Ticker Sense wishes the bull market a happy birthday and compares it to previous bull markets. It looks like somewhere around this stage, the market typically crosses into a euphoria stage. They also look at the Commitment of Traders data for futures vs. the Nasdaq for signs of potential covering.
Michael Covel highlights a paper titled "A Quantitative Approach to Tactical Asset Allocation" by Mebane Faber describing a mechanical model:
The purpose of this paper is to present a simple quantitative method that improves the risk-adjusted returns across various asset classes. The approach is examined since 1972 in an allocation framework utilizing a combination of publicly traded indices including the Standard and Poor’s 500 Index (S&P 500), Morgan Stanley Capital International Developed Markets Index (MSCI EAFE), Goldman Sachs Commodity Index (GSCI), National Association of Real Estate Investment Trusts Index (NAREIT), and UnitedStates Government 10-Year Treasury Bonds. The empirical results are equity-like returns with bond-like volatility and drawdown, and over thirty consecutive years of positive returns.
The system uses Jeremy Siegel's 200-day simple moving average timing system.
Brett Steenbarger looks at what happens when selling becomes extreme as measured by NYSE Tick values below -1200. He finds that:
Since 2004 (N = 695 trading days), we've only had 50 days in which the NYSE TICK has gone below -1100. Two days later, the S&P 500 Index (SPY) is up on average .37% (31 up, 19 down). That is quite a bit stronger than the average two-day gain of .06% (367 up, 328 down) for the entire sample.
CXO Advisory summarizes a paper that looks at a volatility forecasting system that appears to be more efficient than the market's model (implied volatility):
A trading strategy that is long (short) at-the-money, one-month-to-maturity straddles for stocks with the largest expected positive (negative) changes in implied volatility yields a statistically and economically significant average monthly return of 15.0% and monthly Sharpe ratio of 0.626. Assuming transaction costs of half the quoted options bid-ask spreads, this average return of 15.0% falls to 5.3% per month. However, focusing on stocks with less liquid options boosts this 5.3% to 6.7% per month.
They discuss a related study that concludes that "A combination of the implied-historical volatility gap and P/E predicts over 26% of the quarterly variation in stock market returns." They also highlight a study on equity index options, but conclude that it's a strategy suitable only for market makers. They note that the best deals are found in writing near maturity calls, buying far maturity calls and selling puts. Perhaps this has to do with the statistics on option buyers and sellers.
They also discuss a finding that diversifying with international small caps has a benefit as measured by Sharpe Ratio.
From a 1998 paper on the venerable Dow Theory:
In this paper, we review Cowles' evidence and find that it supports the contrary conclusion -- that the Dow Theory, as applied by its major practitioner, William Peter Hamilton over the period 1902 to 1929, yielded positive risk-adjusted returns. A re-analysis of the Hamilton editorials suggests that his timing strategies yield high Sharpe ratios and positive alphas.
Via the Kirk Report:
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