Market Map

Growth, momentum, long only, etf investing
Market Map
Growth, momentum, long only, ETF investing
Contributor since: 2013
By utilizing a mechanical and empirically derived quantitative tactical model based on decades of history, we can review past instances of market behavior similar to what may be happening in the present. In viewing the model's signaling history in a visual representation, we can see that past episodes of overperformance ( typically a signaling to "cash" allocation - price based variable / step #1 * ) accompanied by price excursion below the long moving average during a "high risk" or "neutral risk" year ( variable / step # 2 * ), has culminated in an underperformance year with a subsequent year containing a 1 or 2 phase 50% equity allocation ( variable / step # 5 * ); this in 8 past occurrences ( 1938, 1941, 1958, 1967, 1975, 1988, 1991, 2012. The likelihood is that this may occur in 2017.
As to "why" the market behaves the way that it has / does, the vast fundamental, economic, technical narratives accompanying the event will usually be fuzzy and difficult to prove with empiricism. This is the beauty of the mechanical and systematic process; one doesn't need to get "caught up" in the narrative ....
The 10 SMA strategy also performed well ( hypothetically ) during the Japan experience 1988 - 2014
Many commentators and experts are confounded that interest rates / long rates can go "any" lower, but we are witnessing this in real time. In looking at long bond prices / VUSTYX an the Japan experience ( or many other countries that possess "negative" yields), is there any law of physics that says the price can't exceed the Jan 2015 high ?
Sorry, I reread it ( a little busy today ) and understand now .
Another method is to allocate:
1) 100% to QQQ / NDX when SPX > 10 mo Simple Moving Average
2) 75% to VUSTX when SPX < 10 mo SMA
3) cash when SPX AND VUSTX < 10 mo SMA
- QQQ / NDX has provided best alpha premium vs. other indices ( historically over last 25 years )
- 10 period MA monthly reduces whipsaws
- Binary "all in all out" is much easier for average investor than "micro" adjusting the pcts of "40 / 60"
There were severe periods of whipsaw in the bond component in the late 70's- 80's interest rate spike. Can maybe be alleviated by using a momentum measure calculation scenario ( GTAA AGG 3 ?)
Choosing a diverse portfolio stocks based on the "largest capitalization" dividend payers early this century, one would had been led astray.
Well spoken.
Having a robust benchmark for comparison in the claims of these "active" DG portfolio strategies is helpful.
One of the top performing audited investment newsletters that has utilized a defined "active" management approach ( similar to what many SA authors attempt to do with DG portfolios), produced 11+% over a 35 year audited period A companion book " Dividends Don't Lie" was published in 1990 and included a list of "guality" dividend paying companies of the day used in the methodology.
Additionally, there were higher stratas of taxation on dividends prior to 2003 ..
Good to hear it Blum ! The evidence favoring small cap value premium is definitely overshadowed by large cap popularity
On the flip side, when a "high" ( for the year ) is registered in December and then January is positive, high positive outcomes for the next 11 months have been generated, statistically.
You could also just invest in small cap value and forgo all of the micro managing of individual stocks ...
Using a low frequency, tactical allocation model could further compound returns over the long run ....
Sounds like you're paying too much attention to the news flow and being affect by the uncertainty of complicated, subjectively based analysis, etc ! A simple, mechanical, non emotional method of producing risk mitigated alpha has been to use a 10 month moving average price cross process applied to both equity index and bond index. Using QQQ as the equity proxy has produced superior alpha premium vs. even the most robust best performing large cap dividend growth stocks over the last 7, 13, and 30 year periods.
Additionally, the process has produced risk mitigated alpha premium, in aggregate, over 5 previous periods of high CAPE valuation back to 1924.
Also worked during the Deflationary Japan experience of 1988 - 2014 ..
When I look at the Wealthfront literature, I am suspect to the "mixing" of domestic, emerging, foreign, REIT equities, and domestic, emerging, foreign bonds. This seems like a recent phenomenon borne out of academia and smacks of trying to be "too clever". I was "trained" in the 90's and 00's that one doesn't need to go foreign or emerging; just stay domestic ( this implied by the great investors such as Buffet, Bogle, Lynch, etc.). Yet, in looking at the performance, world markets are highly correlated and, after 6 years, continued economic drag ( with no end in sight ) is still being witnessed in these exotic markets.
A newer RA, "Hedgeable", implores one to fork over $250K+ for a "hedged against risk" option. It appears to be a group of young "startups" with an idea and some credentials. Yet, when I test a simple tactical asset allocation model utilizing domestic based equities index against both of these firms backtests, I have done much better. And a simple, little known and little discussed academically proven premise of utilizing the buy and hold of the small cap value universe beats them also
Seems like there's a race to the bottom "fee" but with no resounding risk adjusted alpha premium being produced. So what's an investor to do ?
We think the key lies in investor's education towards self portfolio management via an easy to use app that provides low frequency empirically tested tactical signaling using mid cap growth and small cap value ETFs. This way, the investor 1) keeps control over their money in their own brokerage account 2) has a reasonably clear idea about what is going on via the signaling 3) and is invested in domestic stock universes that have provided the highest alpha premium over all other stock universes, historically, and is not invested in exotic emerging or foreign equity and debt vehicles. This project is underway .
It is valuable to to clear up misconceptions especially for novice and unwary investors. As large and mega cap dividend paying stocks may have a place in one's portfolio diversification, there is no denying that human nature pursues the highest terminal asset value in the accumulation phase ( and in other life endeavours ). And it is important to have academic portfolio management research and empirically defined evidence on one's side in order to make sound judgements vs. anecdotal narrative.
Clear empirical evidence has shown that small cap value has produced highest decile alpha premium over 90 year range, ( Fama and French evidence *). Large / mega cap has underperformed small cap value over the long run. Recently in the last 15 years, a position in Vanguard Small Cap Value ( VISVX ) has produced 350% vs. 314% return of a large individual stock portfolio of popular dividend aristocrats, with no stock picking required.
One of the top performing audited investment newsletters, using a defined and documented dividend growth process, produced 11+% over a 35 year audited period **
Establishing a core position in small cap value as early in one's investing life as feasible, gives an advantage, based on the evidence
Market timers who use subjectively derived methods ( charting, technical indicators with too much lag, divergences, support levels, etc.) usually get crushed. The lack of robust, evidence based, binary / contingency based heuristic via the subjective interpretation leaves them open to uncertainty and emotionalism. You will see this time and time again. With enough investment experience, one can spot this type of "inexperienced" participant fairly quickly.
A simple, objective and mechanical approach that has generated risk adjusted alpha has been the use of a simple 10 mo simple moving average applied to index history with an innovation of using the QQQ ETF as the equity proxy and bond allocation during cash periods.
A relatively simple and often overlooked approach to risk management and alpha production, has been to use the price of S&P500 vs. it's 10 mo moving average crossing as allocation signaling. This eliminates the need to devine market movements from the myriad of factors and subjectively based analysis discussed and, for an average investor, is easy to calculate . Over the toughest 40 year period for the stock market ( 1969 - 2008 ), this strategy produced pronounced risk adjusted alpha premium vs. buy & hold.
Further implementation of the use of the QQQ / Nasdaq 100 proxy in place of the
S&P 500 and the use of the 10 mo moving average applied to a long bond proxy during "cash equivalent" periods, produced further risk adjusted alpha ( while retaining exposure to the many FANG variants that have been constituents of the index over the years )
Beware of stick picking experts. The investment world has greatly evolved over the last 15 years. An investor can buy ETFs and outperform individual stock portfolios. Start with and accumulate small cap value and don't look back.
Historically, one has been able to maximize their expected value at terminal accumulation stage by using small cap value universe.
Small cap value has been the stock universe that has produced the highest alpha premium ( as shown academically ) over 90+ years. One aspect to look at in planning an accumulation strategy is to know where one falls in the "investment life cycle". If one falls in the 20 - 50 age demographic, then it makes sense and as early as possible, that one would want to maximize the growth of their stake with an initial core accrual of SCV; and preferably in a self directed tax deferred account. From there, as their investment options within work 401k plans become more restricted, they can add other universes or styles, such as growth and large cap stocks ( as these tend to be common style offerings the many 401k plans ). The compounding power of the small cap value in the beginning years of the life cycle can assure, statistically, that terminal asset value into spending phase will be highest. This is a simple fact that investors don't realize as the long term use of a stock universe ( via an ETF ) doesn't provide the "allure" of buying and selling "stocks" . And the "time" factor holds an advantage in being able to riding out the volatility and "in and out of favor" idiosyncratic to SCV. There is a premise that one can pick and manage individual stocks and at various points in a stock market cycle, but the longer term, terminal growth statistics don't bear out / justify their ownership vs. SCV.
Combining tactical asset allocation with SCV has added additional value and risk mitigation.
As long bonds ( and cash ) act have proven to be decent "non correlated" assets against equity "turmoil", a simple moving average switching strategy using QQQ, VUSTX ( Vanguard Long dated ), and cash has produced alpha vs. a portfolio of top DG stocks over the last 30 years
A strategy such as this appears to be somewhat immune to individual stock issue / sector "idiosyncratic" risk, dividend cuts, and the uncertainty that these entail. It is relatively easy to calculate and deploy.
The signals table / moving average calculation indicates that Long Bond allocation, if prices remain at present levels, will be indicated for 2/1/2016 ( present stance is cash ).
It is prudent to incorporate many methodologies and stock universes in the accumulation phase. A risk mitigative / alpha producing strategies as shown can be of benefit .
For me, the question was answered today as price based variable # 2 indicated 2016 to be a "HIgh" risk profile year ( 2nd in a row )
Other consecutive strings of high risk years were ( 1969 - 70 , 1973 - 74, and 1981 -82 )
scroll timeline here :

Model will go to cash on Feb 1 after entry on Dec 31 Over 90 year sample, the worst Jan SP500 loss under similar Dec 31 entry circumstances was -5.3% in 1978.
Being armed with an empirically derived set of heuristics / map of 90 years of repeatable market outcomes and contingency based sequential signaling can help alleviate "uncertainty" and operating from emotion.
The use of leverage is also a bugaboo for many "traders"..
I was reading an old "Motley Fool Guide To Investing" paperback at a used bookstore, that was published in 1999. As it was written coming out of the 90's stock run, one of the last chapters dealt with "dividend paying" stocks. The tenor of the chapter seemed to bely that, since dividends were taxed (as they were at that time and up until 2003?), that the "DG strategy "was definitely 2nd or 3rd fiddle to the growth stock strategies mentioned in previous chapters.
This ( imagining of ) reactivation of the taxing of dividends doesn't feel too far fetched ...
This premise , put forth by Philosophical Economics, has held a certain curiosity for me:
" In all likelihood, present and future valuations will prove to be more important to returns over the next 65 years than they were to returns over the last 65 years. The reason why is that the growth of the population is set to slow, with the average age set to increase significantly. Slowing population growth and a significant upward shift in the average age, towards the elderly, implies reduced aggregate demand growth, and therefore a reduced need for expansive corporate investment. Corporations, if they want to do well for their shareholders, will therefore have to shift their capital allocation strategies away from traditional capital expenditures towards what might be perjoratively described as “capital recycling”–the payment of dividends (which get reinvested into the market) and the conduct of share buybacks (which are essentially identical to reinvested dividends in terms of their effect on total return). But the rate of return that dividends (reinvested at market prices) and share buybacks (repurchased at market prices) produce is strongly dependent on the valuations at which the reinvestments and repurchases occur. It follows that as the corporate sector shifts towards capital recycling as an allocation strategy (a shift that is already well underway), valuations–not only at the moment of purchase, but also during the entirety of the holding period–will become increasingly important to the market’s return prospects. To illustrate the point, imagine a demographically and technologically stagnant future world where dividends are punitively taxed, and where capital expenditures, in excess of depreciation, are neither needed nor profitable–a world where such expenditures do nothing but fuel competition, deflation, and profit margin shrinkage–put simply, a world that is Japan. If corporate managers in such a world are good stewards of capital, they will deploy 100% of their earnings into share repurchases. EPS growth will then be entirely determined by how much the repurchases contract the S, the share count. But the amount by which a given repurchase event contracts the S, the share count, is determined by the repurchase price–and therefore, the valuation. And so, in such a world, expensive valuations will depress EPS growth, and by extension, investor returns. The simulation above bears this out, with reinvested dividends as the proxy for share buybacks.
Crucially, a large portion of the EPS growth that was realized over the last 65 years was the result of expansive capital formation, the net building of new things that produced new profits, and an EPS that grew by the E. In a futuristic Japanese world where that driver of EPS growth is removed, and where all EPS growth results from repurchases, a shrinking S, the returns to an always-expensive scenario will be that much weaker."
This is why index based products are a good solution for most investors in their accumulation years. The probabilities of selecting and managing the "correct" portfolio of individual stocks, one that will produce alpha premium above buy and hold, are stacked against us.
I attended a Powershares sponsored presentation in fall 2015 and talked to a PShares research analyst about getting back years data ( pre 2002 ) for the LYPT . He put in a call to PS analytics dept in D.C. and a follow up email, but I never heard back ... Would be nice to see it's performance in the 90's.
It is also informative, from a research standpoint, to look at the sample with the removal of "outliers" ( highest / lowest performer ). It can reduce a "luck" factor * . That way, one can present a more balanced returns picture, especially when trying to gauge expected market returns within the designing of a retirement strategy. For example, we made the adjustment here Table 1 section 1:
* As the distribution implies 14% of all stocks can produced returns of greater than 20%.
"Can sell stocks" might be too soft of a phrase. If the median household retirement asset balance ages 55 and up is $150 - 200K, and if investors have newly "embraced" the div growth strategy in recent years yet with forward returns on Large / Mega cap div growth stocks appearing to be subpar, then most likely they will "have to sell shares" ....
The "young" investor demographic in the "Investing Life Cycle" can maximize their asset growth most effectively by using small cap value universe ( as small cap value has produced highest decile alpha prremium over 90 year range, proven academically Fama and French evidence *). Large / mega cap has underperformed small cap value over the long run. In the last 15 years, a position in Vanguard Small Cap Value ( VISVX ) has produced 350% vs. 314% return of a large individual stock portfolio of popular dividend aristocrats, with no stock picking required. A young investor can establish a core position in SCV
then gradually, over time, add growth, biotech ,/ healthcare and possibly some DG. When investors enter the mature part of their accumulation phase, they could mitigate capital drawdown inherent in the small cap value universe by utilizing a tactical asset allocation process
In the spending phase, an investor can perform hybrid scenarios of converting to dividend paying stocks for income or selling shares of the small cap value, growth, sectors as those areas have continued growth **
* as small cap value has returned highest alpha premium of stock universes; international SCV actually higher, but no need to necessarily go non-domestic
** a rising "equity allocation" glidepath in retirement ( proposed by M. Kitces and Phau ) vs. a more conventionally accepted rising bond allocation glidepath, has been shown to extend the life of account value / slow the depletion of assets in the latter years of life, as the equities will inherently "appreciate" more than bonds; and with bonds not necessarily being any "safer" than equities. By further owning an allocation of SCV and growth will add the highest alpha premia component for further growth ...
Also at present, the popularity of dividend strategies has led to a rise in the prices of these stocks and reduced their expected returns going forward.
Over 90 years, when "Sell in May" anomaly was incorporated with the tactical model, alpha premium has been added ( using small cap value universe ).
The model indicated 2015 as a "high risk" profile year and contained a "statistically significant 4th quarter" ... We held VBR from Sep 29 2014 - May 1 2015 (slide 6 here ) Return was 5.8% ...
Returns degraded from May 1 - Dec 31 = -7.4% ( affected by typical "high risk" year behavior ? )
We went back in on Nov 2 2015 ...
"REITs Whacked Down The Hardest In 2015"
Not to mention the energy MLPs with the promising income prospects ( so touted over that last 2 -3 years ) ...
"Stock picking is difficult"
Fundamental data series used for computation towards tactical allocation decision heuristics, such as PE, inflation, earnings, economic series, etc., are subject to revision, and they "lag" and confirm equity market price trend behavior "after the fact". From these series, creating "thresholds" that provide precision in allocation signalling and portfolio management is difficult and, many times, leads to ambiguity and uncertainty.
As it is important to "prepare" for the next decline of magnitude, it is important to utilize a strict, rules driven tactical process that: 1) is empirically derived 2) tested over a robust historical sample 4) is reasonably precise 5) uses non subjective and unambiguous signalling heuristics. Further confidence in the signalling is derived from the review of it's long term return outcomes generated over 10, 15, etc. rolling periods. The research effort applied towards this goal is not an easy task and is a whole level of expertise that is, because of various factors, difficult to "legitimize" in the financial industry.
Stepping away from all of the hypothesis' about "why" markets have risen in different periods, a simple and effective way of mathematically / non subjectively managing risk, has been through the use of (an improvement on) the standard 10 month moving average methodology. During periods of "spikes" in valuation over the last 90 years as measured by CAPE10 movements vs. it's standard deviations , the use of this simple process produced forward 10 year alpha premium ( in aggregate and sometimes substantially) vs. buy and hold. This methodology was also applicable during the Japan experience of 1988 - 2012.
Further risk managed alpha has been produced by using the Nasdaq 100 / QQQ as equity allocation proxy 1986 - 2015
Prudent investing can include a diversification of stock universes and methodologies. If one is in their accumulation stage, it would be imprudent to put 100% of one's money into a portfolio of mature DG stocks.
If one has been new to DG investing methodolgy and they are in their spending phase, 2015 represented a interesting example of a sequence of return "risk" as:
1) portfolios didn't appreciate ( use NOBL's YTD return as an example )
2) high valuations and lowish yields were/are present and low returns are expected going forward
3) the economy appears to be stable and "dove"ish"" to stock prices
A conundrum that presents itself is that if all of one's eggs were in the DG universe, and they started investing in DG over the last couple years ( as it appears that many have ), then looking at statistics on the size of the average asset size versus expenses vs. income generated, they may have had to sell shares to meet expenses ( higher sequence of returns risk).
If one had combined a portfolio of DG favorites with a buy and hold allocation of biotech sector over the past 2 years, the biotech allocation would have produced 50% appreciation ( using IBB as example )
Over the past 30 years, the return of the combination by retirement phase would: 1) have produced double the asset growth with slightly more risk 2) had produced the same asset growth in DG stock allocation as with just the DG portfolio alone ( and consequently produce the same income at start of retirement phase ) AND 3) had an additional stake still in the Biotech which: a) could be held for additional growth in retirement while receiving income from the DG stocks or b) converted into DG growth stocks for "double" income ( or other income producing entities ). We can see this comparison in column K and L here:
Healthcare has also been a serious contender
here : diversification