undervalued stocks and short overvalued stocks) performed poorly since 2007? Is it dead, or will it recover? In their August 2019 paper entitled “Explaining the Demise of Value Investing”, Baruch Lev and Anup Srivastava examine the performance of the Fama-French value (HML) factor portfolio, long stocks with high book value-to-market capitalization ratios and short those with low ratios, because it is the most widely used value strategy. They then investigate reasons for its faltering performance. Using value factor returns and accounting data for a broad sample of U.S. stocks during January 1970 through December 2018, they conclude that: Keep Reading

Stock Market and the National Election Cycle

Some stock market experts cite the year (1, 2, 3 or 4) of the U.S. presidential term cycle as a useful indicator of U.S. stock market returns. Game theory suggests that presidents deliver bad news immediately after being elected and do everything in their power to create good news just before ensuing biennial elections. Are some presidential term cycle years reliably good or bad? If so, are these abnormal returns concentrated in certain quarters? Finally, what does the stock market do in the period immediately before and after a national election? Using daily and monthly S&P 500 Index levels from January 1950 through August 2019 (nearly 70 years and about 17 presidential terms) and focusing on “political quarters” (Feb-Apr, May-Jul, Aug-Oct and Nov-Jan), we find that: Keep Reading

Weekly Summary of Research Findings: 9/16/19 – 9/20/19

Below is a weekly summary of our research findings for 9/16/19 through 9/20/19. 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

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