Cliff Smith
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Cliff Smith

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276 Comments

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## Simple Tactical Methods Incorporated Into An Equity-Treasury Hedge Strategy [View article]

On the bond side, there are two ETFs: TMF and SHY. The 3-month returns of both ETFs are calculated, and the ETF with the highest return is selected if it passes the 7-month moving average filter. If the value of TMF is above the 7-month moving average, then it passes the filter and is selected. If not, SHY is selected.

On the equity side, only a 5-month moving average filter is used. If the value of the equity is above the 5-month moving average, then the equity ETF is selected. If not, then SHY is selected.

Hope that explains it.

Cliff

## Tactical Updates For August 18, 2014 [View instapost]

Yes, you make a good suggestion. I actually did this sort of thing with the Unified Tactical Strategy, UTS, where I combined two equity strategies (SSSEquity4 and AllAssetsExceptBonds) with a bond strategy (Low Volatility Bond, LVB, Strategy). I will look into it.

Thanks again,

Cliff

## ETF Recommendations For July 16, 2014 [View instapost]

You are referring to the tactical bond sub-strategy that uses TMF and SHY. These two ETFs are ranked based on 3-month return, and the top-ranked ETF is selected for that period. But then the top-ranked ETF has to pass a 7-month moving average filter. If it doesn't, then SHY is selected. Semi-monthly updates are used.

For the tactical equity sub-strategy, there is no ranking, but the equity has to pass a 5-month moving average filter to be selected. Otherwise, SHY is selected.

The above system is based on TMF and SPY/SSO.

If you want to use TMV and SPXS, you would have to short them, but you could still use the results of the THS to get you out of TMV and/or SPXS in bear markets. Or you could go with a constant split between short TMV and short SPXS with periodic rebalancing.

Hope that helps,

Cliff

## Quarterly Tactical Strategy Backtested To 2003: CAGR Over 28% And Consistent Positive Returns [View article]

Thanks,

Cliff

## Simple Tactical Methods Incorporated Into An Equity-Treasury Hedge Strategy [View article]

Thanks,

Cliff

## Simple Tactical Methods Incorporated Into An Equity-Treasury Hedge Strategy [View article]

1. I've just opened an account on optionXpress to enable me to short inverse leveraged ETFs. Rather than being long in SSO and TMF, I'd rather be short in SDS and short in TMV. I have recently (in the last week) started with a small amount of money ($10K) to see how this will work out. I shorted $6500 in SDS and $3500 in TMV. We will see how it works out. I will have to rebalance periodically (like each month).

2. If equities and treasuries go up at the same time (positive correlation), this strategy does well. And it does well if one goes up and the other goes down. The challenge is when equities and treasuries go down at the same time (for an extended period of time). That's why we need some sort of tactical method to get us to cash or long SDS or long TMF. That's what I'm trying to do in this strategy.

3. Yes, I've read the same thing. All I know is that when I run SSO in ETFreplay from Jan, 2013 to the present (a bull equity market), the total return has increased 88.1%. SPY in that period increases 39.8%. When I look at the Jan, 2008 - Jan, 2009 timeframe (a bear equity market), SSO loses 65.2% while SPY loses 34.3%. So the factor isn't exactly two, but it is close.

I think the problem comes when the equity market is flat with volatility, and then SSO loses money while SPY does not. The daily rebalancing inherently loses money, i.e. the leaking of value. That's what "the experts" warn against I think. At least that's my take.

Another interesting aspect of this issue is that this leaking of value can be made to work for us by shorting the inverse. So, if I short SDS and rebalance semi-monthly, then we see an increase of 94.6% from Jan, 2013 - present (versus 88.1%), and a loss of 55.7% from Jan. 2008 - Jan. 2009 (versus 65.2%). The advantage of shorting the leveraged inverse is even more pronounced with 3X instead of 2X ETFs.

Thanks for your questions,

Cliff

## Simple Tactical Methods Incorporated Into An Equity-Treasury Hedge Strategy [View article]

The challenge is to get CAGR=20% or greater combined with low drawdown. And positive growth every year. Those are the challenges before us.

And I, for one, think we can meet those goals. Certainly there are backtest results going back to 2000 and beyond that support my hypothesis. The problem we have is that many strategies cannot be tested far enough back to verify their results. In the future, with more ETF data available, there will be strategies backtested for 20-25 years. Then we will have more confidence in the tactical strategies based on momentum and moving averages and other tactical methods.

Thanks,

Cliff

## Simple Tactical Methods Incorporated Into An Equity-Treasury Hedge Strategy [View article]

O.K. Here's the answer. It makes sense.

Cliff,

Your thinking is correct when applied to long positions, but not shorts.

Using your example, you establish a 100% short position in SDS. Then, at the end of the month rebalancing, the position would be closed out and the if it has been profitable, a new larger (i.e. more shares because now have more equity) short position in SDS would be taken. Conversely, if the original position had been a loser, then a smaller position (fewer shares) would be established on rebalancing.

If that same process had been carried out with a long position it would have had no impact - the same size position would be established each time.

SH - the inverse S&P-500 ETF - effectively does this on a daily basis in order to maintain the inverse daily percentage return. You can use the ETF Portfolio backtest to compare a Short SPY position vs. SH benchmark with daily rebalancing (vs. B&H) etc:

http://bit.ly/WONj8j

There is a lot of information available on the web concerning the rebalancing of inverse ETFs.

Kind regards,

Simon.

## Simple Tactical Methods Incorporated Into An Equity-Treasury Hedge Strategy [View article]

I have emailed ETFreplay to get the answer to why buy&hold and rebalancing give different answers. I'll let you know.

Yes, shorting SPXS combined with shorting TMV gives more growth but with higher drawdown. The split is about 50/50 for this combination. See my previous article on this strategy without tactical methods included: http://seekingalpha.co...

Thanks,

Cliff

## Simple Tactical Methods Incorporated Into An Equity-Treasury Hedge Strategy [View article]

Thanks,

Cliff

## Simple Hedging Strategies Employing A Short TMV Position [View article]

In this article, there weren't any "lookback" periods. These strategies were buy & hold with periodic re-balancing. I incorporated tactical methods in a later article. Here's the link: http://seekingalpha.co...

Thanks,

Cliff

## Simple Tactical Methods Incorporated Into An Equity-Treasury Hedge Strategy [View article]

When I compare our yearly numbers for the quarterly switching method, we match exactly except for 2008 (28.7% vs. 11.09%) and 2014 (8.5% vs. 13.24). Interesting. My CAGR = 17.5%, max DD = -18.5%, and Sharpe = 1.00.

Yes, I see your point that the CAGR is higher at the expense of higher drawdown. My desire is to get good growth (>20%) and low drawdown (less than 10%).

Thanks,

Cliff

## Simple Tactical Methods Incorporated Into An Equity-Treasury Hedge Strategy [View article]

## Simple Tactical Methods Incorporated Into An Equity-Treasury Hedge Strategy [View article]

I don't know. They may be, but I don't have all of his backtest results. Varan didn't tell the maximum drawdown, or the CAGR. And he didn't tell what the annual returns are for each year. So I really don't know.

Thanks,

Cliff

## Simple Tactical Methods Incorporated Into An Equity-Treasury Hedge Strategy [View article]

The ETFreplay annual results using quarterly updates (compared to SPY in parenthesis) are:

2003: 15.5% (-8.7%)

2004: 1.5% (-8.6%)

2005: 5.9% (-1.3%)

2006: 11.4% (-2.3%)

2007: 19.1% (+14.7%)

2008: 28.7% (+63.0%)

2009: 33.0% (+8.2%)

2010: 7.8% (-6.5%)

2011: 38.4% (+35.9%)

2012: 10.1% (-7.0%)

2013: 29.0% (+1.2%)

2014: 8.5% (-0.4%)

The CAGR is 17.5% and the max drawdown is -18.5%.

Thanks for your comments.

Cliff