Market Map Model Allocates To Cash

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

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 (NYSEARCA:SPY), Vanguard Total market ETF (NYSEARCA:VTI), or Powershares QQQ Trust ETF (NASDAQ:QQQ)), 2) long treasury bonds (the iShares 20+ Year Treasury Bond ETF (NYSEARCA:TLT) or the Vanguard Long-Term Treasury Fund Investor Shares (MUTF: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
Model S&P500 Drawdown
Year Return return
excluding
dividends
1924 20.1% 20.1% -5.8%
1925 19.3% 19.3% -3.0%
1932 23.2% -14.8% -24.0%
1933 44.9% 44.9% -13.6%
1934 -5.0% -5.0% -13.0%
1935 40.0% 40.0% -12.6%
1936 30.1% 30.1%
1938 24.0% 23.6% -19.0%
1941 -11.2% -17.9% -4.0%
1942 12.6% 12.6% -13.7%
1943 19.4% 19.4%
1944 13.7% 13.7%
1945 30.1% 30.1%
1947 4.9% 4.9%
1948 2.0% 2.0% -8.0%
1949 9.2% 9.2% -10.5%
1950 27.8% 27.8%
1951 16.3% 16.3%
1952 11.8% 11.8%
1954 45.0% 45.0%
1955 26.4% 26.4%
1958 22.5% 33.0%
1959 8.5% 8.5% -10.0%
1961 26.9% 26.9%
1963 18.9% 18.9%
1964 13.0% 13.0%
1967 10.2% 20.0%
1971 10.8% 10.8%
1972 15.6% 15.6%
1975 8.7% 31.5%
1976 19.1% 19.1%
1979 11.6% 11.6%
1980 25.8% 25.8% -9.0%
1983 17.3% 17.3%
1985 26.3% 26.3%
1986 14.6% 14.6% -3.0%
1988 7.8% 12.4% -2.2%
1989 27.3% 27.2%
1991 26.3% 26.3% -5.4%
1993 7.1% 7.1%
1994 -1.5% -1.5% -6.6%
1995 34.1% 34.1%
1996 20.3% 20.3%
2003 33.9% 26.4% -4.5%
2004 9.0% 9.0% -3.8%
2005 3.0% 3.0% -5.5%
2006 13.6% 13.6% -2.3%
2007 3.5% 3.5% -3.1%
2009 39.0% 23.4%
2012 13.4% 13.4%
2013 29.6% 29.6%
Cum 920.7% 900.2%
Avg 18.1% 17.7% -8.3%
Click to enlarge
Click to enlarge

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 Map model 2
Neutral Risk profile years
using S&P500 index
excl. dividends
Year year return Drawdown cash compounded
1926 5.8% -10.9% 2.0%
1927 37.1% 0.0% 2.0%
1928 47.5% 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%
1965 5.6% -3.7% 2.0%
1966 -14.3% -20.8% 2.0%
1968 7.7% -9.1% 2.0%
1973 -17.4% -21.9% 2.0%
1977 -11.5% -15.6% 2.0%
1984 1.4% -10.4% 2.0%
1998 26.7% 0.0% 2.0%
2014 ???
Cum 23.6% 35.0%
Avg 1.6% -12.7%
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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 Map model 2
returns BOND allocation = 75%
15 years
using S&P500 index
$1 becomes
dividends reinvest % returns
1.00
SP 500 10/02/1998 40.0% 1.40
BOND 07/09/1999 1.1% 1.42
cash 10/02/1999 1.1% 1.43
SP 500 12/31/1999 -1.9% 1.40
cash 01/21/2000 2.5% 1.44
BOND 07/06/2000 2.5% 1.48
cash 09/28/2000 1.0% 1.49
BOND 07/06/2001 5.6% 1.57
cash 09/29/2001 1.0% 1.59
BOND 07/05/2002 11.9% 1.78
SP 500 10/04/2002 10.0% 1.96
cash 12/31/2002 0.0% 1.96
50% SP 500 02/03/2003 76.6% 3.46
50% SP 500 05/02/03
cash 01/18/2008 1.0% 3.49
BOND 07/03/2008 3.4% 3.61
cash 10/03/2008 1.0% 3.65
50% SP 500 03/09/2009 34.6% 4.91
50% SP 500 05/29/09
BOND 07/09/2010 4.9% 5.15
SP 500 10/01/2010 17.3% 6.04
BOND 07/08/2011 16.0% 7.00
cash 09/30/2011 0.0% 7.00
SP 500 12/30/2011 46.3% 10.24
cash 01/17/2014
CAGR 16.80%
Click to enlarge
Click to enlarge

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
NDX 10/02/1998 87.5% 1.88
BOND 07/09/1999 1.1% 1.90
cash 10/02/1999 1.0% 1.92
NDX 12/31/1999 3.8% 1.99
cash 01/21/2000 2.5% 2.04
BOND 07/06/2000 2.6% 2.09
cash 09/28/2000 1.0% 2.11
BOND 07/06/2001 5.6% 2.23
cash 09/29/2001 1.0% 2.25
BOND 07/05/2002 11.9% 2.52
NDX 10/04/2002 22.3% 3.09
cash 12/31/2002 0.0% 3.09
50% NDX 02/03/2003 97.0% 6.08
50% NDX 05/02/03
cash 01/18/2008 1.0% 6.14
BOND 07/03/2008 3.4% 6.35
cash 10/03/2008 1.0% 6.41
50% NDX 03/09/2009 43.8% 9.22
50% NDX 05/29/09
BOND 07/09/2010 4.9% 9.68
NDX 10/01/2010 20.5% 11.66
BOND 07/08/2011 16.0% 13.53
cash 09/30/2011 0.0% 13.53
NDX 12/30/2011 57.7% 21.33
cash 01/17/2014
CAGR 22.60%
Click to enlarge
Click to enlarge

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.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.