February 19, 2015 - Sentiment Indicators
A reader suggested looking at Rydex asset ratios as stock market sentiment indicators. The reasoning for these indicators is that a high (low) ratio of assets in bullish funds to assets in bearish funds indicates an overbought (oversold) market. Are these indicators useful? The most timing-intensive traders arguably use leveraged funds, suggesting that a bull-bear… Keep Reading
February 18, 2015 - Bonds, Equity Premium, Strategic Allocation
What is the best mix of stocks and bonds to hold during retirement worldwide? In his January 2015 paper entitled “The Retirement Glidepath: An International Perspective”, Javier Estrada compares outcomes for different stocks-bonds allocation strategies during retirement from a global perspective. He considers declining equity, rising equity and static glidepaths with an annual withdrawal rate of 4% (of the portfolio value at retirement) and annual… Keep Reading
February 17, 2015 - Fundamental Valuation, Size Effect
Given the conflicting evidence about the import of the size effect, is there a way investors can extract a reliable premium from small stocks? In their January 2015 draft paper entitled “Size Matters, If You Control Your Junk”, Clifford Asness, Andrea Frazzini, Ronen Israel, Tobas Moskowitz and Lasse Pedersen examine whether controlling for firm quality mitigates the following seven unfavorable empirical… Keep Reading
February 13, 2015 - Momentum Investing, Strategic Allocation
A subscriber inquired whether the “Simple Asset Class ETF Momentum Strategy” (SACEMS) is a good diversifier of the U.S. stock market. This strategy allocates funds at the end of each month to the one (Top 1), equally weighted two (EW Top 2) or equally weighted three (EW Top 3) of the following asset class exchange… Keep Reading
February 12, 2015 - Equity Options, Strategic Allocation
Is use of long-term stock index call options effective for those approaching retirement with desires of limiting exposure to crashes without sacrificing all benefit of equity exposure? In his January 2015 paper entitled “Individuals Approaching Retirement Have Options (Literally) to Secure a Comfortable Retirement”, Bryan Foltice proposes retirement strategies that employ stock index options during the five years before retirement (when… Keep Reading
February 11, 2015 - Equity Premium, Size Effect, Value Premium
Does adding profitability and asset growth (investment) factors improve the performance of the widely used Fama-French three-factor (market, size, book-to-market) model of stock returns? In the September 2014 version of their paper entitled “A Five-Factor Asset Pricing Model” Eugene Fama and Kenneth French assess whether extensions of their three-factor model to include profitability and investment… Keep Reading
February 9, 2015 - Calendar Effects, Momentum Investing
Are overnight trading motivations systematically different from those that drive trading during normal trading hours? In the January 2015 version of their paper entitled “Tug of War: Overnight Versus Intraday Expected Returns”, flagged by a subscriber, Dong Lou, Christopher Polk and Spyros Skouras (1) decompose abnormal returns associated with well-known stock return predictors into overnight and intraday… Keep Reading
February 5, 2015 - Big Ideas
How much can the (in)accuracy of retirement portfolio modeling assumptions affect conclusions about the safety of retirement income? In their December 2014 paper entitled “How Risky is Your Retirement Income Risk Model?”, Patrick Collins, Huy Lam and Josh Stampfli examine potential weaknesses in the following retirement income modeling approaches: Theoretically grounded formulas – often complex with rigid assumptions. Historical backtesting – the… Keep Reading
February 4, 2015 - Bonds, Momentum Investing, Strategic Allocation
In reference to “Optimal Monthly Cycle for Simple Asset Class ETF Momentum Strategy?”, a subscriber asked about an optimal monthly cycle for the “Simple Debt Class Mutual Fund Momentum Strategy”. This latter strategy each month allocates the entire portfolio value to the one of the following 12 debt class mutual funds with the highest past total return (optimally over the last… Keep Reading
February 2, 2015 - Technical Trading
Is stock pairs trading particularly successful under predictable conditions? In their December 2014 paper entitled “On the Determinants of Pairs Trading Profitability”, Heiko Jacobs and Martin Weber present a large-scale analysis of pairs trading, evaluating the effects on profitability of the type of news driving pair divergence, the level of available investor attention and obstacle to exploitation (limits of… Keep Reading