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Does the Turn-of-the-Month Effect Work for Sectors?

A reader inquired whether the Turn-of-the-Month Effect, a concentration of positive stock market returns around the turns of calendar months, works for U.S. stock market sectors. To investigate, we measure turn-of-the-month (TOTM) returns for the nine sector exchange-traded funds (ETF) defined by the Select Sector Standard & Poor’s Depository Receipts (SPDR), all of which have trading data back to December 1998:

Materials Select Sector SPDR (XLB)
Energy Select Sector SPDR (XLE)
Financial Select Sector SPDR (XLF)
Industrial Select Sector SPDR (XLI)
Technology Select Sector SPDR (XLK)
Consumer Staples Select Sector SPDR (XLP)
Utilities Select Sector SPDR (XLU)
Health Care Select Sector SPDR (XLV)
Consumer Discretionary Select SPDR (XLY)

We define TOTM as the eight-trading day interval from the close five trading days before the first trading day of a month to the close on the fourth trading day of the month. Using daily dividend-adjusted closes for the sector ETFs and for S&P Depository Receipts (SPY) as a benchmark from December 1998 through December 2017 (229 months), we find that: Keep Reading

Turn-of-the-Month Effect Persistence and Robustness

Is the Turn-of-the-Month (TOTM) effect, a concentration of relatively strong stock market returns around the turns of calendar months, persistent over time and robust to different market conditions. Does it exist for all calendar months? Does it persist throughout the U.S. political cycle? Does it work for different indexes? To investigate, we define TOTM as the interval from the close five trading days before to the close four trading days after the last trading day of the month (a total of eight trading days, centered on the monthly close). Using daily closes for the S&P 500 Index during January 1950 through December 2017 (816 TOTMs) and for the Russell 2000 Index during September 1987 through December 2017 (364 TOTMs), we find that: Keep Reading

P/E10 for Country Stock Market Timing?

“Usefulness of P/E10 as Stock Market Return Predictor” investigates whether P/E10 (or Cyclically Adjusted Price-Earnings ratio, CAPE) usefully predicts U.S. stock market returns over the long run. That analysis employs Robert Shiller’s data set, which defines P/E10 as inflation-adjusted S&P Composite Index level divided by average monthly inflation-adjusted 12-month trailing earnings of index companies over the last ten years. Do more timely country P/E10 series work for timing country stock markets and trading pairs of country stock markets? Within each country market, higher (lower) P/E10 suggests overvaluation (undervaluation). Across countries, variation in P/E10 gaps arguably indicates which country markets are relatively overvalued and undervalued. To investigate, we consider:

  • P/E10 time series for Germany, Japan and the U.S. evaluated separately over available sample periods using DAX, Nikkei 225 and S&P 500 indexes, respectively. We also look at separately timing SPDR S&P 500 (SPY) and iShares MSCI Japan (EWJ).
  • Japan P/E10 versus U.S. P/E10 for pair trading of SPY versus EWJ over the available sample period.

Using monthly data for the three P/E10s, the three associated stock market indexes, SPY, EWJ and 3-month U.S. Treasury bill (T-bill) yield as available during December 1981 through December 2017, we find that: Keep Reading

Weekly Summary of Research Findings: 1/16/18 – 1/19/18

Below is a weekly summary of our research findings for 1/16/18 through 1/19/18. 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

Chemical Activity Barometer as Stock Market Trend Indicator

A subscriber proposed: “It would be interesting to do an analysis of the Chemical Activity Barometer [CAB] to see if it has predictive value for the stock market. Either [look] at stock prices when [CAB makes] a two percent pivot down [from a preceding 6-month high] as a sell signal and one percent pivot up as a buy signal…[or when CAB falls] below its x month moving average.” The American Chemistry Council claims that CAB “determines turning points and likely future trends of the wider U.S. economy” and leads other commonly used economic indicators. To investigate its usefulness for U.S. stock market timing, we consider the two proposed strategies, plus two benchmarks, as follows:

  1. CAB SMAx Timing – hold stocks (the risk-free asset) when monthly CAB is above (below) its simple moving average (SMA). We consider SMA measurement intervals ranging from two months (SMA2) to 12 months (SMA12).
  2. CAB Pivot Timing – hold stocks (the risk-free asset) when monthly CAB most recently crosses 1% above (2% below) its maximum value over the preceding six months. We look at a few alternative pivot thresholds.
  3. Buy and Hold (B&H) – buy and hold the S&P Composite Index.
  4. Index SMA10 – hold stocks (the risk-free asset) when the S&P Composite Index is above (below) its 10-month SMA (SMA10), assuming signal execution the last month of the SMA measurement interval.

Since CAB data extends back to 1912, we use Robert Shiller’s S&P Composite Index to represent the U.S. stock market. For the risk-free rate, we use the 3-month U.S. Treasury bill (T-bill) yield since 1934. Prior to 1934, we use Shiller’s long interest rate minus 1.59% (the average 10-year term premium since 1934). We assume a constant 0.25% friction for switching between stocks and T-bills as signaled. We focus on number of switches, compound annual growth rate (CAGR) and maximum drawdown (MaxDD) as key performance metrics. Using monthly data for CAB, the S&P Composite Stock Index, estimated dividends for the stocks in this index (for calculation of total returns) and estimated long interest rate during January 1912 through December 2017 (about 106 years), and the monthly T-bill yield since January 1934, we find that: Keep Reading

Stock Market Earnings Yield and Inflation Over the Long Run

How does the U.S. stock market earnings yield (inverse of price-to-earnings ratio, or E/P) interact with the U.S. inflation rate over the long run? Is any such interaction exploitable? To investigate, we employ the long run dataset of Robert Shiller. Using monthly data for the S&P Composite Stock Index, estimated aggregate trailing 12-month earnings and dividends for the stocks in this index, and estimated U.S. Consumer Price Index (CPI) during January 1871 through June 2017 (about 147 years), and the monthly yield on 3-month U.S. Treasury bills (T-bills) since January 1951, we find that:

Keep Reading

Do Copper Prices Lead the Broad Equity Market?

Is copper price a reliable leading indicator of economic activity and therefore of future corporate earnings and equity prices? To investigate, we employ the monthly price index for copper base scrap (not seasonally adjusted) from the U.S. Bureau of Labor Statistics, which spans multiple economic expansions and contractions. Using monthly levels of the copper scrap price index and the S&P 500 Index during January 1957 through December 2017 (61 years), we find that: Keep Reading

Sticky SACEMS

Subscribers have suggested an alternative approach for the “Simple Asset Class ETF Momentum Strategy” (SACEMS) designed to suppress trading by holding past winners until they fall further in the rankings than in the baseline specification. SACEMS each month picks winners from the following set of exchange-traded funds (ETF) based on total returns over a specified lookback interval:

PowerShares DB Commodity Index Tracking (DBC)
iShares MSCI Emerging Markets Index (EEM)
iShares MSCI EAFE Index (EFA)
SPDR Gold Shares (GLD)
iShares Russell 2000 Index (IWM)
SPDR S&P 500 (SPY)
iShares Barclays 20+ Year Treasury Bond (TLT)
Vanguard REIT ETF (VNQ)
3-month Treasury bills (Cash)

There are three versions of SACEMS: (1) top one of the nine ETFs (Top 1); (2) equally weighted top two (EW Top 2); and, (3) equally weighted top three (EW Top 3). To test the suggestion, we specify three “sticky” versions of SACEMS as follows:

  1. Top 1 Sticky – retains the past winner until it drops out of the top 2.
  2. EW Top 2 Sticky – retains past winners until they drop out of the top 3.
  3. EW Top 3 Sticky – retains past winners until they drop out of the top 4.

We compare sticky and baseline strategies using the tabular performance statistics used for the baseline. Using monthly total (dividend-adjusted) returns for the specified assets during February 2006 (limited by DBC) through December 2017, we find that:

Keep Reading

Weekly Summary of Research Findings: 1/8/18 – 1/12/18

Below is a weekly summary of our research findings for 1/8/18 through 1/12/18. 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

Inflation Forecast Update

The Inflation Forecast now incorporates actual total and core Consumer Price Index (CPI) data for December 2017. The actual total (core) inflation rate for December is a little lower than (a little lower than) forecasted.

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