Today, I'd like to wrap up this series on using economic indicators to time the market. In this final post, I'll look at using the unemployment 200-day SMA indicator I've used in the first three parts of the series (link to part 3), but this time apply it to individual stock quant portfolios. All of the strategies mentioned are listed in the Portfolios page. Let's jump right in.
The analysis here is pretty straightforward. I'll take three example quant portfolios I've discussed many times here, then compare the portfolio stats of the stand-alone quant strategy with that of the quant strategy using the unemployment 200-day SMA indicator (UI) on a monthly basis. I'm using the trending value (TV2) quant portfolio, the consumer staples value (CS Value) portfolio, and the large stock index value portfolio (Large stock SHY). The other quant portfolios react similarly to these three. All the portfolios consist of 25 stocks, equal weighted, and the backtests are run from Jan. 1999 through the June 10, 2016. Results are shown below:
The table shows three variations of each strategy; the stand-alone strategy, the strategy using the SPY 200-day SMA to manage risk (note: in quant strategies, simply using the 200-day SMA of the individual stocks leads to horrible performance), and the strategy using the UI indicator to manage risk in the strategy. The characteristic of quant strategies that makes them hard to invest in is the increased drawdowns and volatility despite their market-crushing returns. Most investors abandon quant strategies during volatile times. Using a risk management strategy makes sticking with these strategies much easier.
Overall, using the UI indicator improves the risk-adjusted performance (higher Sharpe and Sortino ratios) of all three quant strategies while still maintaining their market-beating performance. The consumer staples value strategy is the one that benefits the least from risk management. This is probably due to the fact that it is fundamentally a risk-off strategy (the utility value strategy reacts the same way).
That's about it. These results are consistent with the findings in the earlier posts. Using the UI indicator enhances the risk-adjusted portfolio performance for individual stock quant portfolios.