Market Map Model 1: Tactical Asset Allocation Using Low-Expense Index ETFs

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 |  Includes: QQQ, SPY, VTI
by: Market Map

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)

Position Model 1 Model 1 Model 1 S&P 500
equity cash allocation dates % return $1 compound $1 compound
    per period   Buy & Hold
         
      1 1
S&P 500 12/31/1923 43.5% 1.43 1.43
cash 01/19/1926 2.0% 1.46 1.47
S&P 500 10/01/1926 4.9% 1.54 1.55
cash 01/18/1927 2.0% 1.57 2.82
S&P 500 12/31/1928 13.8% 1.78 3.2
cash 07/05/1929 4.0% 1.85 0.72
S&P 500 04/11/1932 179.7% 5.19 2.03
cash 01/22/1937 3.0% 5.34 1.09
S&P 500 04/04/1938 28.1% 6.84 1.39
cash 02/03/1939 2.0% 6.98 1.42
S&P 500 12/29/1939 -3.2% 6.76 1.37
cash 01/19/1940 2.0% 6.89 1.2
S&P 500 12/31/1940 73.6% 11.96 2.08
cash 07/08/1946 0.5% 12.02 1.71
S&P 500 10/01/1946 0.7% 12.10 1.72
cash 12/31/1946 0.5% 12.16 1.64
S&P 500 04/25/1947 81.9% 22.13 2.99
cash 01/30/1953 2.0% 22.57 2.81
S&P 500 12/31/1953 74.2% 39.33 4.89
cash 01/20/1956 1.0% 39.72 5.29
S&P 500 12/31/1956 -4.4% 37.97 5.05
cash 02/01/1957 1.5% 38.54 4.92
S&P 500 05/01/1958 32.2% 50.96 6.5
cash 01/22/1960 1.0% 51.47 6.58
S&P 500 12/31/1960 18.3% 60.90 7.79
cash 01/19/1962 1.0% 61.51 6.37
S&P 500 09/28/1962 54.1% 94.82 9.82
cash 01/22/1965 1.0% 95.77 10.46
S&P 500 12/31/1965 1.5% 97.16 10.62
cash 01/21/1966 1.0% 98.13 8.67
S&P 500 9/30/1966 12.4% 110 9.75
cash 12/30/1966 0.0% 110 9.89
S&P 500 02/03/1967 5.6% 116 10.45
cash 02/02/1968 1.0% 118 11.76
S&P 500 12/31/1968 -1.7% 116 11.55
cash 01/17/1969 1.0% 117 10.43
S&P 500 12/31/1969 -1.2% 115 10.3
cash 01/16/1970 1.0% 116 9.64
S&P 500 10/01/1970 39.5% 162 13.45
cash 01/19/1973 1.0% 164 11.05
S&P 500 12/31/1973 -2.0% 161 10.82
cash 01/18/1974 2.0% 164 7.36
S&P 500 10/01/1974 5.5% 173 7.76
cash 12/31/1974 2.0% 176 9.4
S&P 500 03/01/1975 24.3% 219 11.7
cash 01/21/1977 2.0% 224 10.8
S&P 500 12/30/1977 -5.5% 211 10.2
cash 01/20/1978 1.0% 214 11.6
S&P 500 09/28/1978 31.4% 281 15.3
cash 01/16/1981 2.0% 286 13.9
S&P 500 12/31/1981 -5.8% 270 13.1
cash 01/22/1982 1.0% 272 13.8
S&P 500 10/01/1982 36.2% 371 18.8
cash 01/20/1984 2.0% 378 18.9
S&P 500 12/31/1984 84.4% 698 34.9
cash 07/10/1987 2.0% 712 28.7
S&P 500 05/16/1988 34.0% 954 38.4
cash 01/19/1990 1.0% 964 34.7
S&P 500 09/28/1990 35.5% 1306 47.0
cash 07/10/1992 1.0% 1319 49.3
S&P 500 12/31/1992 110.4% 2775 104
cash 07/11/1997 1.0% 2802 110
S&P 500 12/31/1997 -1.0% 2775 109
cash 01/16/1998 1.0% 2803 113
S&P 500 10/02/1998 40.0% 3925 159
cash 07/09/1999 1.5% 3984 166
S&P 500 12/31/1999 -1.9% 3908 163
cash 01/21/2000 2.5% 4005 91
S&P 500 10/04/2002 10.0% 4405 100
cash 12/31/2002 0.0% 4405 94
S&P 500 02/03/2003 59.6% 7032 150
cash 01/18/2008 1.0% 7102 77
S&P 500 03/02/2009 57.7% 11203 122
cash 07/09/2010 0.0% 11203 130
S&P 500 10/01/2010 17.3% 13138 152
cash 07/08/2011 0.0% 13138 142
S&P 500 12/30/2011 31.2% 17232 187
open SPX 1650      
         
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Statistics 1924-2013, 2000-2013

  S&P 500 B&H Market Map model 1
  dividends excluded dividends excluded
  1924-2013 1924-2013
     
CAGR 6.7% 11.45%
Average 8.43% 11.72%
Standard Deviation 18.8% 14.0%
Sharpe Ratio 0.45 0.84
S&P points captured 1642 2985
S&P cum % during invest   1184%
S&P cum % during cash   -283%
# of trades n/a 76
Max Drawdown 1929-1932 1941-1942
  -86% -28.3%
Worst month -29.9% -13.9%
% positive months 60% 67%
$1 becomes $187 $17,230
     
  S&P 500 B&H Market Map model 1
  dividends excluded dividends excluded
  2000-2013 2000-2013
     
CAGR 1.0% 12.1%
Average 1.55% 10.41%
Standard Deviation 17.9% 18.2%
Sharpe Ratio 0.09 0.57
S&P points captured 181 1531
S&P cum % during invest 13% 174%
S&P cum % during cash   -98%
# of trades n/a 10
Max Drawdown 2007-2009 2007-2008
  -56% -14.5%
Worst month -16.9% -9.7%
% positive months 59% 69%
$1 becomes $1.13 $4.32
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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

equity   cash return
       
12/31/1923   01/19/1926 43.4%
12/31/1928   07/05/1929 13.8%
12/29/1939   01/19/1940 -3.2%
12/31/1940   07/08/1946 73.5%
12/31/1953   01/20/1956 74.2%
12/31/1956   02/01/1957 -4.3%
12/31/1960   01/19/1962 18.3%
12/31/1965   01/21/1966 1.4%
12/31/1968   01/17/1969 -1.7%
12/31/1969   01/16/1970 -1.2%
12/31/1973   01/18/1974 -2.0%
12/30/1977   01/20/1978 -5.5%
12/31/1981   01/22/1982 -5.8%
12/31/1984   07/10/1987 84.4%
12/31/1992   07/11/1997 110.4%
12/31/1997   01/16/1998 -1.0%
12/31/1999   01/21/2000 -1.9%
12/30/2011   open  
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Predefined allocation dates 4th quarters

equity   cash return
       
10/01/1926   01/18/1927 4.9%
10/01/1946   12/31/1946 0.66%
09/28/1962   01/22/1965 54.1%
09/30/1966   12/30/1966 12.4%
10/01/1970   01/19/1973 39.5%
10/01/1974   12/31/1974 5.5%
09/28/1978   01/16/1981 31.4%
10/01/1982   01/20/1984 36.2%
09/28/1990   07/10/1992 35.5%
10/02/1998   07/09/1999 40.0%
10/04/2002   12/31/2002 10.0%
10/01/2010   07/08/2011 17.3%
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Allocation dates defined by price oscillator

equity   cash return
       
04/18/1932   01/22/1937 179.7%
04/04/1938   02/03/1939 28.1%
04/28/1947   01/30/1953 81.9%
05/01/1958   01/22/1960 32.2%
02/03/1967   02/02/1968 5.6%
03/01/1975   01/21/1977 24.3%
05/23/1988   01/19/1990 34.0%
02/10/2003   01/18/2008 59.6%
03/09/2009   07/09/2010 57.7%
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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.