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In our previous articles, we presented an overview and performance statistics for the Market Map tactical asset allocation model. The articles introduced the implementation of five components which, during fixed times in a given year, guide us with defined "risk profiles" as to where to allocate capital between exchange traded funds based on: 1) market indices (the SPDR Trust ETF (SPY), Vanguard Total market ETF (VTI), or Powershares QQQ Trust ETF (QQQ)), 2) long treasury bonds (the iShares 20+ Year Treasury Bond ETF (TLT) or the Vanguard Long-Term Treasury Fund Investor Shares (VUSTX)) or 3) "cash" (short term treasury equivalents/money market funds).

As 2013 was a "Favorable" risk year (years which the model allocates assets towards equity ETFs), we can see from table 1 that as with many other favorable risk years in the past, the model returns matched the returns of the S&P500.

Table 1 = "Favorable" risk years using Market Map 2

Table 1

Market Map model 2
Favorable Risk years
ModelS&P500Drawdown
YearReturnreturn
excluding
dividends
192420.1%20.1%-5.8%
192519.3%19.3%-3.0%
193223.2%-14.8%-24.0%
193344.9%44.9%-13.6%
1934-5.0%-5.0%-13.0%
193540.0%40.0%-12.6%
193630.1%30.1%
193824.0%23.6%-19.0%
1941-11.2%-17.9%-4.0%
194212.6%12.6%-13.7%
194319.4%19.4%
194413.7%13.7%
194530.1%30.1%
19474.9%4.9%
19482.0%2.0%-8.0%
19499.2%9.2%-10.5%
195027.8%27.8%
195116.3%16.3%
195211.8%11.8%
195445.0%45.0%
195526.4%26.4%
195822.5%33.0%
19598.5%8.5%-10.0%
196126.9%26.9%
196318.9%18.9%
196413.0%13.0%
196710.2%20.0%
197110.8%10.8%
197215.6%15.6%
19758.7%31.5%
197619.1%19.1%
197911.6%11.6%
198025.8%25.8%-9.0%
198317.3%17.3%
198526.3%26.3%
198614.6%14.6%-3.0%
19887.8%12.4%-2.2%
198927.3%27.2%
199126.3%26.3%-5.4%
19937.1%7.1%
1994-1.5%-1.5%-6.6%
199534.1%34.1%
199620.3%20.3%
200333.9%26.4%-4.5%
20049.0%9.0%-3.8%
20053.0%3.0%-5.5%
200613.6%13.6%-2.3%
20073.5%3.5%-3.1%
200939.0%23.4%
201213.4%13.4%
201329.6%29.6%
Cum920.7%900.2%
Avg18.1%17.7%-8.3%

At the end of 2013 and recently on 01/17/2014, requirements towards taking action in allocating assets from the equity ETFs to "cash" as calculated by the components were satisfied. The components determining these requirements were:

  • 2012 and 2013 were consecutive years of "overperformance"; each year's performance greater than an average of the 40 CAGR of the S&P500 index (components #1 & #2)
  • the "performance score" derived from the time series calculation for the November and December 2013, January 2014 period has been low (component #3)

The present outcome generated by these indications has defined a shift from a "Favorable" risk profile to a "Neutral" risk profile which has, historically on average, produced medium to high correlation coefficients relative to a flat market performance in the following year accompanied by increased volatility.

Table 2 shows the performance of the Neutral risk profile years encompassed in the past 90 years data set. As we can see, volatility increased during these periods compared to "Favorable" risk profile years while holding cash was preferred.

Table 2

Market Mapmodel 2
Neutral Risk profile years
using S&P500 index
excl. dividends
Yearyear returnDrawdowncash compounded
19265.8%-10.9%2.0%
192737.1%0.0%2.0%
192847.5%0.0%2.0%
1937-38.7%-36.7%2.0%
1939-5.3%-20.1%2.0%
1953-6.6%-13.8%2.0%
1957-11.3%-16.3%2.0%
1960-3.0%-10.7%2.0%
19655.6%-3.7%2.0%
1966-14.3%-20.8%2.0%
19687.7%-9.1%2.0%
1973-17.4%-21.9%2.0%
1977-11.5%-15.6%2.0%
19841.4%-10.4%2.0%
199826.7%0.0%2.0%
2014???
Cum23.6% 35.0%
Avg1.6%-12.7%

Table 3 = Market Map model performance using the S&P500 index over last 15 years of asset allocation periods through 01/17/2014.

Table 3

Market Mapmodel 2
returns BOND allocation = 75%
15 years
using S&P500 index
$1 becomes
dividends reinvest% returns
1.00
SP 50010/02/199840.0%1.40
BOND07/09/19991.1%1.42
cash10/02/19991.1%1.43
SP 50012/31/1999-1.9%1.40
cash01/21/20002.5%1.44
BOND07/06/20002.5%1.48
cash09/28/20001.0%1.49
BOND07/06/20015.6%1.57
cash09/29/20011.0%1.59
BOND07/05/200211.9%1.78
SP 50010/04/200210.0%1.96
cash12/31/20020.0%1.96
50% SP 50002/03/200376.6%3.46
50% SP 50005/02/03
cash01/18/20081.0%3.49
BOND07/03/20083.4%3.61
cash10/03/20081.0%3.65
50% SP 50003/09/200934.6%4.91
50% SP 50005/29/09
BOND07/09/20104.9%5.15
SP 50010/01/201017.3%6.04
BOND07/08/201116.0%7.00
cash09/30/20110.0%7.00
SP 50012/30/201146.3%10.24
cash01/17/2014
CAGR16.80%

Table 4 = Market Map model performance using the Nasdaq 100 index over last 15 years of asset allocation periods through 01/17/2014.

Table 4

Market Map

model 2

returns BOND allocation = 75%
15 years
using Nasdaq 100 index
$1 becomes
dividends reinvest% returns
1.00
NDX10/02/199887.5%1.88
BOND07/09/19991.1%1.90
cash10/02/19991.0%1.92
NDX12/31/19993.8%1.99
cash01/21/20002.5%2.04
BOND07/06/20002.6%2.09
cash09/28/20001.0%2.11
BOND07/06/20015.6%2.23
cash09/29/20011.0%2.25
BOND07/05/200211.9%2.52
NDX10/04/200222.3%3.09
cash12/31/20020.0%3.09
50% NDX02/03/200397.0%6.08
50% NDX05/02/03
cash01/18/20081.0%6.14
BOND07/03/20083.4%6.35
cash10/03/20081.0%6.41
50% NDX03/09/200943.8%9.22
50% NDX05/29/09
BOND07/09/20104.9%9.68
NDX10/01/201020.5%11.66
BOND07/08/201116.0%13.53
cash09/30/20110.0%13.53
NDX12/30/201157.7%21.33
cash01/17/2014
CAGR22.60%

In conclusion, the Market Map model has indicated that an asset allocation change from an equity position to a cash position is warranted. The next time frame of note for a possible asset allocation shift will occur in the beginning of July.

When navigating the sea of financial opinion and emotion, we can find solace and confidence in over 90 years of non-subjective, statistically significant data incorporated into a model that has produced consistent and repeatable outcomes with reasonable risk management.

Overview article here. Risk profile article here.

Source: Market Map Model Allocates To Cash