With last week's severe market decline, several international stock indices are now more than 20% off their 2011 peaks, a level that most commentators consider bear market territory. While the S&P 500 and most of our domestic stock indices aren't officially in bear market territory yet, the current market reaction feels like it is far more serious than just a garden variety market correction.
The news flow is eerily reminiscent of 2007-08 as the world was coming to grips with the severity of the crisis that gripped the global financial system. If so, we can expect more volatility in the months ahead, including both tradeable rallies and shortable declines. Again, this is no time to be a BUY-and-HOLD (BUY-and-HOPE) investor.
This essay by Comstock Partners sums up the bearish thesis quite well.
"What is currently happening in the market and the economy was predictable and is following the sequence we have long expected. Households accumulated enormous debts in the past decade, leading to the credit crisis and recession of 2007-2009. The government stepped in with massive monetary ease and fiscal expansion that produced only a weak recovery and a vast increase in government debt. The market erroneously assumed that the recovery would follow the pattern of typical post-war expansions and rallied strongly from the early 2009 bottom to the recent highs.
A similar pattern developed in Europe where sovereign debt of the weaker EU members has become a serious problem that EU leaders have been unable to solve. Now we are undergoing the aftershocks of the crisis.
As we have repeatedly stated, crisis recoveries are characterized by short sub-par recoveries and numerous recessions as household debt burdens dampen consumer spending for long periods. We did see the short sub-par recovery and now it seems to be ending at a time when the Fed has already used its best weapons and fiscal policy is due to become more restrictive. First half GDP was revised down sharply. Housing has continued to weaken. Consumer spending has been sluggish. Initial jobless claims for the latest period jumped back over 400,000. The ECRI leading index has declined to 127.9 from its April peak of 131.1.
Even more shocking was the plunge in the August Philly Fed Index to minus 30.7 from 3.2 in July. The drop was the weakest since October 2008. In addition, the August University of Michigan Consumer Confidence Index dropped to 54.9, lower than any level during the recession and the lowest in 31 years. These are the types of readings seen only in recessions. Although the Fed only recently lowered its economic outlook for the second half of this year and 2012 these projections already seem outdated. Today the New York Fed lowered its outlook while numerous brokerage firms and banks have belatedly been scrambling to cut their forecasts as well.
If anything the situation looks even worse in Europe. Germany reported second quarter GDP growth of 0.1% and growth in France was zero. Moreover European banks with exposure to PIIGS debt have been turning to the ECB for emergency loans. Today the ECB reported that one bank (not named) has borrowed 500 million Euros a day for seven days.
The remaining areas of the world cannot stop global GDP growth from shrinking. Japan is in a recession. China is still tightening to dampen inflation. China as well as the other emerging nations are export-driven economies that depend heavily on American and European consumers.
We, therefore, believe that the market has now entered a major downtrend. It is a mistake to dismiss the slide we've seen to date as mindless and devoid of fundamentals as many strategists maintain. These are not just scary headlines----they are scary fundamentals. As usual, there will undoubtedly be some more sharp rallies that will be interpreted as new bull markets. In our view, however, the bear market has only begun, and has a long way to go."
Saturday, August 20, 2011
Returns for week ending 8/19/11
Returns for the past week:
Model portfolio: -3.46%
Actual managed account: 0.0%
NOTE:
While the model portfolio moved to a 50% invested / 50% cash allocation on 8/1, I have moved my managed accounts to 100% cash until the return vs. risk profile is improved. This accounts for the difference between model (hypothetical) and actual returns.
Saturday, August 13, 2011
Returns for week ending 8/12/11
Returns for the past week:
Model portfolio: +0.71%
Actual managed account: 0.0%
NOTE: The DecisionPoint timing model threw a NEUTRAL signal on 7/29. While the model portfolio has moved to a 50% invested / 50% cash allocation, I have moved my actual managed accounts to 100% cash until the return vs. risk profile is improved. This accounts for the difference between model (hypothetical) and actual returns.
Sunday, August 7, 2011
Where are we? Comparing 3 secular bear markets...
Click to enlarge chart
Another interesting commentary and chart from Doug Short, implying that our current secular bear market may have a ways yet to run...
Doug Short, "It's time again for the weekend update of our "Real" Mega-Bears, an inflation-adjusted overlay of three secular bear markets. It aligns the current S&P 500 from the top of the Tech Bubble in March 2000, the Dow in of 1929, and the Nikkei 225 from its 1989 bubble high.
The chart below is consistent with my preference for real (inflation-adjusted) analysis of long-term market behavior. The nominal all-time high in the index occurred in October 2007, but when we adjust for inflation, the "real" all-time high for the S&P 500 occurred in March 2000."
What does a 4% down day mean re: Market Condition
Interesting commentary from Doug Short, saying that the -4%+ down day last Thursday indicates that the bear market has resumed.
Doug Short, "My tentative conclusion is that, at least since the onset of the 21st Century, declines in excess of 4% happen in cyclical bear market declines. The one outlier during this time frame was a 4.28% decline on April 20 2009, about six weeks after the 2009 low. So, if you're looking for a glimmer of hope, there is one 21st Century precedent for 4% plus down day in a cyclical bull market. But the overall perspective is not encouraging. "
Note that in the 2000-03 bear market, A couple of the 4% decline days punctuated the market trend's important reversal points, providing a leading indicator of trade-able counter-trend rallies lasting multiple weeks. This is quite different from the 2008-09 bear market, where the 4% decline days were mostly followed by more selling, perpetuating the waterfall decline without a pause for a counter-trend rally. I believe the difference between the two bear markets was that the first was due to a normal business cycle recession whereas the last was due to a financial crisis.
click chart to enlarge
Returns for week ending 8/5/11
Returns for the past week:
Model portfolio: -4.6%
Actual managed account: -0.7%
NOTE: As noted here last week, the DecisionPoint timing model threw a NEUTRAL signal on 7/29. This proved to be a timely signal, enabling our portfolio to neatly side step last week's waterfall decline.
While the model portfolio shifted to a 50% invested / 50% cash allocation on Monday, as noted here, I moved my managed accounts to 100% cash until the risk vs. reward improves. That accounts for the variance between model returns and actual returns shown above.
Investor sentiment is currently extremely negative (extreme FEAR), pushing stocks to lower prices where return vs. risk is vastly improved. It is useful to think of investor sentiment as a pendulum, swinging from one etreme to another over a period of weeks and months. Once FEAR measures begin to show that FEAR is dissipating, I intend to invest up to 50% of my funds in the model portfolio stocks while awaiting a fresh BUY signal from the DecisionPoint timing model.
Saturday, July 30, 2011
comment re: DecisionPoint timing model
DecisionPoint recently commented on their market timing model and its performance over various time frames. Also commented on what the recent "whipsaw" signals might mean re: current market conditions. I chose DecisionPoint to provide my market timing model because of its long term track record and its consistent, math driven approach. Enjoy.
"2010 TIMER DIGEST RANKINGS FOR DECISION POINT
#16 Intermediate-Term Stocks (52-Weeks) (TD Index 105.07 Vs. SPX 112.78)
#6 Intermediate-Term Stocks (3 Years) (TD Index 152.31 Vs. SPX 85.65)
#7 Intermediate-Term Stocks (5 Years) (TD Index 156.44 Vs. SPX 100.75)
#10 Intermediate-Term Stocks (10 Years) (TD Index 135.84 Vs. SPX 95.26)
#26 Long-Term Timer (2 Years) Stocks (TD Index 91.9 Vs. SPX 139.23)
#8 Long-Term Timer (3 Years) Stocks (TD Index 124.30 Vs. SPX 85.65)
#4 Long-Term Timer (5 Years) Stocks (TD Index 146.21 Vs. SPX 100.75)
#4 Long-Term Timer (10 Years) Stocks (TD Index 177.64 Vs. SPX 95.26)
As you can see, 2010 was an unusually bad year for our intermediate-term (52-week) and long-term (2-year) timing. But if you look at the longer periods shown, you can see we have a very good record that is consistent over time. As usual, past performance does not guarantee future results.
As for politics dominating the market, just remember "it's always somethin'." Our models are focused solely on price, and nothing else. Whatever is going on in the world is reflected in prices. Our timing models aim at a specific time frame and respond to price movement in a predetermined way. The models are not always correct, but they usually stick with the longer-term trend and limit losses/drawdowns.
Recently we have begun to experience whipsaw signals, which I believe are associated with long-term topping activity. I recommend that you read the documentation on the models so that you have an understanding of why a signal changes. This would allow you to use discretion as to how you should respond to any signal."
"2010 TIMER DIGEST RANKINGS FOR DECISION POINT
#16 Intermediate-Term Stocks (52-Weeks) (TD Index 105.07 Vs. SPX 112.78)
#6 Intermediate-Term Stocks (3 Years) (TD Index 152.31 Vs. SPX 85.65)
#7 Intermediate-Term Stocks (5 Years) (TD Index 156.44 Vs. SPX 100.75)
#10 Intermediate-Term Stocks (10 Years) (TD Index 135.84 Vs. SPX 95.26)
#26 Long-Term Timer (2 Years) Stocks (TD Index 91.9 Vs. SPX 139.23)
#8 Long-Term Timer (3 Years) Stocks (TD Index 124.30 Vs. SPX 85.65)
#4 Long-Term Timer (5 Years) Stocks (TD Index 146.21 Vs. SPX 100.75)
#4 Long-Term Timer (10 Years) Stocks (TD Index 177.64 Vs. SPX 95.26)
As you can see, 2010 was an unusually bad year for our intermediate-term (52-week) and long-term (2-year) timing. But if you look at the longer periods shown, you can see we have a very good record that is consistent over time. As usual, past performance does not guarantee future results.
As for politics dominating the market, just remember "it's always somethin'." Our models are focused solely on price, and nothing else. Whatever is going on in the world is reflected in prices. Our timing models aim at a specific time frame and respond to price movement in a predetermined way. The models are not always correct, but they usually stick with the longer-term trend and limit losses/drawdowns.
Recently we have begun to experience whipsaw signals, which I believe are associated with long-term topping activity. I recommend that you read the documentation on the models so that you have an understanding of why a signal changes. This would allow you to use discretion as to how you should respond to any signal."
Returns for week ending 7/29/11
Returns for the past week:
Model portfolio: -8.1%
Actual managed account: -7.6%
NOTE: The DecisionPoint timing model switched to a NEUTRAL signal on Friday.
While the model portfolio moves to a 50% invested / 50% cash allocation, I intend to move my managed accounts to ALL cash until another Window of Opportunity (WOO) opens up giving us an improved return vs. risk scenario.
The model portfolio's return was -8.6% for the 4-week BUY period just ended. Most of that loss came last week, the final week of the BUY period. This loss nearly equals the maximum interim loss of -8.8% for any of the 16 previous BUY periods since the model's inception. (see chart)
In addition to the very short 4-week duration of the most recent BUY signal, there are other signs that the Market may be in the process of putting in a long term top. This would lead the Market into a correction or possibly even a bear market. This is no time to be a BUY-and-HOLD (BUY-and-HOPE) investor.
Saturday, July 23, 2011
Monday, July 18, 2011
Friday, July 8, 2011
Returns for week ending 7/8/11
Returns for the past week:
Model portfolio: +2.1%
Actual managed account: +1.6%
Value of $10,000 invested in model portfolio at inception in 2003: $294,593
The gap between the actual managed account's returns and the model portfolio's hypothetical returns is mainly due to tracking error. Because the hypothetical returns are based on Friday's closing prices, while the actual managed account executed its trades early Monday morning after the market had already made some gains, the actual managed account was able to capture about 75% of the hypothetical gains this week.
The Window of Opportunity (WOO) is still open. This remains an opportune time to put capital to work in the model portfolio if you haven't already done so. History shows that last week's BUY signal ushers in a short period where the probability of significant gains is high, while the risk of a significant periodic loss is lower than usual.
Sunday, July 3, 2011
Returns for week ending 7/1/11
Returns for the past week:
Model portfolio: +1.2%
Actual managed account: +0.4%
Value of $10,000 invested in model portfolio at inception in 2003: $277,131
Note: The model portfolio and my managed accounts were holding a high amount of cash going into this week, while awaiting a fresh DecisionPoint BUY signal. This explains the lower-than-market returns shown above.
The DecisionPoint timing model threw a fresh BUY signal on Friday, indicating favorable market conditions for holding stocks. The model portfolio's target allocation for a new BUY period is 100% invested. History shows that a DecisionPoint BUY signal marks an opportune time to put capital to work and invest in the model portfolio ...providing an improved return vs. risk. While a BUY signal is no guarantee of gains, it DOES historically indicate a reduced risk of a significant periodic loss before the model portoflio goes on to make a new equity high water mark.
In my managed accounts, I will now be ahering closely to the target allocations.
Saturday, June 25, 2011
Returns for week ending 6/24/11
Returns for the past week:
Model portfolio: +0.9%
Actual managed account: +0.4%
Value of $10,000 invested in model portfolio at inception in 2003: $273,728
Note: It's time to be prepared. History shows that, on average, the stock market provides just one or two opportunities each year to buy stocks at relatively depressed prices. These Windows Of Opportunity (WOO) give the astute investor an opportunity to put capital to work in the best stocks just as a new intermediate term rally begins, and then ride the wave as institutional investors ("Big Money") pour THEIR funds into the same stocks, driving up the price further.
The model's internal metrics are suggesting we are nearing one of these times. It pays to be patient. ...and then seize the WOO!
Fortunately we don't need to guess when the time is right. Our model will provide the necessary BUY signal.
Saturday, June 18, 2011
Click chart to enlarge
The above chart shows the model portfolio's return for each of the "BUY-NEUTRAL-SELL" signal periods since inception. The Strategic Growth Model takes its BUY-NEUTRAL-SELL timing signals from the DecisionPoint Thrust/Trend Model.
The most recent BUY period ended the week of 6/10/11. The model portfolio returned +28% for the 39 weeks of the BUY period, triggered 39 weeks earlier. This is equal to a 37% annualized rate of return.
The hypothetical returns reflect the performance of the new, improved Strategic Growth Model portfolio as described here a few weeks ago. Actual performance will vary.
The chart shows that the model portfolio declined -15% from its recent peak to the end of the BUY period. This is within the range we've seen for interim losses during the final phase of previous BUY periods. As noted here, the end of a BUY period is the riskiest point in the cycle as far as incurring an interim loss. For this reason, I've advised here that I'm holding more cash in my actual managed accounts than the model portfolio. This has proven to help protect capital that will be put to use during the next BUY period.
Since 4/29 peak, returns:
Model porfolio: -14.8%
Actual managed account: -8.2%
Now that the market has pulled back significantly and is well off its recent highs, the risk vs. return is much improved for investing fresh capital. Upon receiving the next BUY signal from the DecisionPoint Thrust / Trend Model, I intend to invest according to the target allocations shown.
Friday, June 10, 2011
Returns for week ending 6/10/11
Returns for the past week:
Model portfolio: -1.7%
Actual managed account: -1.0%
Value of $10,000 invested in model portfolio at inception in 2003: $272,596
The DecisionPoint.com Thrust / Trend Model is now on a NEUTRAL signal as of today. The TTM drives the model portfolio's target allocations. Upon receiving a NEUTRAL signal, the model portfolio halves its position size from $10,000 to $5,000, raising 50% cash while we wait for a fresh TTM BUY signal.
Since the model portfolio currently holds only 4 stocks (above) the model portfolio allocation is now at 80% cash / 20% stocks. As mentioned before, I continue to hold an even greater percentage of cash in my managed accounts while awaiting a fresh BUY signal. This has helped to preserve capital while we seek a better return vs. risk opportunity to put our capital to work.
Saturday, June 4, 2011
Returns for week ending 6/3/11
Returns for the past week:
"New" model portfolio: -1.6%
Actual managed account: -0.5%
Value of $10,000 invested in model portfolio at inception in 2003: $277,344
I continue to hold significantly more cash in my actual managed accounts than in the model portfolio shown here as we await a fresh T/TM BUY signal. This accounts for the difference in performance between the model portfolio and the actual managed account.
Saturday, May 28, 2011
Returns for week ending 5/27/11
Returns for the past week:
"New" model portfolio: -1.3%
Actual managed account: -0.6%
Value of $10,000 invested in model portfolio at inception in 2003: $281,711
Note: In my managed accounts I continue to hold more cash than the model portfolio. I expect to continue with a higher cash balance for the duration of this intermediate cycle. e.g. until the Thrust / Trend Model throws a "fresh" BUY cycle.
Saturday, May 21, 2011
Sunday, May 15, 2011
Returns for week ending 5/13/11
Returns for the past week:
Model portfolio: -3.2%
Managed account (actual): -1.9%
Value of $10,000 invested in model portfolio at inception in 2003: $289,727
Note: In my managed accounts I continue to hold more cash than the model portfolio. I expect to continue with a higher cash balance for the duration of this intermediate cycle. e.g. until the Thrust / Trend Model throws a "fresh" BUY cycle.
Saturday, May 7, 2011
Returns for week ending 5/6/11
Returns for the past week:
"New" model portfolio: -6.03%
Actual managed account: -3.65%
Value of $10,000 invested in model portfolio at inception in 2003: $299,129
Note: "Actual" return varies from the model's return because I'm maintaining a higher cash position (approximately 50%) until the Thrust / Trend Model (TTM) gives us a fresh "BUY" signal.
As I mentioned last week, I'm doing this because of risk vs. reward. While the "new and improved" model has better returns than before, it also has higher weekly volatility, as we've seen just this past week. Because of this, it's now much more important to time the investment of fresh funds during times where we have a fresh BUY signal from the TTM.
As I noted last week, the market trend has become quite extended above its trend line since the current BUY signal was triggered in September, 2010. The risk of a "normal" market sell-off giving us a significant interim loss in our portfolio is much greater now than if the TTM had just thrown us a fresh BUY signal. In my judgement, this is not a good point in the intermediate term cycle to increase our risk exposure.
Saturday, April 30, 2011
Changes to the Strategic Growth Model, continued
This chart shows the Strategic Growth Model portfolio returns for each of the Thrust / Trend Model (TTM) signal periods since the model's inception in 2003, including the four interim losses that exceed -4%. It's an interesting visualization of the data shown in the earlier table.
This picture clearly shows the benefits of putting 100% of funds to work in the best stocks at the right time, and avoiding stocks all together when it's NOT the right time.
It also clearly shows that the model portfolio's biggest interim losses tend to come when market's up trend has been extended for several weeks beyond a fresh BUY signal.
Changes to the Strategic Growth Model, continued
Managing risk vs. reward...
There are two primary success factors required for the model to profitably align the portfolio's capital in accordance with prevailing market conditions... The model must 1) CONSISTENTLY determine the prevailing market conditions (BUY-NEUTRAL-SELL) and 2) allocate the portfolio's capital (long-short-cash) to take best advantage of the potential rewards while managing the risks associated with the various market conditions.
The Strategic Growth Model relies on the Thrust / Trend Model (TTM) by DecisionPoint.com to signal the various market conditions. The TTM is purely mathematical, which is ideal for our purposes because this removes the possibility that the model's allocations will be affected by human emotions, which tend to be wrong at the most inopportune times.
The table shows the model returns for the 31 TTM signal periods (BUY-NEUTRAL-SELL) since inception in 2003. It also shows the maximum interim loss for each signal period. You'll note that in sixteen "BUY" periods, the maximum interim loss exceeded -4.0% only four times and the maximum interim loss for ANY BUY period was -8.8%. This shows that if the model were to invest 100% of its funds in the selected stocks upon receiving a fresh BUY signal, it's infrequent that the portfolio would weather an intermim loss of even -4% before going on to make a new high water mark, and it would be extremely rare that it will ever see an interim loss worse than -9%. This is well within the system's design limits.
Also note that the benchmark S&P 500 index was down during four of the five "SELL" periods, while the model portfolio was able to show gains during three of these periods.
In summary, the Thrust / Trend Model has demonstrated a CONSISTENT ability to keep the model portfolio on the right side of the market at the most critical turning points.
So... if the SGM is using the same stock selection model and the same Thrust / Trend Model as before, what's changed?
What's changed is the model's allocation strategy.
The specific instrument formerly used to hedge our portfolio (TWM) has been shown to put a drag on the portfolio's performance that far exceeds its value as a hedge against risk. There are multiple factors involved including the specific index being used for the hedge (TWM is linked to the Russell 2000 index of small cap stocks) and the "tracking error" associated with a 2x leveraged fund.
During periods of low risk (BUY) the model portfolio will now allocate 100% of its funds to stock positions. During periods of moderate risk (NEUTRAL) the model portfolio will reduce its exposure to stocks and hold 50% of its funds in cash. During period of heightened risk (SELL) it will allocate 50% of funds to a short position in a non-leveraged INVERSE fund and hold the balance in cash. While this allocation strategy introduces a higher amount of weekly volatility, we've already seen that the model's expected maximum interim loss remains well within acceptable limits.
The model portfolio's allocations are now as follows, in accordance with the Thrust/Trend Model's signals:
BUY - 100% long
NEUTRAL - 50% long / 50% cash
SELL - 50% short / 50% cash
Please note that in my managed accounts, I'm currently maintaining a higher cash position than the model portfolio (approximately 50%), and will continue to do so until the Thrust / Trend Model gives us a fresh "BUY" signal.
I'm doing this because of risk vs. reward. The market trend has become quite extended above its trend line since the current BUY signal was triggered in September, 2010. The risk of a "normal" market sell-off giving us a significant interim loss in our portfolio is much greater now than if the TTM had just thrown us a fresh BUY signal. In my judgement, this is not a good point in the cycle to increase our risk exposure.
Changes to the Strategic Growth Model
As you will recall, the Strategic Growth Model (SGM) is designed to maximize returns over the full market cycle (Bull-Bear-Bull or Peak-to-Peak), and is comprised of two main elements... 1) Select stocks that are expected to outperform the market, and 2) Manage risk vs. reward by aligning capital (long vs. short) with prevailing market conditions. Rather than attempt to "predict" where the market may go in the future, the SGM uses a mechanical Thrust/Trend Model (TTM) by DecisionPoint.com to determine prevailing market conditions. It then allocates capital according to the risk vs. reward profile associated with where the market is within the context of its full cycle.
re: #1) Stock Selection... Except for a 12 month period immediately following the historic market decline of 2007-09, the stock selection algorithm has performed exceedingly well since the model's inception in 2003. So the model portfolio will continue to use the same stock selection algorithm as before. The chart's "SGM long portfolio" shows that the stocks selected by the Strategic Growth Model have outperformed the benchmark S&P 500 index by nearly 3:1 for the 12 months ending 4/22.
re: #2) Managing risk vs. reward... We've seen that the stocks greatly outperformed the benchmark index over the past 12 months, yet we know that the hedged portfolio has failed to capture a significant portion of those gains. This isn't acceptable. There needs to be a better way to manage risk without allowing the hedge to put such a drag on the portfolio's peformance. This is where the improvements are focused.
Monday, April 25, 2011
The new and improved Strategic Growth Model
This chart shows the hypothetical performance of the new and improved Strategic Growth Model portfolio, since inception in May 2003 through April 22, 2011, including its performance during the different phases of the intermediate cycle (BUY-NEUTRAL-SELL).The "old" model is shown for comparison, as is a 100% hedged model with no market timing, and the benchmark S&P 500 index.
The new model uses the crucial pillars of the retired model... the exact same stock selection criteria and the same timing model. The only change is in the way the timing model drives the portfolio's allocations to stocks, cash and inverse funds in alignment with prevailing market conditions.
The result is a model portfolio that has far greater weekly returns, more than compensating for an increase in its weekly volatility. It is largely uncorrelated with the market, even showing gains during the bear market of 2007-09. As I'll explain in another post, the timing model also greatly assists in managing the risk of a significant interim loss before the portfolio goes on to attain a new high water mark.
Enough for now.
Sunday, April 24, 2011
Note from Steve
While the model portfolio's "full cycle" performance since the market top in October 2007 is impressive (+63% vs -17% for the S&P 500), its performance since the historic market bottom (Spring 2009) has significantly lagged the market, which has been extremely frustrating. In this note, I'll pass along some findings from my recent post performance analysis, and explain some changes I'll be making to the model portolio to hopefully improve its overall performance going forward.First, I'm reassured from my analysis that the model is again showing that it has the ability to consistently select stocks that will outperform the market. Consider the chart, which shows the "stock only" performance (no hedge) in my ACTUAL trading account for the 12 months ending April 22, 2011. As you can see, the stocks selected for the model portfolio have gained 42.5% while the S&P 500 has gained 11% over the same 12 month period, nearly a 4:1 advantage. These "excess returns" are consistent with the model portfolio's performance since inception in 2003.
The exception was the 12 month period immediately following bottom made in Spring 2009, where the stocks selected by the model significantly underperformed the benchmark index. The model was simply out-of-phase with the market during this period. Why? ...because the model selects growth stocks that are expected to outperform the market in a "normal" rally where money chases growth, whereas the 2009-2010 rally period was led by a bounce-back in large financial stocks that had been severely punished as the financial system unraveled. The model simply isn't designed to select down-trodden stocks... rather it selects high performing growth All-Stars, which happened to underperform the broader market during the 12 month period ending April 2010. This was a highly unusual period following a historic panic fueled decline, and now that money is again chasing growth, our model stocks are out performing the benchmark index.
Going forward you'll see some changes. First, I'm removing the hedge (TWM) from the model portfolio. Even without the hedge the model is uncorrelated with the stock market. e.g. the model has shown to have less than a 30% correlation with the market since inception, which is about as good as it gets. The portfolio's allocations will range from "100% long" to "50% short" depending on market conditions.
To drive the portfolio's long/short allocation, I'll continue to use the same third party timing model I've been using for years... the DecisionPoint Thrust / Trend Model (TTM). Google it if you'd like a detailed description. I've analyzed dozens of market timing algorithms and this is by far the BEST I've ever seen. Importantly, it enabled us to neatly side step the severe market decline in 2008-09 and also correctly got us on the right side of the market in early 2009 as the market began to rise from the ashes.
The TTM gives us three types of intermediate term signals which will drive the allocations:
BUY - 100% long
NEUTRAL - 50% long, 50% cash
SELL - 50% short
Going forward, I'll continue to post the hypothetical "Model Portfolio" stock selections and allocations, and I'll begin posting the ACTUAL weekly performance in my trading account rather than hypothetical model portfolio returns. This will make it easier to track your performance against what is actually achievable rather than what is theoretically achievable. You should be seeing less tracking error as a result.
Enough for now.
Saturday, April 23, 2011
Monday, April 18, 2011
Sunday, April 10, 2011
Saturday, April 2, 2011
Sunday, March 27, 2011
Sunday, March 13, 2011
Sunday, March 6, 2011
I've been traveling extensively and will post performance data later.
Since May of last year, the model stocks have greatly outperformed the S&P 500 by approximately 2 to 1. However the hedge against the small cap stocks (TWM) has negated that gain. As a result, at least one of our investors have removed a portion of the hedge by carrying a smaller weighting of TWM resulting in a portfolio that is approximately 2/3 model stocks and 1/3 TWM all the time.
I have begun doing the same for my managed portfolios. At some point I will re-run the model since inception using this allocation and post the results. Until then I will continue posting the results for the model portfolio as shown.
Monday, February 21, 2011
Monday, February 14, 2011
Monday, February 7, 2011
Saturday, January 29, 2011
Monday, January 24, 2011
Saturday, January 15, 2011
Sunday, January 9, 2011
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