Current
Signal Performance as of
Signal
Type |
Trade
Date |
Return
since issued |
|
|
|
World |
U.S. |
|
Nasdaq
100
(QQQQ)
|
Russell
2000
(IWM)
|
S&P
500
(SPY)
|
|
The Nasdaq 100 (QQQQ)
, S&P 500 (SPY)
and Russell 2000 (IWM)
respectively gained 0.50%, 1.07% and 1.56% over the five-day span. All three ETFs remain located above both their 50-day and 200-day exponential moving averages (EMAs).
For its part, our World portfolio posted a 0.91% gain this week. The portfolio consists of the 5 top-ranked world ETFs as of January 28, which marked the beginning of the current 4-week holding period. Please note that since we now have an active Cash signal, the World approach calls for selling your holdings if you follow the "Long Only" or "Long and Short" strategy. Only if you follow the "Buy and Rebalance" strategy should you remain invested in the top 5 ETFs, as the strategy calls for staying invested at all times. Please go to the "Our Service" page for all the details.
Our current Cash signal remains in effect.
Wouldn't it be nice to know what the market will do tomorrow
simply by looking at what it did today? Sounds like a dream?
This was a reality in the old days, and when we say old,
we only mean about ten years ago. Before going into more
details, let's say that there are basically two schools
of thought here: market trending versus mean-reversion.
The former claims that the market is usually trending, so
if it is up one day, it will likely stay on the same path
and be up again the next day. Similarly, if the market is
down today, it is more likely to go down tomorrow. On the
other hand, fans of mean-reversion have the exact opposite
viewpoint. They will tell you that the market always has
a tendency to go back to its equilibrium point. Reusing
the previous example, if the market is up today, they are
betting that it will reverse its course and go down the
next day.
Let's plot this on a graph and see who is right. In the
simulation below, we compare on a daily basis the market-trending
(also called daily follow-through) with the mean-reversion
approach. How it works is very simple: in the daily follow-through
case if today's close is higher than yesterday’s,
then we will go long assuming that the trend continues.
In the mean-reversion strategy, if today’s close is
higher, we will assume the market reverts back the next
day. Thus, we will go short at the close to profit from
this shift back the other way. If today's close is lower,
then we do just the opposite. Here is how it looks like
for the lifetime of the Nasdaq Composite index
:
Nasdaq Composite: Daily Follow-Through Vs Mean-Reversion
The result is stunning! As you can see, before 2000, the
market-trending method worked for as long as we can look
back, with a regularity that defies the imagination. Who
said the market is unpredictable! Between 1971 (Nasdaq
Composite index inception) and 2000 the daily follow-through
approach has an annualized return of 56%! The mean-reversion
approach on the other hand was consistently wrong. The daily
mean-reversion strategy has an annualized loss
of 37% over the same period.
Unfortunately, since the year 2000, this beautiful pattern
comes to an end. One possible explanation is that this paradigm
shift was caused by the generalization of the use of computers
on trading platforms. Prior to 2000, the ability to enter
orders quickly was only accessible to a handful of people
(traders on the trading floor and a few others). These days
almost anybody can rapidly trade from the comfort of their
living room, or even on the run from their smartphones.
The market is reacting instantly to any piece of news, not
to mention day traders who are now trying to make money
by the minute. All of this is bringing lots of noise, of
course, as what was thought to be true today becomes not
so true the next day.
So let's see if the mean-reversion camp now has a better
chance to bring something to the table? We'll look at the
S&P 500
, this time between 2000 and 2011, plotting the
same two opposite daily strategies:
S&P 500: Daily Follow-Through Vs Mean-Reversion
This time, mean-reversion is finally at the top, especially
in a period of high volatility, like 2008.
This example shows that market behavior has definitively
changed during the past decade. Simple trading techniques
like the one exhibited above that worked well during the
previous decades are now giving very poor results. On the
contrary, mean-reversion which was failing miserably before
now is a much better approach. While we were developing
the Turbo Model we have been trying to capture as much
as possible this shift in market behavior. Turbo Model
incorporates both mean-reversion and market-trending techniques,
doing so in a very opportunistic manner, and delivering
its best returns during periods of high market volatility.
Stay
tuned for more on this as we finish up the revamping of
our website.
Question: Which are the strongest U.S. markets?
We know the World ETF Ranking as our guide
to the strongest world geographies, but we often forget that
it also serves to rate the various segments of the U.S. market.
Of the 31 World ETF Ranking indexes, 7
are U.S. based and they reflect the strength of the type of
stocks in their respective index. For the portion of your
assets you dedicate to the U.S. market, if any, past history
favors the indexes ranked the highest.
As of last week, the US indexes were ranked very high in our
list (four in the top five!). The ranking shows the small
caps and technology (Nasdaq 100
) being the strongest and the
large caps like the S&P 500
and the Dow Jones
being the
weakest (although still in the middle of the pack compared
to all the foreign index ETFs).
Warm wishes and until next week.
The TimingCube
Staff
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