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varan
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Individual investor.
  • Simple GMR 101 comments
    Jul 31, 2014 10:31 PM | about stocks: EEM, IJJ, ILF, EPP, TLT, MVV

    Starting in August 2014, I will be tracking the results of the simplified Global Market Rotation strategy applied to baskets of ETFs. On the first trading day of every month, the strategy invests in the asset that performed the best during the immediately preceding three months on the basis of total return (i.e. including dividends and any other distributions). The back test results for three baskets (the mutual fund basket has been added mainly to get an estimate for the returns for a longer time period) for the periods ending on 7/31/2014 follow:

    RS-GMR-ETF: IJJ, IEV, ILF, EPP, EEM, TLT

    RS-GMR-LETF: MVV, IEV, ILF, EPP, EEM, TLT

    RS-GMR-MF: FDVLX, FIEUX, FEMKX, FLATX, FPBFX, VUSTX

     

    Period

    CAGR

    Sharpe (Sortino)

    Max. Drawdown

    Min. Annual Return

    RS-GMR-ETF

    2003-2014

    28.6%

    1.3 (2.8)

    17.2%

    6.5%

    RS-GMR-LETF

    2007-2014

    31.5%

    1.12 (2.11)

    22.4%

    4.1%

    RS-GMR-MF

    1991-2014

    20.7%

    0.97 (1.93)

    24.6%

    -24.6%

    YTD Returns

    RS-GMR-ETF 13.1%

    RS-GMR-LETF 4.1%

    RS-GMR-MF 14.1%

    For August 2014, both of the ETF strategies are going to be invested in EEM.

    The following figures display some results for the RS-GMR-ETF and the RS-GMR-MF baskets.

    (click to enlarge)

    (click to enlarge)

    (click to enlarge)

    (click to enlarge)

    Disclosure: The author is long EEM.

    Additional disclosure: This is not investment advice in any form.

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Comments (101)
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  • Stanford Chemist
    , contributor
    Comments (713) | Send Message
     
    Interesting. .will follow!
    31 Jul 2014, 10:52 PM Reply Like
  • ikkyu
    , contributor
    Comments (248) | Send Message
     
    I agree with the Chemist. Sounds cool.
    1 Aug 2014, 03:24 AM Reply Like
  • Algyros
    , contributor
    Comments (104) | Send Message
     
    Thanks, Varan.
    1 Aug 2014, 08:01 AM Reply Like
  • Korndog
    , contributor
    Comments (20) | Send Message
     
    Me too, will follow. Have been tracking other GMR articles and discussions and it is a subject I follow with a lot of interest. Thanks!
    1 Aug 2014, 10:23 AM Reply Like
  • extremebanker
    , contributor
    Comments (1721) | Send Message
     
    I have been doing similar strategy but with more funds. I look forward to your updates!
    1 Aug 2014, 10:29 AM Reply Like
  • Left Banker
    , contributor
    Comments (2280) | Send Message
     
    Looks very interesting.

     

    Can you briefly explain the thinking behind the difference between RS-GMR-ETF and RS-GMR-LETF (IJJ vs. MVV)?

     

    Is that 4.1% YTD for RS-GMR-LETF a typo? (14.1%?)
    1 Aug 2014, 10:32 AM Reply Like
  • varan
    , contributor
    Comments (4045) | Send Message
     
    Author’s reply » @Left Banker

     

    The result is somewhat surprising, but it is not a typo. The LETF was invested in MVV last month. MVV lost over 10% in July. ETF was invested in EEM, which was barely above water, but did not lead to a loss.
    1 Aug 2014, 10:41 AM Reply Like
  • Algyros
    , contributor
    Comments (104) | Send Message
     
    Varan,

     

    Do you think that that the lower CAGR for the mutual fund version of this strategy simply reflects a longer backtest period, or is there some inherent quality of the mutual funds you use that might explain it?
    1 Aug 2014, 11:06 AM Reply Like
  • varan
    , contributor
    Comments (4045) | Send Message
     
    Author’s reply » My first instinct is to say that 28% CAGR for the ETFs is too high to persist for a long time, and so the mutual fund results are probably more realistic, even though still pretty good. In this regard my baseline is BRK-A: any strategy, that can yield a CAGR of around 15% or higher during 1991-to-date with much less volatility (as determined by Sharpe being significantly higher than the Sharpe of 0.65 for the Buffett's fund) and with very little degradation of the performance during 2000-to-date, is probably as good as one can normally expect.

     

    There may be some influence of the idiosyncratic risk of the mutual funds too, as they are all purported to be actively managed.
    1 Aug 2014, 12:01 PM Reply Like
  • spielerman
    , contributor
    Comments (220) | Send Message
     
    Thanks Varan,
    A couple of questions here as I've been trying to balance out the various strategies and methodologies over time periods as well as different investment accounts.

     

    -in my 401k I am stuck with the 91 trading day window on fees with switching funds. Does this strategy work as well on a 90 adjustment instead of monthly?

     

    -any idea on tax efficiency, or this is a matter of pay your taxes because the absolute returns, risk adjusted returns, and max drawdowns means.... success?
    1 Aug 2014, 12:24 PM Reply Like
  • varan
    , contributor
    Comments (4045) | Send Message
     
    Author’s reply » For three month update period the maximum drawdown and maximum annual loss are too high.

     

    ETF (2003-2014)

     

    CAGR 22% Sharpe 1 Sortino 2 Max Drawdown 35% Min annual return -13%

     

    Mutual Funds (1991-2014)

     

    CAGR 15.7% Sharpe .73 Sortino 1.3 Max Drawdown 46.4% Min annual return -41%

     

    I am afraid that I am not qualified to make any statements about tax efficiency.
    1 Aug 2014, 12:39 PM Reply Like
  • retring investor canada
    , contributor
    Comments (14) | Send Message
     
    I am curious as to why you opted for only one leveraged ETF (NYSEARCA:MVV) in the portfolio RS-GMR-LETF, when there are leveraged versions of EEM, TLT, ILJ and EPP.
    2 Aug 2014, 08:22 AM Reply Like
  • varan
    , contributor
    Comments (4045) | Send Message
     
    Author’s reply » Excellent question. The main reason is that not much historical data is available for many leveraged ETFs: for EMLB and UBT only since 2011, for URR since 2009, etc.

     

    For the limited dataset, the back testing suggests that using UBT instead of TLT (and not URR for IEV or EMLB for EEM) provides the best possibility of improvement for the leveraged version. The CAGR for 2011-2014 with UBT and MVV increases from 27% to 36%, and more importantly the YTD return improves from about 4% to 20% (reflecting the fact that TLT has done well this year). Addition substitutions by URR and EMLB actually degrade the performance.
    2 Aug 2014, 02:30 PM Reply Like
  • tmdoherty
    , contributor
    Comments (426) | Send Message
     
    According to my calculations, here's what you get when you substitute UBT or TMF (3x leveraged) for TLT for the time period Feb 2010 thru the present:

     

    With TLT:
    Win Rate: 69.2%
    Median Rolling 12-Mo. Return: 36.3% (SD = 21.5%)
    CAGR: 35.1%

     

    With UBT:
    Win Rate: 69.2%
    Median Rolling 12-Mo. Return: 37.6% (SD = 36.3%)
    CAGR: 49.0%

     

    With TMF:
    Win Rate: 65.4%
    Median Rolling 12-Mo. Return: 21.1% (SD = 53.1%)
    CAGR: 44.2%

     

    So at face value, adding leverage to the long-term treasury ETF might improve results a bit, but also introduces greater volatility. I didn't calculate Sharpe ratios, but my guess would be that substituting UBT and TMF would diminish Sharpe ratios because of the greater volatility.
    11 Aug 2014, 07:18 PM Reply Like
  • crakes
    , contributor
    Comments (4) | Send Message
     
    The key to rotational strategy success is the etf universe. Dave Varadi has blogged on one method to identify what is needed to have a well constructed universe for rotation. How did you go about selecting your universe(s) for this return - trail and error or is there a systematic process?

     

    Thanks!
    2 Aug 2014, 10:53 AM Reply Like
  • varan
    , contributor
    Comments (4045) | Send Message
     
    Author’s reply » Sorry, I should have mentioned that the ETF basket was chosen by Mr. Grossman in an earlier very popular article on SA.

     

    http://bit.ly/1mEMAoa

     

    I just assumed that this will be obvious to the readers.

     

    I just wanted to provide a simpler version that does not use volatility for rankings, as it seems to me that the optimization that might have gone into choosing just the right combination of relative strength and volatility may not necessarily be the best way to develop a robust strategy.
    2 Aug 2014, 02:36 PM Reply Like
  • Algyros
    , contributor
    Comments (104) | Send Message
     
    Hello Varan,

     

    It is pretty clear that you were basing your ETF choices on Frank Grossman's article.

     

    Now that I think about Grossman, I was wondering what this strategy would look like under your thoughtful lense: http://seekingalpha.co....
    2 Aug 2014, 02:55 PM Reply Like
  • varan
    , contributor
    Comments (4045) | Send Message
     
    Author’s reply » @algyros Most of those strategies are based on EDV for which the date of inception is quite recent (2009). For the 2009-todate, MDY/EDV :21.7%, ZIV/EDV 40%.
    2 Aug 2014, 07:03 PM Reply Like
  • rorubs
    , contributor
    Comment (1) | Send Message
     
    Thanks for sharing your twist on grossman/cohn strategies.

     

    picking, I would be careful with the - always possible, especially with these strategies - hindsight bias in selecting the universe.

     

    Especially, ijj seems a little odd compared to the other etfs (mid caps vs big caps, which is maybe better played with another strategy), ilf overweights Latin America vs Eastern Europe or Emerging Asia, and Japan is excluded. In hindsight, those choices make sense, but without it... For robustness purpose, I would suggest to test adding spy/Japan and removing ilf/iff

     

    That being said, it seems treasuries are not rotated into very frequently, which might be good for the future.

     

    Cheers.
    2 Aug 2014, 11:01 AM Reply Like
  • IndyDoc1
    , contributor
    Comments (180) | Send Message
     
    How about shorting the corresponding inverse 3x Direxion fund of the winner to capture the beta slippage. For example, the winner this month of Grossmann's GMR is EEM, how about shorting EDZ!
    2 Aug 2014, 06:46 PM Reply Like
  • varan
    , contributor
    Comments (4045) | Send Message
     
    Author’s reply » That - shorting EDZ when EEM is the ETF to be invested in - may well work. But I have not tried it.
    2 Aug 2014, 07:07 PM Reply Like
  • EdwardjK
    , contributor
    Comments (132) | Send Message
     
    varan,

     

    I assume the three month measurement period is 63 trading days, yes?

     

    Can you devise some circuit breaker that moves the monthly investment to cash in anticipation of a market decline? maybe something as simple as an x% decline within x trading days…

     

    Thank you.
    2 Aug 2014, 08:05 PM Reply Like
  • varan
    , contributor
    Comments (4045) | Send Message
     
    Author’s reply » It's three calendar months. So for January: last trading day of prior year's September thru last trading day of the prior December, and then increment both the months by a month for subsequent months. My guess would be that using 63 days should work as well. If there is a substantial difference, I will withdraw this whole strategy as that would imply the strategy to be very brittle.

     

    The circuit breaker is a good idea, but I have not implemented that yet, and therefore not tested it.
    2 Aug 2014, 08:28 PM Reply Like
  • TrendXplorer
    , contributor
    Comments (50) | Send Message
     
    A circuit breaker or trend filter is an interesting idea. For GMR "simple" I tested the following filters:
    - Mom > 0;
    - Close > SMA4;
    - Close > EMA4;
    - SMA4 > SMA4[-1];
    - EMA4 > EMA4[-1];

     

    The length of the simple and exponential moving averages is based on the lookback period varan used in his test: 3 months, hence 4 bars. All versions of the trend filter lead to lower CAR, Sharpe and Sortino, except for the SMA4 > SMA4[-1] version. Applied to monthly quotes this filter compares the current (or last) value of a 4 bar/month simple moving average against the next to last reading, resulting in a slightly higher CAR, but more importantly: a 2.5% better max draw down percentage.

     

    The next link shows the comparison overview:
    http://bit.ly/1sNrLsr

     

    The equity curve with key perfomance indicators for GMR simple with the SMA4 > SMA4[-1] trend filter:
    http://bit.ly/1sNrK7R

     

    This exercise with trend filtered momentum rotation brings an older comment into mind made by a visitor on my blog:
    "(...) I am not very enthusiastic about the way (...) momentum [is measured]."
    and
    "You can pick any TF function, from something as simple as Mebane's to the more sophisticated one Andreas Clenow describes in his TF book (...) and TF will figure it out automatically what works (and what doesn't)."
    (For more, see: http://bit.ly/1sNrLsv)

     

    If anyone knows a better way to measure momentum or apply a trend filter, please step forward.
    12 Aug 2014, 11:09 AM Reply Like
  • extremebanker
    , contributor
    Comments (1721) | Send Message
     
    I use SHY and 200 day moving average as circuit breakers. If no funds are above 200 day average or SHY is the best performer for the last three months then monies go to cash.
    2 Aug 2014, 09:07 PM Reply Like
  • varan
    , contributor
    Comments (4045) | Send Message
     
    Author’s reply » I have not tried the SMA, but adding SHY degrades the performance a bit: CAGR decreases by about 2%, and the maximum drawdown increases by about 3%, and the Sharpe decreases by 0.08. But even then it may be a good addition as a circuit breaker.
    2 Aug 2014, 09:21 PM Reply Like
  • extremebanker
    , contributor
    Comments (1721) | Send Message
     
    I just finished a twenty year backtest using FUSEX and VUSTX. Updating monthly with the one that has the best relative strength for the last three months. performance was almost double and declines were reduced. I am currently going to rework that study to go to cash when both are negative to see how this will work. You might be able to do it very quickly with your math skills.
    2 Aug 2014, 11:10 PM Reply Like
  • varan
    , contributor
    Comments (4045) | Send Message
     
    Author’s reply » That is paired-switching. For 1991-2014 you get a CAGR of 12.7% for FUSEX( Fidelity does have a sense of humor)/VUSTX. The best pair is FDVLX/VUSTX: if you update quarterly based on just prior month's returns you get 16.4% for 1991-2014. The GMR, in my nomenclature, is polygamously paired switching.

     

    .
    3 Aug 2014, 12:14 AM Reply Like
  • drftr
    , contributor
    Comments (250) | Send Message
     
    Why would you limit yourself to a pre-defined shortlist of ETFs or mutual funds? Since it's not a buy & hold or volatility based strategy why not trying to max your gain as long as the momentum is there?

     

    You may want to create ETF groups only including well-traded ETFs and make sure there's not for instance 5 Indian ETFs in one group, but for the rest I'd say buy ANY ETF that has been gaining above the cut off point (2%?, SHY?), is above the 200 DMA and is gaining momentum. And you could set a selling rule like going to cash for the rest of the month if there's a 3 or 5% loss compared to the buying price.

     

    In this way you don't have to leave out levered and/or inverse ETFs and you don't care about asset allocation, economic climates, market conditions, crashes, et cetera. You just buy the ETFs that have momentum.

     

    Note: For levered and/or volatility ETFs you may want to cap your gain, like take a 5% monthly gain and get out, or use a trailing stop.

     

    I'm relatively new to this subject but after reading 50 or so articles about this subject it isn't clear to me why you would restrict yourself if you're focusing on momentum without theoretical "life savers" like risk parity, relative strength, et cetera. After all, who cares about this if you have an exit strategy that limits losses?

     

    Thanks,

     

    drftr
    6 Aug 2014, 04:10 AM Reply Like
  • varan
    , contributor
    Comments (4045) | Send Message
     
    Author’s reply » Of course. There are multiple ways to invest successfully. A method like this provides one of many systematic approaches that is easy to implement.
    6 Aug 2014, 09:53 AM Reply Like
  • Algyros
    , contributor
    Comments (104) | Send Message
     
    If you backtest a strategy such as Varan's (for example, on ETFscreen.com), you'll find that if you use too many ETFs the results suffer. In fact, if you use the universe of all ETFs on their database, the results are awful.
    6 Aug 2014, 10:33 AM Reply Like
  • vn888
    , contributor
    Comments (11) | Send Message
     
    @Algyros:

     

    I think David Varadi has a good explanation why this is the case in his blog post on Momentum Score:

     

    http://bit.ly/X2AFZi
    6 Aug 2014, 06:13 PM Reply Like
  • ikkyu
    , contributor
    Comments (248) | Send Message
     
    I read a great line from a book on fly fishing by Yvon Chouinard that said that performance genius/mastery is in finding not in what one can add, but in what one can take away. I think Varan implicitly understands this. That is the genius of his ways, take it or leave it.
    6 Aug 2014, 10:20 AM Reply Like
  • varan
    , contributor
    Comments (4045) | Send Message
     
    Author’s reply » @ikkyu
    thanks a lot.
    6 Aug 2014, 03:27 PM Reply Like
  • drftr
    , contributor
    Comments (250) | Send Message
     
    I hear what you say Ikkyu and the portfolio that is still most appealing to me is something like trading the best 1 or 2 out of VTI-TLT-GLD-SHY as this will do very well in about any market situation. But for an other part of my investments I'd like to find out more about the limits of momentum trading. And therefor all responses are educative to me. Tnx!

     

    drftr
    6 Aug 2014, 10:59 PM Reply Like
  • drftr
    , contributor
    Comments (250) | Send Message
     
    Varan,

     

    Do you have any selling rules in place or are you always waiting until it's time to decide which ETF to invest in for the next period of time?

     

    drftr
    7 Aug 2014, 09:54 PM Reply Like
  • varan
    , contributor
    Comments (4045) | Send Message
     
    Author’s reply » @drftr

     

    I do not have any selling rules.

     

    If there is a change in the selection on the first trading day of the month, the one held in the prior month is sold, and the proceeds are used to invest in the new one. Otherwise, no action is necessary.

     

    Thanks.
    8 Aug 2014, 12:02 AM Reply Like
  • IndyDoc1
    , contributor
    Comments (180) | Send Message
     
    How about placing your favorite FLPSX instead of FDVLX ?
    8 Aug 2014, 12:45 PM Reply Like
  • varan
    , contributor
    Comments (4045) | Send Message
     
    Author’s reply » that will work too, probably better. I think though that FDVLX behaves more like other value funds, and FLPSX is more active.
    8 Aug 2014, 12:51 PM Reply Like
  • TrickPony
    , contributor
    Comments (26) | Send Message
     
    Is anyone using this or similar momentum type systems with real money? if so what percentage of your portfolio are you comfortable allocating too it?
    9 Aug 2014, 01:48 PM Reply Like
  • extremebanker
    , contributor
    Comments (1721) | Send Message
     
    I track 40 ETFs and try to stay invested in the top 5-10 and out of or short the bottom 5-10. 55% of my portfolio is involved with this strategy at the present time.

     

    I use 4 month relative strength for most of my calculations.
    10 Aug 2014, 10:03 AM Reply Like
  • drftr
    , contributor
    Comments (250) | Send Message
     
    extremebanker,

     

    How did you select those 40 ETFs? Personally I would be looking at the top ETFs for any economic climate (Varan may for instance want to change his ETFs if/once high inflation kicks in) so you can ride the trend from an early stage, but I'm interested to find out what moves other investors. Tnx!

     

    drftr
    11 Aug 2014, 09:17 AM Reply Like
  • varan
    , contributor
    Comments (4045) | Send Message
     
    Author’s reply » I haven't seen or done an analysis, but if you use relative strength with a basket of very large number of funds, the probability of false discovery during backtesting might increase. This is speculation on my part, of course. Even if it is correct, no one knows how large large is in that context. Clearly, since it is working well for extermebroker, the threshold is perhaps much higher than 40.
    11 Aug 2014, 09:34 AM Reply Like
  • extremebanker
    , contributor
    Comments (1721) | Send Message
     
    Nine of the ETFs are large, mid, small growth,blend and value. Two are domestic and international real estate. Two are commodity and gold related. Five are international stock related. Seven are related to fixed income. Ten are actually funds that are in my 401k. The remainder are country specific and sector specific chosen from a list. A good source for relative strength strategies is "quantpedia"

     

    When my performance really excels is when the bear markets strike. I go to cash and treasuries which is a good mix in a bear market.
    11 Aug 2014, 06:05 PM Reply Like
  • drftr
    , contributor
    Comments (250) | Send Message
     
    Excellent - thanks! And do you limit your choice by only selecting ETFs with a minimum turnover, minimum years on the market, maybe even buying and holding prices?

     

    I'm trying to figure out a sensible way to get rid of many 100s of ETFs that would fit the bill but may be to risky.

     

    drftr
    12 Aug 2014, 07:42 AM Reply Like
  • extremebanker
    , contributor
    Comments (1721) | Send Message
     
    I prefer ETFs with at least 500 million in assets. I also want funds that represent distinct asset classes. I try not to have too much duplication. A simple version is included with the link below.

     

    http://bit.ly/1sNeiAZ
    12 Aug 2014, 10:20 AM Reply Like
  • drftr
    , contributor
    Comments (250) | Send Message
     
    Either the link is not working or it's blocked by the Chinese government (which may be the case if there's anything Google-ish in there). I'll find a way around it in a couple of days in another city and have a look. Thanks for posting.

     

    drftr
    12 Aug 2014, 10:35 AM Reply Like
  • tmdoherty
    , contributor
    Comments (426) | Send Message
     
    The link works for me (I am in the US).
    12 Aug 2014, 04:07 PM Reply Like
  • drftr
    , contributor
    Comments (250) | Send Message
     
    A VPN connection in China makes everything on the web work again... Thanks extremebanker for the link.

     

    drftr
    13 Aug 2014, 09:32 AM Reply Like
  • varan
    , contributor
    Comments (4045) | Send Message
     
    Author’s reply » The August selection EEM has returned 2.27% todate. The final return will be determined by the closing price on 9/3/2014.

     

    For September, ILF is the clear selection, as its return during the period 5/30/2014 thru 8/30/2014 has been 15%. The return of the second ranked ETF during this period for the un-leveraged basked was 6.7% for EEM and for the leveraged basket it was 8.9% for MVV.

     

    Summary:

     

    8/2014 return: 2.27% (both baskets)
    9/2014 selection: ILF (both baskets)
    9/2014 second ranked ETF:
    EEM (unleveraged basket) return 6.7%
    MVV (leveraged basket) return 8.9%

     

    (All data based on Yahoo Finance adjusted close prices.)
    31 Aug 2014, 02:28 PM Reply Like
  • Korndog
    , contributor
    Comments (20) | Send Message
     
    Thanks for this months update. Do you have any hesitation or timing suggestion about rolling over into the new selection of ILF after it had such a stellar return this past month? EEM did well this past month but Mr. Putin's adventurism seemed to put a damper on it the last few days; even so I was happy with my results. Just struggle each month as to the "best" method of transitioning into the next selection.
    1 Sep 2014, 06:05 PM Reply Like
  • varan
    , contributor
    Comments (4045) | Send Message
     
    Author’s reply » Thanks.

     

    I will leave that subjective judgment to anyone who wants to actually implement it.

     

    I would just like to follow this for a while, unadorned by any subjective criteria, to see how it works out.

     

    Given that reservation, I am going to buy ILF tomorrow, solely on the basis of this ranking.

     

    Sorry.
    1 Sep 2014, 06:13 PM Reply Like
  • tmdoherty
    , contributor
    Comments (426) | Send Message
     
    Korndog, just my opinion, but I think when you begin to second guess things, that defeats the purpose of an algorithmic strategy such as this. That's a slippery slope that invites introducing more and more subjective bias.

     

    It may be tempting, but more often than not "the enemy of good is better."

     

    Even though ILF has had a runup and is testing moderate chart resistance, there are no signs of technical weakness that I can see. The ETF is overbought to be sure, but overbought conditions are not necessarily unstable and can persist indefinitely.
    2 Sep 2014, 01:28 AM Reply Like
  • TrickPony
    , contributor
    Comments (26) | Send Message
     
    Wow...ILF took a pounding today.
    Kurt
    8 Sep 2014, 04:12 PM Reply Like
  • tmdoherty
    , contributor
    Comments (426) | Send Message
     
    Yes it did. Now we can see significant technical damage and sell signals in place. But that said, TAA is not based on technical indicators, so we'll just have to see how this plays out over the rest of the month.
    8 Sep 2014, 09:02 PM Reply Like
  • TrickPony
    , contributor
    Comments (26) | Send Message
     
    I think we are approaching the 200 day moving average, if we break that look out below.
    23 Sep 2014, 01:40 PM Reply Like
  • varan
    , contributor
    Comments (4045) | Send Message
     
    Author’s reply » Yeah. Getting ugly.

     

    Given that during the period Jan 2003 thru Aug 2014, only 2 months out of 155 had losses of more than 10% and only 7 losses greater than 7.5%, this seems like a very uncharacteristic month for the strategy.
    23 Sep 2014, 02:05 PM Reply Like
  • ikkyu
    , contributor
    Comments (248) | Send Message
     
    Very true! I run with 10% stop loss circuit breaker on my momentum positions, because, as you say, such triggers are rare and have meaning.

     

    The market might be rolling over. I lot of movement all of the sudden.

     

    Cheers.
    23 Sep 2014, 08:41 PM Reply Like
  • ikkyu
    , contributor
    Comments (248) | Send Message
     
    EDV has pulled to the front on the maximum yield rotation strategy. Will see if he holds through to the switch at the end of the month.
    23 Sep 2014, 08:45 PM Reply Like
  • tmdoherty
    , contributor
    Comments (426) | Send Message
     
    Hi TP,

     

    ILF blew through the 50sma and 100 sma like a hot knife through butter. But now it is extremely oversold, has gotten away from its 10sma, and looks ripe for a mean reversion sort of a bounce here.

     

    If so, then the next big question is whether ILF can get back up to the prior peak that it hit about a week ago at $41. That's the critical test in my view, because it ILF cannot make it up that far, then that means it will have formed two lower lows and two lower highs. That would be a very bad sign indeed, and a test of the chart support region around the 200sma would be the next step.

     

    Personally, I thnk the 200sma carries little significance in the case of ILF. If you look at the long-term chart, I think you will see that ever since the bubble implosion of 2008, ILF has been stuck in a wide trading range, and has repeatedly violated the 200sma with impunity, but that never seems to indicate an orderly rolling over of the trend. Conversely, when ILF rallies through the 200sma, that doesn't necessarily mean that everything's wonderful and ILF will just steadily churn upwards. That's just not the nature of post-bubble ILF anymore, which is invariably the case with markets that are unwinding bubbles.

     

    For reference purposes, just look at China, which is pretty classic post-bubble behavior. It is now about 7 years past the peak, and the Shanghai and Shenzhen composites are trading 65% below their peaks.

     

    That market is particularly striking from a chartist/technician's standpoint, because while the underlying economy has been expanding strongly, equities have just disintegrated, show no signs of life now, and in my opinion haven't hit rock bottom and won't equal the previous highs in real value terms for another 20 years at least.

     

    Anyhow, bottom line is that I see an imminent bounce to be very likely, but no buy signals yet.
    24 Sep 2014, 01:25 AM Reply Like
  • extremebanker
    , contributor
    Comments (1721) | Send Message
     
    Paired switching and some other rotation strategies (IVY portfolio) have underperformed the last several years. I believe they have a tendency to underperform in bull markets but make up for it when the bears strike.
    23 Sep 2014, 02:36 PM Reply Like
  • ikkyu
    , contributor
    Comments (248) | Send Message
     
    It is EDV for Global Market Rotation and Max. Yield Rotation for Oct. based on performance only.

     

    Curiously, ETF tools showed SHY for GMR with the 70/30 (return/vola) calculation.

     

    I think Varan is a TLT, rather than a EDV, man.

     

    Cheers from Osaka,

     

    john
    1 Oct 2014, 01:00 AM Reply Like
  • varan
    , contributor
    Comments (4045) | Send Message
     
    Author’s reply » Yes, TLT it is.

     

    Return Aug 1/2014-todate: -12.2% Yuck.
    1 Oct 2014, 01:12 AM Reply Like
  • jeezuz30
    , contributor
    Comments (428) | Send Message
     
    I wonder if the strengthening dollar had much to do with ILF's performance this last month.

     

    At least the EWZ has been getting killed and that's probably the biggest component of ILF. Maybe next time one of these volatile ETFS like ILF or EPP come up as first place it may be better to split it with either EDV or MDY to control the high volatility.
    1 Oct 2014, 12:20 PM Reply Like
  • Korndog
    , contributor
    Comments (20) | Send Message
     
    I think you are right on both accounts. The volatility cuts both ways, and sure wasn't much fun this past month. I'm pretty cash heavy right now, so it wasn't horribly painful, but I still don't like loosing. ILF can be a wild ride and may need to be tamed a little even at the expense of some upside.
    1 Oct 2014, 12:59 PM Reply Like
  • tmdoherty
    , contributor
    Comments (426) | Send Message
     
    Korndog and jeezuz, I am not sure normalizing for volatility will help.

     

    There was discussion here about this maybe 5 or 6 months ago. As I recall, both Varan and Cohn tried normalizing for volatility, and it didn't help returns and probably hurt.

     

    With 20/20 hindsight, it would have helped Sept results, but as you say, that's a double-edged sword, and it will also tend to blunt upside returns.

     

    Terry
    1 Oct 2014, 04:05 PM Reply Like
  • SpanglerDavis
    , contributor
    Comments (877) | Send Message
     
    In my experience, the building blocks are:

     

    Find a switching or cutoff mechanism for downside risk
    Look at pair switching for return when momentum warrants
    Select a frequency of calculation that is appropriate for the universe of ETFs chosen
    Only add those ETFs to the mix that provide meaningful and consistent volatility.
    Too big of a universe results in lower returns
    Erratic ETFs cause lower returns through no follow through on momentum.
    For example, IBB is a tough ETF to include due to its extreme violatility and the eventual mistakes made by the system.
    6 Oct 2014, 10:42 PM Reply Like
  • varan
    , contributor
    Comments (4045) | Send Message
     
    Author’s reply » good summary. thanks.
    6 Oct 2014, 10:57 PM Reply Like
  • varan
    , contributor
    Comments (4045) | Send Message
     
    Author’s reply » Positive return for 10/2014 but lower than SPY.

     

    The selection for November continues to be TLT.

     

    I will follow this till the end of 2015 at least.
    2 Nov 2014, 11:43 AM Reply Like
  • TrickPony
    , contributor
    Comments (26) | Send Message
     
    Thanks for the update
    3 Nov 2014, 02:56 PM Reply Like
  • Activelypassive
    , contributor
    Comments (3) | Send Message
     
    Whats the update for Nov 14? still TLT?
    1 Dec 2014, 11:00 AM Reply Like
  • varan
    , contributor
    Comments (4045) | Send Message
     
    Author’s reply » Yes, still TLT.
    1 Dec 2014, 11:30 AM Reply Like
  • Activelypassive
    , contributor
    Comments (3) | Send Message
     
    Cheers Varan.
    1 Dec 2014, 12:42 PM Reply Like
  • alsobirdman
    , contributor
    Comments (412) | Send Message
     
    Hi Varan,

     

    Just found you while reading Frank Grossman's latest. I want to be sure I understand this correctly;

     

    For the RS-GMR-ETF: IJJ, IEV, ILF, EPP, EEM, TLT - ETF strategy, you are 100% in one of the 6 funds, and that one fund is the one that was the best performer over the previous 3 months? It seems so easy I figure I might be over-thinking it and miss something?

     

    Thank you
    2 Dec 2014, 04:24 PM Reply Like
  • varan
    , contributor
    Comments (4045) | Send Message
     
    Author’s reply » That's correct. On 1st of January (and so on for the first trading day of every month), I find the ETF whose total return (based on the adjusted close data from Yahoo Finance) during the period Oct thru December of the prior year.

     

    Starting in January 2015, I will add QQQ and drop ILF, as this improves the year to year volatility of the returns.
    2 Dec 2014, 04:28 PM Reply Like
  • Left Banker
    , contributor
    Comments (2280) | Send Message
     
    Which would mean QQQ for December if you did the change yesterday, correct?
    2 Dec 2014, 04:42 PM Reply Like
  • varan
    , contributor
    Comments (4045) | Send Message
     
    Author’s reply » Yes. That is correct. Thank you for your interest. I will post a detailed note in the next few weeks.
    2 Dec 2014, 04:49 PM Reply Like
  • Left Banker
    , contributor
    Comments (2280) | Send Message
     
    thanks, v. I'll be looking for it.

     

    I've found this exercise interesting. From following several momentum stories late last year I decided to move a bunch of my fixed-income allocation to TLT in the spring for a month, and have had it there ever since. Without having been looking at momentum articles I would never have considered TLT.

     

    Not sure how it stands today, but as of a few days ago TLT had been beating SPY and QQQ soundly YTD.

     

    It got my attention and I've been studying up on momentum strategies.

     

    Final point: I notice a lot of momentum investors do incorporate a volatility component. Haven't seen much use of that here and wonder if you have any thoughts.

     

    Thinking back a few months when this portfolio went to ILF (I've been watching but not actively investing) might that have prevented that tough month?
    2 Dec 2014, 05:09 PM Reply Like
  • varan
    , contributor
    Comments (4045) | Send Message
     
    Author’s reply » I have incorporated volatility only in the risk parity based balanced strategy that I have described in a prior post.

     

    Perhaps some combination of volatility and return would have excluded ILF from the GMR selection. I don't know if that is worth finding out.

     

    Thanks.
    2 Dec 2014, 08:11 PM Reply Like
  • ikkyu
    , contributor
    Comments (248) | Send Message
     
    I have never been able to backtest it, but choosing the momentum fund pick basked on the fund with the highest Sharpe Ratio seems like simple way to include volatility risk.
    3 Dec 2014, 03:36 AM Reply Like
  • TrendXplorer
    , contributor
    Comments (50) | Send Message
     
    To touch base quickly: the charts for GMR with QQQ instead of ILF.
    http://bit.ly/1AvUAxO
    5 Dec 2014, 02:53 PM Reply Like
  • varan
    , contributor
    Comments (4045) | Send Message
     
    Author’s reply » Thank you TrendXplorer.

     

    Nice charts.

     

    With ILF replaced by QQQ:

     

    CAGR 27.15% maxDD 14.6% Sharpe 1.38 Sortino 2.94

     

    Without Replacement

     

    CAGR 26.4% maxDD 17.1% Sharpe 1.21 Sortino 2.41

     

    More importantly, and the results that dictated the modifications, the recent annual returns (the modified GMR results in parentheses)

     

    2012 6.5% (15.6%)
    2013 20.7% (24.2%)
    2014 0% (25.0%)
    5 Dec 2014, 03:05 PM Reply Like
  • tmdoherty
    , contributor
    Comments (426) | Send Message
     
    @Trend:

     

    Very nice JW, thanks!

     

    I notice that rolling returns plunged at the worst possible time (mid- to late-2008), but then again the DD was nothing compared to what most people were experiencing at that time.
    5 Dec 2014, 10:34 PM Reply Like
  • Market Map
    , contributor
    Comments (364) | Send Message
     
    Don't you think that replacing ILF with QQQ puts too much tilt ( combined with IJJ ) in the whole thing towards a U.S. weighting ? There certainly are theories about why Latin America is having problems but, even as the ILF has had a string of deep and discouraging losses and "momentum" failures, sometimes these problems resolve themselves in surprising ways and the ILF could roar back with a string of significant gains. This does seem to happen in these type of systems; a big loss comes through, we get disconcerted and try to rework with the formula, and then miss out on the gains from what the old version would have given us if we were able to "stomach" our disconcertion.

     

    Viewing the breakdown of GMR aggregate historical monthly returns , ILF is still the leader since 2003 here: http://bit.ly/1vYcitL
    5 Dec 2014, 03:45 PM Reply Like
  • varan
    , contributor
    Comments (4045) | Send Message
     
    Author’s reply » I am with you on your basic thesis and the methodology.

     

    I included QQQ mainly for pragmatic reasons - three years of less than mediocre performance is quite a long time.

     

    I will personally use the modified version but continue to track both.

     

    Thanks.
    5 Dec 2014, 04:19 PM Reply Like
  • tmdoherty
    , contributor
    Comments (426) | Send Message
     
    @Market Map:

     

    Hmmm...I would say yes and no.

     

    On one hand, I don't think it matter much how much weight is in what market. Varan (and others) have TAA strategies that begin with baskets of securities that represent sectors within the S&P500, and these can work quite well.

     

    Instead, I think one of the key factors is that the securities in the starting basket are variably correlated/uncorrelated with one another. The ideal situation is where the correlation cyclically varies over a range from -1.00 to +1.00. Look at the 20-day correlations of the QQQ:ILF or IJJ:ILF ratios and compare those to the 20-day correlations of the QQQ:IJJ ratios:

     

    http://bit.ly/1q4ol87

     

    http://bit.ly/1q4olok

     

    http://bit.ly/1q4okkk

     

    I think you will agree that the former two pairs generally tend to vary over a wider range and with a more regular periodicity (or relatively constant cycle length) than the QQQ:IJJ ratio.

     

    This tells me that adding QQQ and ILF to the basket would create a better mix of ETPs than adding QQQ and IJJ, but not for the reasons you suggest.

     

    Why should correlation matter? Because that enhances the probabilities that a momentum-based strategy with look-back periods that are of a reasonable length compared to the cycle length of the varying correlations will detect when relative momentum shifts from one ETP to the other. It doesn't help to have a good strategy to detect when the momentum baton gets passed from one ETF to another if that baton never gets passed, and the ETFs just move in lockstep most of the time.

     

    I am also suggesting that the magnitude of the range of correlations is important as well: the wider the swings, the better. That way, the signal:noise ratio is enhanced, and your strategy has a better chance to detect signal and not be unduly swayed by noise.

     

    Fortunately, the whys and wherefores and geopolitical and macroeconomic inputs that might be causing the shifting correlations and relative momentums are all but irrelevant. The centrally important facts are that they happen, can be detected with reasonable sensitivity/specificity, and can therefore potentially be exploited for profit.

     

    TMD
    5 Dec 2014, 10:56 PM Reply Like
  • TrendXplorer
    , contributor
    Comments (50) | Send Message
     
    Starting ultimo 2002 with a hypothetical $100,000 as initial capital and with IJJ, IEV, ILF, EPP, EEM and TLT as our portfolio, at the end of last August ILF's profit contribution still was at a decent 12%:
    http://bit.ly/15XTlOf

     

    September's severe hit for ILF changed its total contribution to -2%:
    http://bit.ly/15XTlOh
    So in hindsight the portfolio would have done better without ILF at all.

     

    These percentages are taken from each ETF's profit contribution measured in $-dollars compared to the portfolio's total dollar profit (End November: $2.095.000).

     

    While to a certain extent the severity of September's blow to the portfolio remains concealed in ILF's aggregate monthly returns, your trading account would have uncloaked it for sure: a $295,000 setback.
    http://bit.ly/15XTj8X
    (check the last column sorted on loss in $-value)
    7 Dec 2014, 04:33 PM Reply Like
  • SpanglerDavis
    , contributor
    Comments (877) | Send Message
     
    Why replace ILF with QQQ? Just add QQQ to the universe from which you choose. The most important attribute is that you only select one investment per time period. The issue then becomes do you want 100% of your assets in Latin America or the 100 largest US companies? If you want EEM or ILF in the universe then the holdings should increase to either 2 with some form of volatility weighting or to a 2 ETF portfolio where a certain percentage is allocated to US equities with EEM or ILF as a satellite holding when appropriate.
    5 Dec 2014, 06:16 PM Reply Like
  • varan
    , contributor
    Comments (4045) | Send Message
     
    Author’s reply » Good idea. I will take a look.

     

    Thanks.
    5 Dec 2014, 06:21 PM Reply Like
  • varan
    , contributor
    Comments (4045) | Send Message
     
    Author’s reply » During 12/2014, TLT (the original Simple GMR selection) returned 3.8%, whereas QQQ (the selection for the same basket but with ILF replaced by QQQ) lost 1.1%.

     

    These would have been the yearly returns for 2014:

     

    Simple GMR: 3.6%
    Simple GMR with QQQ: 23%.

     

    2003-2014 Performance

     

    Simple GMR: 26.8% Worst Year: 2014 (3.6%)
    Sharpe 1.24 MaxDD 17.1%

     

    Simple GMR with QQQ: 27% Worst Year: 2004 (13.6%)
    Sharpe 1.38 MaxDD 14.6%

     

    For 1/2015, the selection for both is TLT (aargh!).
    2 Jan, 01:39 PM Reply Like
  • Stanford Chemist
    , contributor
    Comments (713) | Send Message
     
    Thanks for the continual updates Varan. Interesting that QQQ gives such a big improvement over ILF.
    2 Jan, 01:49 PM Reply Like
  • extremebanker
    , contributor
    Comments (1721) | Send Message
     
    I have found broad indexes seem to work better than using sector indexes or region or country funds. In other words, EFA and EEM work better than using EPP,ILF and IEV.

     

    Much more volatility with funds that are too specific.
    2 Jan, 01:56 PM Reply Like
  • Activelypassive
    , contributor
    Comments (3) | Send Message
     
    Thanks Varan for all your updates..
    5 Jan, 07:57 AM Reply Like
  • speranz1
    , contributor
    Comments (16) | Send Message
     
    Thank you to Varan for following this strategy as well as sharing several innovative allocation strategies. Most, if not all, have been well thought out and insightful.

     

    One question I'd like to raise: when evaluating which funds to use in our "basket" or monthly allocation, to what degree do we test whether we are backtest overfitting? I know this is a topic that Varan and others have touched on in the past, but increasingly worries me when implementing this strategy.

     

    To me, and this is purely subjective, the substitution of QQQ for ILF seems to violate the investment thesis, or at least raises a red flag that I'd attempt to resolve before investing. The reason mid-cap US equities was used in the original GMR was to provide an allocation to US equity that had a relative volatility in line with the global equity funds. Using QQQ, at least on the surface, seems to violate that reasoning.

     

    Additionally, in my mind this strategy works to some degree due to global supply and demand forces. Momentum in and of itself is not an investment hypothesis, but relative momentum within a basket of global equities (plus the often forgotten TLT) due to long and short term swings in demand for equities in a given global market is. Removing ILF for QQQ would violate or at least challenge such a thought process by narrowing the global exposure.

     

    I guess what my question boils down to, is how do we evaluate whether the substitution of an asset is merely overfitting the backtest? And depending on how we resolve that question, how do we evaluate whether Grossman's strategy does the same?
    12 Jan, 04:29 PM Reply Like
  • varan
    , contributor
    Comments (4045) | Send Message
     
    Author’s reply » I share your concern in general.

     

    Although the modification was prompted by mundane pragmatic considerations, it is not entirely without analytical basis.

     

    Inasmuch as EEM does contain some exposure to Latin America, the ILF could be a bit redundant in any case.

     

    This is borne out by the fact that if you look at the correlation matrix of the basket, the largest (non-diagonal) element is the cross-correlation between EEM and ILF.

     

    In addition the smallest off diagonal elements - when you include QQQ - in the correlation matrix are the cross-correlations between QQQ and EPP and EEM.

     

    I did not do any search for the best replacement, and just tried QQQ, and, serendipitously, it proved to be quite good.

     

    I know that this is not as satisfactory an answer as the issue demands, but probably suffices as the first step.
    12 Jan, 05:35 PM Reply Like
  • jeezuz30
    , contributor
    Comments (428) | Send Message
     
    Are you still using 3 months for your look back period? Is this still the optimal timeframe or have you made any adjustments?

     

    Thanks
    18 Jan, 05:00 PM Reply Like
  • varan
    , contributor
    Comments (4045) | Send Message
     
    Author’s reply » Just three months. It may well be that some weird number of days like, say, 53 or 41, will provide a better return for the past data, but I take all such optimized strategies with a huge grain of salt as they may not be very robust. Most of the time I only test for three and twelve months of lookback for annual strategies, and only three months for the ones with shorter holding periods.

     

    Thanks.
    18 Jan, 05:11 PM Reply Like
  • jeezuz30
    , contributor
    Comments (428) | Send Message
     
    Thanks for the reply, good to see that you can remain with a strategy for quite some time without the need to constantly optimize.
    19 Jan, 02:56 PM Reply Like
  • varan
    , contributor
    Comments (4045) | Send Message
     
    Author’s reply » As much as I would like to get out of TLT, its returns continue to dominate those of other assets. It has, however, saved me from some minor losses during January (TLT returned 8.6%, and January returns of others range from -2.7% to 1%).

     

    The last three months' returns for the top three ETfs in both baskets:

     

    TLT 16%
    QQQ .1%
    IJJ -.4%

     

    So if GMR is to be followed mechanically, no change is required for the month of February for either of the strategies. Common sense and simple arithmetic suggest that one of these months TLT will underperform and lead to a loss, but when I do not know.
    1 Feb, 01:04 PM Reply Like
  • Left Banker
    , contributor
    Comments (2280) | Send Message
     
    Not to be too flip, but a 7.6 to 11.3 percentage point differential in a month's time hardly fits my definition of minor. Even more so 15+ percentage point differential over the next best two for 3 months.

     

    Agree that it seems inevitable that TLT will drop, but I've been telling myself that for months now. Right now, I don't share your reluctance to stay that course. Isn't that what a momentum strategy dictates? Anyway, it's going to have to crash a lot -- and a lot more than I think it's slated to given the macro factors that are driving its rise -- to make me regret my willingness to keep on keepin' on.

     

    At worst I expect it to flatten. The rest of the world will continue to buy LT treasuries for one good reason: there's no place else to go. Look at what happened after it dropped on Thursday. Came roaring back with an opening gap that not only sucked up that entire loss but set a new high yet again.

     

    Of course all of this might well mean it's time to bail. After all, one of my commenters compared my views to getting tips from your shoeshine boy.
    1 Feb, 07:47 PM Reply Like
  • varan
    , contributor
    Comments (4045) | Send Message
     
    Author’s reply » Thanks Leftbanker.

     

    I think I did not communicate well. I agree with your point. I was just trying to make sure that anyone who follows this understands the uncertainties, with which I am myself completely at ease.
    1 Feb, 08:11 PM Reply Like
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