binary rs and dynamic asset allocation
TRANSCRIPT
Binary RS and Dynamic Asset Allocation
Kevin G. Hockert, CMTProspero Institute for Investors
[email protected] 320-762-0175
Important financial market relationships
• Bonds – Yield Curve
• Treasury Bonds vs. Invest. Grade Corporate
• Invest. Grade Corporate vs. High Yield
• Stocks vs. Bonds
• Large vs. Small
• US equity vs. International Equity
• Value vs. Growth
Applications of RS
• Optimize returns available from a broad universe of securities Ranking/Rotation - universe of growth stocks i.e. IBD, Sector Rotation
• Dynamic Asset Allocation
• Binary – isolate 2 markets that encompass important market relationships
Components of TrendScore
• Short term trend • Intermediate term trend• Long term trend• Intermediate term momentum• Long term momentum• Intermediate term relative strength• Long term relative strength
Definition of components
• Trend – position of price relative to past
• Momentum = acceleration or deceleration in trend
• Relative Strength = performance of a security relative to a market index and/or universe of securities
Binary RS
• Data set is confined to 2 markets & encompasses IMPORTANT market relationships
• Utilize Intermediate or Long Term RS
• Long Term Trend
• Price divided by Price
• Smooth data (exponential moving averages)
• Relationships
• Level and direction = Momentum of RS
S&P 500 vs. Russell 20001971-2012
0
500000
1000000
1500000
2000000
2500000
3000000
RS
SPX
RUT
Variance in 13 Week Returns Style and Market Cap
-0.2
-0.15
-0.1
-0.05
0
0.05
0.1
0.15
0.2
Mid Value-Mid Growth
Mid Growth-Small Val
Small Value-Small Growth
Small Value-Large Value
Large Value-Large Growth
13 Week Correlations & Standard Deviation of Variance
• Mid Value-Mid Growth 90.65%
• Mid Growth-Small Value 85.78%
• Small Value-Small Growth 92.89%
• Small Value-Large Value 91.96%
• Large Value-Large Growth 87.34%
• Mid Value-Mid Growth 4.7%
• Mid Growth-Small Value 5.9%
• Small Value-Small Growth 4.2%
• Small Value-Large Value 4.2%
• Large Value-Large Growth 5.1%
RS Line IVW/IVEwhen direction is up
growth outperforming value
0.985
0.990
0.995
1.000
1.005
1.010
1.015
1.020
1.025
1/4
/20
10
2/4
/20
10
3/4
/20
10
4/4
/20
10
5/4
/20
10
6/4
/20
10
7/4
/20
10
8/4
/20
10
9/4
/20
10
10
/4/2
01
0
11
/4/2
01
0
12
/4/2
01
0
1/4
/20
11
2/4
/20
11
3/4
/20
11
4/4
/20
11
5/4
/20
11
6/4
/20
11
7/4
/20
11
8/4
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11
9/4
/20
11
10
/4/2
01
1
11
/4/2
01
1
12
/4/2
01
1
1/4
/20
12
2/4
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12
3/4
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4/4
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12
5/4
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6/4
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12
7/4
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12
8/4
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12
9/4
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12
10
/4/2
01
2
11
/4/2
01
2
Large Value vs. Large Growth
0
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100000
150000
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RS
IVW
IVE
Large Value vs. Large Growth
Year RS IVW IVE
2001 -11.16% -11.11% -10.95%
2002 3.75% -24.80% -21.93%
2003 32.43% -6.96% 2.28%
2004 11.51% 7.65% 16.76%
2005 5.37% 5.54% 7.53%
2006 14.89% 7.69% 16.17%
2007 2.68% 5.34% 1.97%
2008 -37.96% -37.54% -42.71%
2009 37.22% 36.90% 27.25%
2010 16.66% 13.94% 12.91%
2011 9.77% 4.79% 0.40%
2012 14.66% 13.41% 13.52%
Large Value vs. Large Growth Long Term Trend Filter
0
50000
100000
150000
200000
250000
RS
IVW
IVE
Mid Growth vs. Small Value
0
50000
100000
150000
200000
250000
300000
350000
400000
450000
RS
IJK
IJS
Mid Growth vs. Small Value
Year RS IJK IJS
2001 3.55% -7.16% 13.16%
2002 -12.45% -20.37% -15.91%
2003 15.50% 3.64% 18.38%
2004 15.65% 13.51% 22.73%
2005 16.24% 15.82% 7.99%
2006 9.45% 3.60% 14.87%
2007 12.67% 13.55% -4.90%
2008 -13.30% -40.87% -33.21%
2009 51.29% 49.70% 30.43%
2010 27.75% 28.86% 23.47%
2011 -1.20% -1.06% -1.19%
2012 14.13% 13.72% 10.49%
EFA vs. SPY
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300000
RS
EFA
SPY
Stocks vs. BondsSPY vs. IEF
0
50000
100000
150000
200000
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300000
RS
IEF
SPY
References
• Cooper, Tony; 2011, Optimal Rotational Strategies using combined Technical and Fundamental Analysis
• Fama, Eugene F.; French Kenneth R. 1992, Cross Section of Expected Stock Returns, Journal of Finance
• Fama, Eugene F.; French Kenneth R. 1993, Common Risk Factors in the returns of stocks and bonds, Journal of Financial Economics
For more informationcontact: Kevin G. Hockert, CMT
320-762-0175