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April 19, 2008

Timing Does Its Job, Reducing Volatility
by Bill Rempel

Timing attempts to provide market equivalent returns over the long term, with a substantial reduction in variability of returns. The two components of the Timing program are EZ+Macro and Fear/Greed. This system trades rarely and splits its allocations between ETFs tracking the S&P 500, the intermediate-term U.S. Treasuries, and cash.

Commentary is presented first this week, followed by the system recap.

Commentary

My intuition is that the U.S. stock market has set up for an intermediate-to-long-term bottom, as discussed much earlier, but the Timing system is mechanical, and will be tracked based on the signals it generates.

The system is designed to provide market returns over the longer term, while significantly reducing equity curve volatility. It may be useful to see how the Timing system has compared to a "buy and hold" of the S&P 500 tracking SPY ETF since inception; below is a weekly chart comparing $100,000 invested in either strategy. If the chart is truncated in your browser, click it for a larger view.

The system went 50/50 stocks/cash on December 21, 2007, and then on January 18, 2008 went to 25/25/50 stocks/bonds/cash. The reduction in volatility is obvious.

System Summary

Information is as of the close on April 18, 2008.

EZ+Macro

My charts are relatively wide, and this site is best viewed at 1280×1024. If the chart is truncated in your browser, click on it to view it in full size.

EZ Trend is still down.

Macro Trend is bullish for Treasuries. This comes into play only if the EZ Trend is not up.

Fear/Greed

The Fear/Greed model signaled a buy for the U.S. stock market in early November, and a sell in December, as the $VIX relative to actual volatility fell to a historically low level. For most of the last four months, the current level of sentiment, as measured by the $VIX relative to actual volatility, has been at levels historically associated with complacency. In the scale of the chart, 80% of the readings since 1990 have been between the red and green lines.

Model Allocation

Based on beginning with a $100,000 portfolio at inception.

S&P 500 SPDRs (SPY) - 25.6%
iShares 7-10 Year Treasury Bond Fund (IEF) - 24.5%
Cash - 49.9%

Returns

Based on beginning with a $100,000 portfolio at inception.

Equity: $98,376.49
Gain, Last 4 weeks: 0.41%
Gain, Year to Date: -2.92%
Gain, Since Inception on 11/12/2007: -1.62%

These returns include the recent April distribution from IEF of $0.31 per share. This system has been 50% allocated to cash since December 21, 2007, and I have not been including gains from cash interest in the returns.

Changes To Model Allocation

There are no changes to the model allocation since this previous message. It is listed below:

S&P 500 SPDRs (SPY) - 25.0%
iShares 7-10 Year Treasury Bond Fund (IEF) - 25.0%
Cash - 50.0%

Tracking

There are no changes to track.

If you'd like to become of member of The Rempel Report, you can register here. At The Rempel Report, I track model portfolios for four different mechanical trading systems, as well as my personal portfolio, and disclose all results (good and bad) at regular intervals. Members receive email notification of new posts and can contribute to the site through comments. Registration is still free!

Bill Rempel
The Rempel Report

Disclaimer: Nothing at The Rempel Report, or any communication from The Rempel Report or its author, should be construed as personal advice, on investing or anything else, and at all times you are responsible for your own actions and you should perform your own due diligence. I'm not an investment professional, and you should probably consult with one, in addition to doing your own due diligence, before making any investment decisions.

I may have a beneficial position in any potential investment I mention. My positions in, and opinions of, those potential investments may change over time. I have no obligation to reveal those positions, and if I should reveal those positions, I am under no obligation to notify you, though this site or through any other means, if I change those positions.

While I do try to verify much of the data presented, I can make mistakes. I rely on third party vendors for data, and sometimes that data could be incorrect. Therefore, I cannot and will not be held liable for incorrect or erroneous data presented in text, table, chart, or other format. This is one more reason why you should consult with an investment professional, in addition to doing your own due diligence, before making any investment decisions.

Modeling is prone to error, and no statistical model is perfect. The output from statistical or predictive modeling should be viewed with skepticism.

Fundamental analysis is based on examinations of company filings such as income and cash flow statements, balance sheets, quarterly and annual filings, proxies, and other such items. Even though a company appears fundamentally sound today, that doesn't imply they actually are, or will remain, fundamentally sound. Fundamentals can change over time, and there is always the possibility that the company filed information that was either fraudulent or incorrect. I might make an oversight or error when examining company filings. In many cases, I will rely on a third party's presentation of filing data, such as a stock screening program's output, without actually reviewing the filings personally.

Technical analysis is based on the study of historical price, volume, and sentiment data over time. Past performance is no guarantee, and there are no certainties hidden in patterns, charts, indicators, or formulae.

FundaTechnical analysis involves those items which mix elements of Fundamental and Technical analysis, including valuation metrics such as the Price/Book or Price/Earnings ratios. Therefore all the warnings for both Fundamental and Technical analysis apply.

Take responsibility for your own actions. You should consult with an investment professional, in addition to doing your own due diligence, before making any investment decisions.

Copyright © 2005-2008 Bill Rempel

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