Roman Chuyan, CFA's  Instablog

Roman Chuyan, CFA
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Frank Donovan, Vice President, Performance Analytics Inc. I am responsible for business development for Performance Analytics Inc., an independent firm based in Boston, which delivers actionable, results-driven asset allocation research to investment management clients. Our research reports are... More
My company:
Performance Analytics
My blog:
Active Equity Allocation - Latest Model Results
  • Not Even A Pause For The Market 0 comments
    May 17, 2012 10:44 PM | about stocks: SPY, DIA, QQQ, IWM, HYG, JNK, SHY, TLT, GLD, OIL, CRUD

    It's just like my mom told me: "Never try to predict short-term market"... well not exactly that, but the point is that predicting short-term market movements is a futile exercise. We thought the S&P 500 would pause around 1350 - it did not. Lesson learned: follow the guide of a proven, tested, unbiased quantitative model!

    Following our PAR model has been paying off. As we started predicting in our March-31st report, the S&P 500 was expected to decline in the next 4-6 months, and the latest April-30th model result put the expected decline at 7%.

    At this point, the S&P 500 dropped by about 7% so far in May. "Does it mean that the decline should be over?", you may ask (as some of our clients did). We back-tested strategies of buying equities at the end on the month when the model predicts a positive return, and selling when it predicts a negative return. This worked well, producing more than 10% of annual Alpha over 5 years (using a 0%-or-100% equity allocations). Following the same strategy means that, after selling on April 1st, confirmed on April 30th, we should keep the underweight-equity allocation until May 31st. If you manage client investment portfolios, we recommend keeping a 6-month horizon, and not reading too much into inta-month volatility.

    Where will this drop end? We don't believe in imaginary lines (a.k.a. technical analysis), but since many people are looking at them, they may give a pause to the market - around 1250 on the S&P. Once again, please be guided by a reliable model in your asset allocation decisions - in our case, we will have to wait and see what the PAR model says on May 31st.

    Lastly, in this sell-off, major commodities - Gold, Oil - are following equities down which tells us that a broad risk-off scenario is developing, rather than equity-only. Today's 2%+ pop in gold was large, but we don't think that commodities will reverse here.

    If you find this useful, FOLLOW us here on Seekingalpha!

    For more info or to subscribe to the full reports, please visit us at

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

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