Market Map Year-End Update

Includes: QQQ, SPY, VTI
by: Market Map

As we approach the end of 2013, the Market Map model's performance has matched the performance of the benchmarks that it uses for comparison (S&P 500 and Nasdaq 100 indices). As the model's algorithms were designed to use "fixed" predefined dates throughout a given year to perform calculations leading to allocation decisions, the dates of the last couple trading days of the year are applicable to that extent.

Below, we review the components of the model that were described in the initial article published here and the Market Map risk profiles here.

Components #1 and #2 calculate:

1) the annual performance(s) of the S&P 500 index versus calculation of an average of the 40-year CAGR (compound annual growth rate) of the S&P 500 index (total return basis).

2) Rule set applied to mean variance / regression calculations performed on "consecutive" years of annual "overperformance" or "underperformance" that occur as calculated in #1. See objective #5.

  • The average of the 40-year CAGR calculation of the S&P 500 up to 12/2013 is 10.3%
  • The return for the S&P 500 for 2012 was 15.9%
  • The return for the S&P 500 for 2013 has been 31.7%

2012 and 2013 have produced consecutive returns greater than the calculation of component #1.

Component #3 derives data 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.

Objective #5 does not apply for this year.

Since the requirement for 2 consecutive years for components #1 and #2 has been fulfilled, this indicates that the market has "overperformed" its mean as calculated by the algorithm. We now have an alert towards asset allocation action. We need to wait for the calculation of component #3, which occurs in the middle part of January.

If component #3 calculation produces a "Favorable Risk Year 6 month" profile, then we will remain allocated in low expense equity ETFs ((SPDR Trust ETF (NYSEARCA:SPY), Vanguard Total market ETF (NYSEARCA:VTI), or Powershares QQQ Trust ETF (NASDAQ:QQQ)) until July 2014. If it produces a "Neutral" or "High Risk" reading, then we will allocate assets towards cash equivalents. The most recent asset allocation action was taken 12/30/2011; SPY @ 125.5 and QQQ @ 55.8.

If "brand new" capital is to be put to work, then allocation towards the QQQ, SPY, or VTI ETFs would be performed, near the end of the last trading day of the year.

Tables 1 and 2 show previous instances of the current scenario:

Table 1
Deployment of brand new cash, last trading day of year and subsequent component #3 indication of "Favorable 6 month" profile:

Market Map model 2
Favorable Risk 1st six months
Invested for 1st half of yr.
excl. dividends
Year Return
1929 16.0%
1946 5.7%
1987 27.2%
1992 -0.7%
1997 23.8%
1999 21.1%
2010 -3.3%
2011 6.8%
Cum 96.6%
Avg 12.1%

Table 2
Deployment of brand new cash, last trading day of year and subsequent component #3 indication of "Neutral" or "High risk" profiles:

Component #2
"neutral" or "High Risk"
allocate to cash S&P500 buy S&P500 sell % return
12/29/1939 Sell 01/19/1940 12.5 12.1 -3.20%
12/31/1956 Sell 02/01/1957 46.67 44.62 -4.39%
12/31/1965 Sell 01/21/1966 92.4 93.74 1.45%
12/31/1968 Sell 01/17/1969 103.8 102 -1.73%
12/31/1969 Sell 01/16/1970 92.06 90.92 -1.24%
12/31/1973 Sell 01/18/1974 97.55 95.56 -2.04%
12/30/1977 Sell 01/20/1978 95.1 89.89 -5.48%
12/31/1981 Sell 01/22/1982 122.5 115.4 -5.80%
12/31/1997 Sell 01/16/1998 970.4 961 -0.97%
12/31/1999 Sell 01/21/2000 1469 1441 -1.91%

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.