First up, IndexUniverse is reporting that Claymore filed for an ETF that would own single country ETFs selected, presumably, in a top down process overseen by Art Laffer's company. Claymore already has one of these, sort of, with the Claymore Zachs Country Rotation Fund (CRO) but it uses individual stocks to build the country weights. I suppose the Laffer idea could be interesting in the context here of late that going with a broad-based fund heavy in Japan and big Western Europe may not be a great way to capture foreign.
The one thing is that I seem to recall is Laffer having a little trouble seeing the worst financial crisis since the great depression ahead of time. Do I have that right? If so is he the best person to make macro calls on individual countries?
There was another comment from Sunday's post that I wanted to reply to. The reader says that any professional attempt to recreate the permanent portfolio would lag the pure strategy by at least the management fee unless the manager took "excessive" risk. Excessive could be strictly thought of as doing anything beyond the specifics of the strategy or a little more loosely. A decision to shorten or lengthen bond maturity could add some return as could some sort of decision about foreign exposure for the equity portion. By strict definition that is excessive risk but in the context of trying to learn from the concept it seems like fair game.
Bespoke Investment Group put out a note to subscribers about the impending crossover of the 50 DMA above the 200 DMA. According to their data the declining 200 DMA is not necessarily a negative here, in fact they say that the average return in the six months following a crossover the average gain has been 6.17%. They report 11 instances of a crossover while the 200 DMA was declining; after the first three the market declined each time but in the eight times since it has gone up.
This study contributes to the idea that bull markets start quietly and are met with skepticism. How bullish are you? I'm not bullish but I did increase exposure a couple of weeks ago.
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29 comments:
I dunno about other people, but it may be a long time before I feel bullish again. Not that I'm a perma-bear. But my usual sunny outlook might be edging a bit in that direction.
Roger,
One of your readers asked me to do some SMA crossover testing. If I may plug some research, I posted my results today. Let me be subtle and just say, I think the crossover system stinks and should be discarded from the mind.
I'm not smarter than the market and I'm certainly not smarter than all the learned seers (including RR) whose posts I read. I simply let the momentum tell me what to do, and it's telling me to get longer and take more risk. Other markets have even stonger flow and are quite ahead of the $SPX in signaling that it's (been) time to get aboard. Scoff if you will, but Cramer is right--there's always a bull market somewhere.
While I appreciate the nuances of slope and lighter volume and whether that means demand for stocks is healthy (I don't think it is), you'll be called out on strikes, thinking that knuckleball is going to be out of the strike zone.
I guess that means I'm quite bullish, but I think such labels and academic debate will only serve to make investors buy higher and sell lower, once again.
"Muse not which way the pen to hold...luck hates the slow and loves the bold." (James Russell Lowell)
Sorry, I just got back from the dentist. Must be the laughing gas.
Is it a rally or is it a bull market? I do not know, but I think it will continue as long as most people think it will not.
We could even get another buying spree after this pull back. There could be a rush to get back in to equities before they get away. Longer term things are difficult to predict.
Laffer has made some bad calls IIRC but, perhaps more to the point, contrary evidence does not appear to cause him to waver in his beliefs in the slightest. Based on his published commentary at least, his grasp of history and macroeconomics seem rather poor, but he does appear to have attracted an audience who find his opinions agreeable so I assume that is the market Claymore is targeting.
As far as moving average crossover system go I think they work okay as a heuristic, as a means to visualize trends and momentum in preparation for strategic re-allocations for example, but as a mechanical trading system I've never heard of one that worked reliably. It may irritate Roger a little here since I'm going to go back to Harry Browne but his take on what he called the “impossible dream” is worth sharing in this regard (IMHO of course):
Efforts to understand and control the apparent randomness of financial events often follow a predictable pattern. Whether it's trading systems, numerical projections, cycle theories, most rules of technical analysis, or whatever:
1. Grain of Truth: A fantasy is usually founded on a principle that makes common sense as a generality - an observation about life or the investment markets that seems self evident when called to your attention.
2. Over the Edge: This principle is then stretched beyond the limits of its usefulness. Instead of being a reminder it becomes a school of analysis.
3. Scientific Posture: Mathematics and the name of science are invoked.
4. Coronation: The fantasy becomes enthroned. The market pattern that now and then seems to hold true becomes a tenet of natural law - it simply happens too often to be coincidence.
5. Sweet Superiority: Those who follow the system, adviser, etc. become the "elite". No matter how many times the plan goes wrong, they must be better off than the poor boobs who are not "with it".
6. Dogma: In fact, there is never a need to acknowledge that something went wrong because:
a. It really did work but was offset by factors that were stronger in this case.
b. The system is perfect but people practice it imperfectly.
c. This was the exception that proves the rule.
d. It happened exactly as expected; you must have misunderstood the expectation.
e. It was a clear cut, textbook example, of the principle working on an inverted basis.
f. The result is delayed, pressure is building, now the effect will be even more powerful
The study of the paranormal and the para-economic can be fun but in the real world there are principles of logic and truth that can't be overruled; if a theory in economics can not, step by step, be explained in terms of the actions of human beings then the idea is hardly better than a superstition.
V recovery verse the old W recovery...I tend to be contrarian, but I jumped on the old pullback ship with everyone else which obviously has yet to materailize..I may have underestimated the sheer dollar amount on the sidelines that come pouring in at anytime.... Much like you Roger I use the Quant stuff to take the emotion out of it all, but I still feel as if something heartbreaking is going to occur. Reading about Green Shoots and other "not as bad" reporting...I've seen this before, and it doesn't end well. From a logical standpoint, with the 10 yr UST yld. 4% I think there are headwinds acomin' and we may be in the eye of anything from a squal to a hurricane. (the UST relating to housing blah blah same old) BillB - tell us what you really think. ;)
Fyi, a recent Roubini interview in The Atlantic.
@ Bill B
One of your readers asked me to do some SMA crossover testing. If I may plug some research, I posted my results today. Let me be subtle and just say, I think the crossover system stinks and should be discarded from the mind.
That was me I think you are referring to. Thanks for running it.
That said, I’m not sure exactly what you are testing, and if it is the result we really care about.
From your link:
” It did not enter the Nasdaq for over 6 years because the 50 day SMA was always above the 200 day SMA during that time.
If I read this right (maybe my reading comprehension skills are lacking) you are saying your test has you out of the market for 6 years during a stretch when the 50 DMA was above the 200 DMA. This perplexes me as to what you are testing. Here are the rules
1. Enter the market when the 50 DMA goes above the 200 DMA
2. ***STAY*** in the market as long as the 50 DMA is above the 200 DMA
3. Exit the market when the 50 DMA goes below the 200 DMA
4. ***STAY*** out of the market as long as the 50 DMA is below the 200 DMA
5. Re-enter the market when the 50 DMA goes above the 200 DMA.
So any test should have you in the market *AT ALL TIMES* when the 50 DMA is above the 200 DMA. Otherwise, you are running the wrong test.
Additional comment, I really think any test of mechanical signals has to have a max drawdown level as well to really give you useful perspective. Take 2 systems. System A has a 12% CAGR with a 55% max drawdown. System B has a 10% CAGR with a 12% max drawdown. System B is the hands down winner.
Consider this. When you really get down to the “core issue” here that surrounds all these discussions: 200 DMA, getting “defensive” sector diversification, country diversification, Permanent Portfolio, etc. etc., etc. it is ALL ABOUT DRAWDOWN. The only reason so many people are revisiting their core beliefs about how “to manage a portfolio” and what is “the right portfolio” going forward is because of the magnitude of drawdown that most have just lived through which was a once in a several decade event for the typical diversified portfolio. A 40-50-60% drawdown shakes you in terms of what you think you can withstand and live through especially if you have limited time to recover and begin living off the portfolio.
So any system that potentially substantially limits drawdown is a winner even if you sacrifice a little CAGR as measured over 20-30 years.
So, that Claymore ETF would be a pyramid fund of funds overseen by a guy who might or might not have a clue. ... Count me out. There's got to be better ways to do it than this.
Bullish? We (that's the spousal we, not the royal we) have some money in the market. There have been some opportunities for trading although I (umm, we) don't do much of that.
But bullish as in Happy Days Are Here Again? Nah. C'mon. Happy Days, as we knew them just a few years ago, are gone and won't return soon. John Hussman in his commentary this week headlined the prospect as "very widely sideways."
Not the end of the world but not bullish, either.
BillM
What Bill B is saying makes sense. If the market opens on the way up and continuously goes up, there's no crossing point to create the buy-in. However, I don't see that on the chart.
Man, Yahoo's charts have really gotten fancy.
Bill B well said about drawdown. If you have a system or portfolio that has theoretical and historical evidence for small drawdowns then you can add money regardless of if you have bullish feelings or not.
I would like to respond to something Mike C said, "it is ALL ABOUT DRAWDOWN"
I can understand some of the psychological problems with having a large drawdown, but to me the quality of earnings from a portfolio is much more important. During this economic storm we have had over the last 18 months or so, the income stream from from a well-diversified portfolio has stood up fairly well, at least for me it has and I am almost 100% invested in various Vanguard funds. Given that most of us here are saving for retirement and will no-doubt be conservative (some sort of SWR) during the withdrawal phase, I see no reason to fear flucuations in the price of investments. I mean who really will need to liquidate their entire portfolio in one day during an event like we are in now?
@ Stephen D
What Bill B is saying makes sense. If the market opens on the way up and continuously goes up, there's no crossing point to create the buy-in. However, I don't see that on the chart.
No, it doesn’t make sense, or at the very least it IS NOT what I’m interested in testing. This isn’t complicated:
1. 50 DMA above 200 DMA = Uptrend, you want to be IN THE MARKET during uptrend
2. 50 DMA below 200 DMA = Downtrend, you want to be OUT OF THE MARKET during downtrend
3. You get IN or OUT when the trend changes (upside or downside crossover)
If on Day 1 of your test (1972, 1960, 1925, 1870, whatever) the 50 DMA is ***ALREADY*** above the 200 DMA then you would be LONG THE MARKET from that day and only get out on the DOWNSIDE CROSSOVER. From that point on, obviously the 50 DMA could ONLY be above the 200 DMA if an UPSIDE CROSSOVER had taken place.
MikeC I think Bespoke studied what you are asking. They tend to be very responsive to questions.
I had (have?) the drawdown figures. So I can rerun it again and post those. And, yes, someone pointed it out correctly, the first 6 years of Nasdaq was a no trade because the 50 bar SMA was never under the 200 bar SMA to cross.
I'll be happy to run the system in various ways, but I don't think that's going to all of a sudden produce a winner.
Hah. Well, if that's not what you want to test then "1. Enter the market when the 50 DMA goes above the 200 DMA" isn't what you wanted to test, either. There is no crossover at the beginning of a market (or whatever you'd call that point).
I'll stop being snarky. Sorry.
MikeC,
Honestly, I think both of you are right/wrong. This is why I brought it up in my comments. Had the results for the existing indices been stellar, I might've been arsed to go further and try it. And it's probably worth noting that you won't know the 50/200 values until around the first year of trading.
My approach would be to try more indices and determine that the results were better than random. If the results were better than random, I'd give the Naz a pass, if they weren't, I'd be skeptical.
Very informative stuff.
It's too bad the EAFE index doesn't go back farther. But I think we can surmise the results would be similar.
I wonder if there's any way to figure standard deviation into this, to see if it's significantly lower over time.
Mr. Nusbaum,
With the SP 500 now appearing to breach the 200 day simple moving average (908 or so) to the downside, what are your plans to take defensive action? Do you lower equity exposure, add short positions, further increase cash levels??
Your insight is appreciated. BTW, I warned all my fellow traders about the whipsaw that was to occur for those that puchased equity above the 200 day moving average. this is going to be a painful summer
sorry can't front run what i do for clients
SD,
I think I could slap together a Sharpe Ratio and risk adjusted return on this data.
Roger,
I checked the Bespoke website where they post daily free research. I didn’t see anything at all about the 50 DMA/200DMA crossover so I assume this is for subscribers only. I’m not a subscriber. Do you think they will answer questions on this for non-subscribers?
@ Bill B
Took a 2nd look at your analysis. Couple of quick questions and observations.
1. The B&H CAGR for the Dow and S&P 500 is surprisingly low even accounting for the meltdown in equity prices the last 12-18 months. Is this analysis price ONLY or does it include dividends and reinvestment of dividends?
2. Once you exclude the NASDAQ (whose system CAGR doesn’t make sense for the reason I’ve already outlined) the crossover system doesn’t look bad. Roughly .5% underperformance on the Dow and .5% outperformance on the S&P 500. But again, the big missing issue is drawdown. B&H exposes you to multiple 50%+ drawdowns (73-74, 00-02, 07-09). I’d be interested to see what the NASDAQ number is once you include being in the market for that 6-year stretch.
To someone else’s point, whatever date you choose as your “START DATE” you are still going to have in existence the price data for the trailing 50 and 200 days UNLESS you go all the way back to the very start of the market or before they tracked daily data (one could always use 10 and 40 weeks if weekly data is available) so even on DAY 1 you can still determine what the 50 and 200 DMAs are and whether the 50 is above or below the 200.
Mike,
1. This does not factor in dividends, taxes, transaction costs, etc. It's purely price.
2. I thought the point was that these buy/sell points were supposed to provide an 'edge'. You could argue less volatility, and to that point, I would agree. But this doesn't outperform. If you want less vol, I would consider diversifiers not signals.
To the other person's point, you always lag using moving averages. You can't very well know what items are going to comprise an index a year in advance, so I'm not sure I understand the point.
For you folks interested in marketing timing systems, check out www.mechanical-investing.com/market-timing.html for results comparing several different systems. Scroll down to table 2 for the data on 50/200 dma crossovers. It's among the very best, again because it got investors out before the big drop in 2008.
I am kind of toying with the idea of putting up a website where people could play with backtesting trading systems. Does anyone know if there something like this that I just haven't found yet?
Going through my blogroll:
http://www.mebanefaber.com/2009/06/16/links-3/
See the 2nd link
Mike C- thxs for the link.
Roger- you should check this study out regarding the 200DMA. Study's preference is the exponential versus simple.
http://www.advisorperspectives.com/newsletters09/pdfs/Moving_Average-Holy_Grail_or_Fairy_Tale-Part_1.pdf
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