Market Map Model 1: Risk Profiles

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 |  Includes: SPY
by: Market Map

In the previous article, we presented an overview of the goals, components and performance statistics of Market Map Model 1. In this article, we assemble risk profiles derived from the historical record statistics into an annual format.

During the research and evolution of this model, the implementation of 1) "fixed dates" ("predefined dates" as mentioned via objective #3 in the first article) on which allocation decisions are made and that are based on an annual framework, 2) multi-month to multi-year equity allocation holding periods, and 3) key components that have produced robust performance led to the discovery of useful and statistically relevant outcomes. When assembled into 3 risk categories or profiles, analysis of these outcomes (prior to the end of the year and January of the next year) can help us gain a general sense of what to expect in terms of market return for an upcoming year. The 3 profiles shown in the tables below are Favorable, Neutral and High Risk.

By cross referencing the historical table in the first article, Market Map model 1 allocates assets toward the S&P 500 during the "Favorable Risk" and "Favorable Risk First 6 Month" years, and allocates into cash during "Neutral" and "High Risk" years.

Favorable Risk

This table shows the Favorable (or low) risk years. The right hand column reflects improved equity allocation entry dates that are infrequently generated using the price oscillator component mentioned in the 1st article:

Market Map model 1
Favorable Risk years S&P500
Year Return Return
excluding Price Osc.
dividends algorithm
applied
1924 20.1%
1925 19.3%
1932 -14.8% 6.2%
1933 44.9%
1934 -5.0%
1935 40.0%
1936 30.1%
1938 31.3% 36.5%
1941 -20.8% -17.6%
1942 12.6%
1943 19.4%
1944 13.7%
1945 30.1%
1947 -2.0% 4.9%
1948 2.0%
1949 9.2%
1950 27.8%
1951 16.3%
1952 11.8%
1954 45.0%
1955 26.4%
1958 38.1% 27.2%
1959 8.5%
1961 23.1%
1963 18.9%
1964 16.7%
1967 20.1% 10.2%
1971 10.8%
1972 15.6%
1975 31.5% 8.7%
1976 19.1%
1979 12.3% 8.0%
1980 20.0%
1983 17.3%
1985 26.3%
1986 14.6%
1988 12.4% 7.8%
1989 27.3%
1991 26.3%
1993 7.1%
1994 -1.5%
1995 34.1%
1996 20.3%
2003 26.4% 33.9%
2004 9.0%
2005 3.0%
2006 13.6%
2007 3.5%
2009 21.3% 63.3%
2012 13.4%
2013 ??
Cum 866.4%
Avg 17.3%
Click to enlarge
Click to enlarge

Favorable Risk - First 6 Months

This table shows years identified with low risk in the first 6 months of the year:

Neutral Risk

Equity investment in years with "neutral" risk had comparable returns to holding cash yet with increased tail risk:

Cash interest rate replicates the present rate environment

High Risk

High risk years had decidedly negative individual year and average year returns:

Examination of this 89 year data sample shows that the mean revision and times series strategies used in the model provide strong correlation between equity allocation exposure and positive market return/low risk years, and between cash allocation and slightly positive market return/neutral risk and negative market return/high risk years.

As the calculation in 2012 deemed 2013 as a Favorable Risk year candidate, the YTD S&P500 return of 16% (as of this writing) seems unsurprising in the context of the average historical Favorable risk year returns. The end of the year will provide more definitive data to this extent.

In the next article, we will combine the risk profiles with the seasonally popular "Sell in May/Six-Month Switching Strategy."

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.