Canadian Money Forum banner

21 - 40 of 65 Posts

·
Registered
Joined
·
16,672 Posts
Discussion Starter #21
I looked at a 5 year chart of UPRO with SMA-200 overlay. It captures 2017 very well, but there is substantial whipsawing going on in 2018 and 2019. SPY looks better. So maybe one could use SPY SMA-200 as the signal and then implement with UPRO. One could do this in a tax-sheltered account to minimize taxes.
That could be plausible. Let me see what would have happened if I used UPRO with my own technical market timing method. My technicals are based on the regular indices. Starting 2017-01-01 and trading UPRO

Result with my system would have been +167%. That's compared to +47% from buy & hold SPY. Amazing.

Then again, as per the other thread, investing is easy (and every strategy works) during a bull market. What happens during the bear market?
 

·
Registered
Joined
·
743 Posts
Then again, as per the other thread, investing is easy (and every strategy works) during a bull market. What happens during the bear market?
That's important to know, particularly when dealing with leveraged ETFs. One has to be nimble with the sell signal, otherwise a good portion of any gains could be wiped out in a few days.
 

·
Registered
Joined
·
16,672 Posts
Discussion Starter #23
I actually have previously backtested my technical method using SSO, a milder leveraged ETF and thought this was a viable strategy. I could see myself using SSO, but wouldn't use UPRO.

I was able to backtest my strategy to 2006 with SSO, which actually existed back then. I am just not confident that UPRO can survive a 2008 scenario.

However, because I've already been using a non leveraged index, I've decided to stick with that for continuity at the moment. Changing to SSO is on the table.
 

·
Registered
Joined
·
743 Posts
I think it is best to stick to the non leveraged products too. Less chance of unpleasant surprises.
 

·
Registered
Joined
·
3,727 Posts
"But what if one could allocate portion of their portfolio to a strategy that would harvest the volatility with less risk (or different risk) than buy-and-hold? Maybe a moving average or trend following strategy. "

I've got one of those too. It involves using the TTM Squeeze, moving averages, and RSI. Can furnish more details if they are wanted.

james4beach would be interested in more details of your method if they are not too technical for the non engineer.
 

·
Registered
Joined
·
16,672 Posts
Discussion Starter #26
Sure Rusty. Here's a simple version of my method. The basic idea is to figure out if the world is in an "up" or "down" mode by looking at moving averages.

To figure out if we're going up or down, I survey major world indices for many countries, stuff like SPY, EFA, EEM, XIU (I use many). For each, I look at whether it's above or below the 200 day moving average. Currently all of these are above, so the average reading is 100%... we're in up mode. This is a boom time!

My buy & sell points are triggered by this average crossing a threshold. As the market weakens, the reading declines. Crossing below a threshold, that triggers my system to sell.

Consider September 1, 2008. The moving average situation was
SPY = below the 200
EFA = below
EEM = below
XIU = above

So the global reading was something like 25%, rather weak. I had already sold; the world was already in "down" mode.

In June 2009, all the above had crossed above the moving average, resulting in a buy signal. It might have happened a bit earlier actually, May? That's a pretty good re-entry into the new bull market.

So that's my method in a nutshell. Basically, monitor major index ETFs to see if they are above or below the 200 day. Get a reading for whether the world is strong or weak.
 

·
Registered
Joined
·
2,186 Posts
James, It is best to have more then one system when playing the market. If one system blows up then the other system or systems might not.

Here is my idea divide your portfolio in half. Keep method your currently using other half do the following.

Keep the same asset allocations except use silver instead of gold for the gold allocations.

For the bond portion when you turn 40 scale into deferred annuities that are not variable. With the mortality credits higher interest is paid then bonds & GICs. As you get older difference is magnified.

For the stock portion would use the decennial pattern. Only 2 buys & 2 sells every 10 years yet out performed buy & hold over 40 fold (44.9 times). According to A Miller if 1 dollar was invested in 1900 would be worth 6660.86 in 2002 using the decennial pattern verses 146.11. All you have to do is sell @ the beginning of the 0 year reenter on June 30th of the second year. Be out of the market During August through October of the 7th year & reenter till the end of the 9th year.

Would use dollar cost averaging for second half of portfolio no readjusting.
 

·
Registered
Joined
·
16,672 Posts
Discussion Starter #28
There's an additional technical method I am experimenting with and this one is much simpler. Currently I plan to use this method to adjust global weights, to emphasize one global index more strongly than the other.

The fundamental idea behind this is that global financial markets go through phases where certain themes take hold. For example in the early 2000s, one theme was a weak US Dollar, and money flooded to both commodities & other foreign markets such as emerging markets. Currently we're in a different theme, where central bank stimulus is pumping money specifically into the S&P 500.

I believe that a little bit of old fashioned return chasing could be useful. Consider the following simple criteria: does SPY or EEM have the highest 4 year trailing % return? Here is the result of that question at the start of each calendar year:

2001: SPY
2002: SPY
2003: EEM
2004: EEM
2005: EEM
2006: EEM
2007: EEM
2008: EEM
2009: EEM
2010: EEM
2011: EEM
2012: SPY
2013: EEM
2014: SPY
2015: SPY
2016: SPY
2017: SPY
2018: SPY
2019: SPY
2020: SPY

You can see this works surprisingly well. It switches into the EEM theme (that market phase) and captures all the boom years. Then there's some uncertainty and some false starts, but it does get into SPY to catch those boom years. The overall return since 2000 is, I think, much higher than just holding SPY alone.

Think ahead to what might happen next. The S&P 500 has become extremely popular, chasing this recent performance. But this too, like everything in financial markets, is a phase that will eventually end. The question is always, what would be the next hot global theme? I think it's worthwhile continuing to watch the SPY vs EEM relationship.
 

·
Registered
Joined
·
16,672 Posts
Discussion Starter #29 (Edited)
Let me add a couple notes. I am confident enough in this method that my official asset allocation and investment policy statement includes a provision to adjust my foreign market weights according to the above. Domestically I hold a steady (constant) Canadian allocation, but my foreign allocation will adjust as suggested above. Currently my foreign component is entirely S&P 500 but if in the future, emerging or EAFE starts being the top performer, I would make that shift.

Based on my understanding of global markets and the way large institutions allocate capital, I think the primary choices for dollar flows (capital and trade) within equities are represented by SPY, EFA, and EEM.

IMO this as not just a technical numbers game. There is a fundamental (global theme) basis for this and I think this technique can "detect" the important global dollar flows, especially those flows which compete between domestic US and other big foreign markets. Those conditions and patterns can last for many years and I think it's worth trying to respond to them.

If you go back and calculate the total % return with those choices above, you will see that the return far exceeds just holding SPY or just EEM. While I do like passive techniques, I think this is only mildly active and the potential reward is very substantial. This is just 4 trades/switches over 20 years which is an average average of 1 trade/switch every 5 years.

That's a low enough activity level that I still think it fits into my passive asset allocation technique.
 

·
Registered
Joined
·
2,186 Posts
Heavy foreign buying of U.S. stocks for decades has served as an excellent indicator of market tops. No crowd of other countries buys foreign stocks intelligently. Foreigners make their biggest commitments when the trend is about to reverse such as record $400 billion in 2000 & record breaking foreign buying again in 2007. Foreigners are all in the U.S stock market rally 7.7 trillion as of July of this year. This top should be bigger then 2000 & 2007
 

·
Registered
Joined
·
743 Posts
Let me add a couple notes. I am confident enough in this method that my official asset allocation and investment policy statement includes a provision to adjust my foreign market weights according to the above. Domestically I hold a steady (constant) Canadian allocation, but my foreign allocation will adjust as suggested above. Currently my foreign component is entirely S&P 500 but if in the future, emerging or EAFE starts being the top performer, I would make that shift.

Based on my understanding of global markets and the way large institutions allocate capital, I think the primary choices for dollar flows (capital and trade) within equities are represented by SPY, EFA, and EEM.

IMO this as not just a technical numbers game. There is a fundamental (global theme) basis for this and I think this technique can "detect" the important global dollar flows, especially those flows which compete between domestic US and other big foreign markets. Those conditions and patterns can last for many years and I think it's worth trying to respond to them.

If you go back and calculate the total % return with those choices above, you will see that the return far exceeds just holding SPY or just EEM. While I do like passive techniques, I think this is only mildly active and the potential reward is very substantial. This is just 4 trades/switches over 20 years which is an average average of 1 trade/switch every 5 years.

That's a low enough activity level that I still think it fits into my passive asset allocation technique.
EM and the US are highly correlated. So the strategy is basically long beta, which is fine if that is what you are looking for, but it will more or less track buy-and-hold, maybe with some diversion. For example in 2008 both US and EM crashed, maybe US more than EM, but still there was a loss. The most efficient way, in my opinion, to harvest the differential would be to go long one and then short the other, so as to cancel the beta exposure. But I doubt that is what you have in mind.

Similar strategies could be implemented between Nasdaq and SPY or a US financial index. So if one thinks in a low interest environment growth will outperform the banks, one goes long Nasdaq and shorts the banks. Some people do this with gold and silver too, when there is a divergence or convergence.
 

·
Registered
Joined
·
16,672 Posts
Discussion Starter #32 (Edited)
EM and the US are highly correlated. So the strategy is basically long beta, which is fine if that is what you are looking for, but it will more or less track buy-and-hold, maybe with some diversion. For example in 2008 both US and EM crashed, maybe US more than EM, but still there was a loss. The most efficient way, in my opinion, to harvest the differential would be to go long one and then short the other, so as to cancel the beta exposure. But I doubt that is what you have in mind.
They definitely have high correlations, but then again, all stocks do. When markets crashed in 2008, everything from Japanese industrials to Canadian railways to US financials crashed exactly in lock step. Global stocks definitely are highly correlated and I expect they will crash again all in sync, as well.

I acknowledge that one remains exposed to the same general market risk. I should have noted that with the strategy I described, maximum drawdown would have increased as well. This does not reduce risk in any way.

However -- compared to what we discussed earlier, I like this method more than using a crazy leveraged ETF. Here we might have implied leverage but it's via real securities and traditional trading instruments. During that EEM boom phase, there was intrinsic leverage in those economies due to cheap dollar financing. EEM was a leveraged investment in those years. In the current S&P 500 boom phase, we've again got intrinsic leverage due to cheap credit domestically in the US, high corporate use of debt, and government manipulation boost via QE, ZIRP, and god knows what else they've been up to these last 10 years.

While these markets have high correlations, the performance varies a lot. When emerging & commodities were strong, EEM had far greater returns than SPY. And more recently when the central banks started pumping QE money into stocks, SPY had far greater returns. Emerging has gone nowhere for years now.

So the high correlations don't dissuade me from trying this. Can one describe this as using leverage? Sure!

Imagine what the next theme might look like (perhaps after the next global correction). Maybe the US stagnates, but the ECB's stimulus combined with strong a EU trade bloc results in excellent European performance. Money flows out of the US, and perhaps cheap dollars finance a EU boom. EFA is already starting from relatively lower valuation than SPY, so maybe it takes off and runs like crazy for the next decade. Who knows?

Similar strategies could be implemented between Nasdaq and SPY or a US financial index. So if one thinks in a low interest environment growth will outperform the banks, one goes long Nasdaq and shorts the banks. Some people do this with gold and silver too, when there is a divergence or convergence.
Definitely possible. I could see someone successfully doing this between say SPY, QQQ, XLF

But the reason I like the big global regions like SPY / EFA / EEM is that global capital is free to move around. In the last few years, it's all been about the US. But that capital can also go elsewhere... if Europe or Japan becomes the hot story, then you would have limited yourself quite a bit just dabbling domestically in the US.

And what I think is very different than just choosing between say gold or silver, or SPY vs QQQ, is that -- at the global scale -- we're dealing with macro pictures involving things like dollar funding (leverage), central bank behaviours, trade balances, and capital directions. These are more fundamental in nature, not just fleeting trading such as one US sector vs another.
 

·
Registered
Joined
·
743 Posts
Okay, I see. I was comparing to a strategy like a moving average or similar (discussed in another thread). Compared to a leveraged ETF, it is a better strategy.
 

·
Registered
Joined
·
16,672 Posts
Discussion Starter #34
Okay, I see. I was comparing to a strategy like a moving average or similar (discussed in another thread). Compared to a leveraged ETF, it is a better strategy.
I made some leaps in that earlier post. Do you think it's feasible to view this as a form of leveraged index investing? I don't know anything about EM before 2000.
 

·
Registered
Joined
·
743 Posts
Your data is very clear as to the winner between US and EM in each time frame. I think it would be important to know how much was the delta for each data point. Because if the winner wins by 1 or 2 percent, it may be a good strategy, but it won't be very leveraged. Plus, it would be a good idea to have some margin of safety (let's say beating by at least 2 percent), just to account for fees, taxes, and things not going exactly as they should.
 

·
Registered
Joined
·
743 Posts
I think basically the strategy is a variation on "relative strength" play, where you would shift funds to a geography with higher returns over the past 4 years, if I am understanding correctly.
 

·
Registered
Joined
·
743 Posts
Looking at Callan's periodic table, I see how it may play out. There are years when EM does spectacular, with some clustering between 2003 and 2012. For example in 2009 it crushed the US by 53%. In 2008 it lost, but just by 16%. So it has a substantially higher beta and could function as leveraged equity exposure (with more upside than downside).

I think your strategy would have been in EM most of those years between 2003 and 2012, which means you would have benefited from the extra returns. The extra returns appear to be substantial in some years.

https://www.callan.com/wp-content/uploads/2019/03/Classic-Periodic-Table-2019.pdf
 

·
Registered
Joined
·
10,102 Posts
I think that was the period where everyone fell over themselves to hold BRIC. How much was real versus pumped up by dumb money chasing the next big thing?

I have seen a lot of fads over the years. Remember when the Far East was the hot play in the mid-90s or so?
 

·
Registered
Joined
·
743 Posts
It was BRIC-related; if I recall correctly it was China in particular.

I would say that for those years being in EM was the smart thing to do, if one had the foresight or the system to get in early.
 

·
Registered
Joined
·
16,672 Posts
Discussion Starter #40
I think most of these are fads that involve greed and hype, including the current popularity of the S&P 500. I think that's just the nature of stock investment over any short ish time period (like 10 years).

> 20 years, I can agree that stocks more or less track fundamental economic / GDP expansion and corporate earnings.

But for something like 5 or 10 year themes, which is what I'm trying to capture here, I think it's all just wild crowd psychology. Always has been.
 
21 - 40 of 65 Posts
Top