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25 years experience in Quant research, portfolio management, and stock market data analytics. 15 years experience in index trading / ETF strategist. Mean revision / time series studies applied towards general market trends with a focus on long term format.
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  • Market Map: Staying The Course For The Long Term 2015

    As we head into Spring 2015 with the model in a cash position, we look back at the model's performance in 2014 and note it as a year of "underperformance" vs. the S&P 500 (as the model produced a return of 8% and the S&P500 benchmark produced 13.5% ). From time to time, it is possible for an occurrence, such as this, to happen and for us to react with skepticism, uncertainty, and doubt, especially when it involves our investments. We are "hard wired" and persuaded by societal cues into thinking in terms of "short term" results and we tend to define the equity market in terms of "winning" and "losing" ( we are much more sensitive to "losing").

    We are fortunate to have 9 decades of historical model performance with which to analyze and review past occurrences of when the model "underperformed" the S&P 500.

    (click to enlarge)Table1

    As we can see in table 1 and the chart above, these years of underperformance have happened occasionally and are evenly distributed over the sample with "consecutive" years of underperformance occurring in sporadic fashion.

    TABLE 2

    Table 2 shows the ratio of outperforming vs. underperforming occurrences and cum % performance.

    The stock market's price is the discounted present value of it's future earnings and the market can "overshoot" this present value for periods of time. During this part of the investment cycle, this "overpricing" can be caused by: 1) portfolio analysts' upwardly adjusted revisions in earnings estimates and 2) investors' optimism and "fear of missing out" as the market rises or has, in retrospect, produced many consecutive positive years returns. We must expect that these periods will exist and can expect to leave some "gains on the table" with the knowledge that we are accumulating and compounding assets over the "long term". We can gain perspective by examining the "long term" performance statistics, and adjust our reactivity and concern accordingly .

    We can also gain perspective by viewing, in a graphic sense, how much equity exposure towards historical market up moves or down moves has been realistically "captured" by the model in order to achieve portfolio alpha (in this presentation) :

    Asset allocation since 01/20/15 = cash
    Probability of allocation into TLT (iShares 20+ Year Treasury Bond ETF) on 7/13/15 = 5O%

    Apr 13 3:16 PM | Link | Comment!
  • Market Map Model Allocates To Cash

    As described in the last blog component # 3 has just identified 2015 as "high" risk profile year. The model makes an allocation change from equities (NASDAQ:QQQ) to 100% cash equivalents.

    The chart below shows returns from the 16 previous instances of "high" risk profiles. (click to enlarge)

    The next "possible" allocation change date will occur in the first week of July 2015.

    Jan 20 10:48 AM | Link | 2 Comments
  • Market Map Update 01/07/2015

    In the current market environment, in order for us to make tactical decisions and define and manage the risk in our portfolio, we use component 1 and 2 identify and measure the annual returns of "overperformance" of the S&P500 index versus it's 40 year compound growth rate. Further identified are consecutive years of "overperformance"and 2014 represented the 3rd year of "overperformance" by this quantification. The chart below shows previous occurrences of susequent returns after the consecutive years of "overperformance":(click to enlarge)

    This gives us preliminary knowledge towards "mapping" risk to reward in the upcoming market environment. As shown above, statistically, odds of consecutive years of overperformance leading to negative returns are slightly more than 50% since 1924. Another way of stating this would be "the odds on which price will revert back to the "mean" in relation to past occurences".

    To be conclusive in our decision making process, we look next to component 3, which defines risk outcomes derived through an analysis from data contained in the months of Nov, Dec, and Jan and segregated into "risk profiles". These "risk profiles" further refine statistical insight towards actionable tactical allocation decisions with final risk profile readings being calculated in the 3rd week of January ( 01/16/2015 ). In the present case, since the consecutive years of outperformance regime has occurred, we look for the following:

    1) a "neutral" or "high" risk profile reading will shift the portfolio allocation towards a "cash" position or

    2) a "favorable invest 1st half of year" risk profile will keep the allocation in equities / Powershares QQQ (NASDAQ:QQQ) until the first week of Jul. The charts below reflect past risk profile return outcomes.

    The chart below illustrates historical returns from the " Favorable Invest 1st Half " and "High" risk profiles:(click to enlarge)(click to enlarge)

    Stay tuned for update on weekend of 01/16/2014 ...

    For further explanation on the model see posts :

    The recent performance of component #4 ( 4th quarter of 2014; when which we allocated to QQQ from TLT ) was again positive contributing to further statistical significance and long term alpha. The charts below show all historical returns for component 4 "select 4th quarters" since 1924, including the 4th quarter of 2014 :(click to enlarge)(click to enlarge)

    Tags: QQQ
    Jan 06 7:08 PM | Link | Comment!
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