Update: Asset Class Rotation

In a post back in August 2008, I examined the results for a simple relative strength asset class rotation scheme. The approach buys the top N of M asset classes each month.


The plot above shows the results for the last 4 1/2 years for buying the top 5 of 8 asset classes each month. The return was better than SPY. The asset classes in this case were actual ETFs (AGG, EEM, EFA, IWM, IYR, SPY, and TIP) and one commodity index (DJAIG).


The results were significantly better by just buying the top 3 of 8 asset classes. The plot above shows the results over the past 4 1/2 years using the same set of asset classes.

While there was a big drawdown during the market crash, an active approach to asset class allocation would seem to be a good approach to helping to smooth out returns during turbulent market periods.

Update: 3x2 System and Crash System

The '3x2 System' has continued making a nice recovery. The equity curve is at the highs of mid-2008.


The 'Crash System' has been moving up and is closing on the highs.

The two systems have complemented each other relatively well over the past few months. A diversified portfolio of active trading methods may be the best approach for the uncertain future.

Diversification

What about diversification into casino gambling? I realize that craps has a negative expectancy, but the house edge on the pass line bet is only 1.41%. One advantage of casino games over the stock market is that you actually know the probability of the various outcomes and the statistics are stationary. Perhaps we can learn something about money management from analyzing casino games?

Take a look above at a typical equity curve for a pass line craps bet. (You of course do not always make a profit for every 1000 trials.) The run lengths of winning and losing (negative run length) bets for the same 1000 trials is also shown above. We can see that you typically do not lose more three times in a row. We can double the amount of the wager after we have lost three in a row and continue with the larger wager until we win. This gives you a good shot at a successful trip to the casino.

I will have to look further into quantifying the apparent improvement in performance by increasing the wager after three losses in a row. Perhaps additional mild progression may be the way to increase the frequency of successful trips to the casino?

Dividend Aristocrats -- Not Good

The low beta/low R-squared stocks like the 'Dividend Aristocrats' have not showed much advantage over the market in the last two years. See the plot above. They have shown a small advantage over the market (SPY) since the crash during the Fall of 2008. The devastation of the financial sector has caused many of the Aristocrats to lose their place on the list.

Red Power

We have a pullback and the market still looks powerful. Can the market resume its move up after a pause?

Long Term Rates Move Higher

The ten year treasury yield continues to move higher. Rates are noticeably higher than after the mid-March Fed Quantitative Easing announcement.

Banks?

Are the banks really what they pretend to be?

The weekly failures continue.

How stressful was the stress test.

Banks looking to sell billions of shares of common stock while the price is up.

Has hope reached its limits?

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Do The Opposite

This is not longer just some crazy notion... this is my religion!

Time Trading

Trading just based on seasonal tendencies is an yet another trading method to examine. The plot above shows the equity curve for a system that is always in the market either long or short. The trades are entered and exited based only on the date. It works fairly well. Over the last 10 years it has done much better than buy and hold. However, the method did poorly in 2006 and 2007 as the market surged higher. But, it caught the big market crash of late 2008.