The articles in this series will focus on Market Map, a quantitative, logic based tactical asset allocation solution designed for investing in the S&P 500 index or Nasdaq 100 index and Treasury markets.
The Objectives of the Market Map model
1a. To capture multi-month to multi-year market index price trend appreciation through investment in index products that track the S&P 500 or the Nasdaq 100 indices (SPDR Trust ETF (NYSEARCA:SPY), Vanguard Total market ETF (NYSEARCA:VTI), or Powershares QQQ Trust ETF (NASDAQ:QQQ)) during "equity" allocation periods, and
1b. To invest in Treasury market instruments during "cash" allocation periods .
2. To add long term value to the portfolio's total return by utilizing low expense and low tax ratio investment products (this under auspices of investment principles set forth by John Bogle, founder of Vanguard Group of funds).
3. To make infrequent asset allocation changes occurring on fixed, predefined dates during the course of market cycles.
4. To show consistent and comparable performance accompanied by reduced volatility relative to the S&P 500 index over many decades of diverse stock market environments and cycles (using historical testing).
5. To strategically decrease equity allocation as upside price appreciation occurs and increase equity allocation as price depreciation occurs.
Key model components applied towards asset allocation decisions
1. Calculation of the annual performance(s) of the S&P 500 index relative to calculation of an average of the 40 year CAGR (compound annual growth rate) of the S&P 500 index.
2. Rule set applied to mean variance/reversion calculations performed on consecutive years of annual "overperformance" or "underperformance" that occur as calculated in #1 (see objective #5).
3. Data derived from a time series analysis applied to strategic data points occurring over the months of November, December, and January segregated into performance scores. These scores have had high correlation coefficients relative to the following year's market performance and are integrated with component #2.
4. Analysis identifying 4th quarters characteristically showing statistically significant probability of profitability.
5. An algorithm based on price oscillator applied during qualifying periods of significant market underperformance to gain price entry improvement versus "predefined date" objective #2.
6. An algorithm applied during "generational" multi-year overperformance
The first table below is the historical record of model #1 which, during entry dates, allocates 100% capital to the S&P500 when "S&P 500" is indicated and 100% capital to short term treasury equivalents when "cash" is indicated.
Note: in an attempt to replicate the present interest rate environment, the interest rate on short term treasury equivalents shown during all historical "cash" periods has been set at a fixed 2% per annum.
Because of the historical efficacy of the key components, the vast improvement of equity drawdown versus buy and hold, and the "long term" investment principle on which the model is based, stop loss methods have been deemed unnecessary.
S&P 500 price history supplied by Yahoo finance and Prophet charts
Market Map model 1 historical table vs. S&P 500 (dividends excluded)
Statistics 1924-2013, 2000-2013
Predefined S&P 500 allocation dates occur on:
a. End of year: the last trading day in December or
b. 4th quarters: Fridays that fall either on the last 3 days of September/1st Friday in October (pertaining to component #4)
"Cash" allocation dates occur on:
a. The 1st Friday after July 4th
b. The last trading day of December
c. The 3rd Friday of January or
d. The 1st Friday occurring in February
Predefined "end of year" allocation dates
Predefined allocation dates 4th quarters
Allocation dates defined by price oscillator
The unique analytical approach utilized by the Market Map model can provide an enhancement to and diversification for portfolios that invest in index funds and bond funds.
The next article will break down Model 1 performance data into risk categories by individual year.
Disclosure: I am long QQQ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Information contained in this article should not be construed as investment advice.