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Re-Entry Signals Following 10 Month Moving Average Exit

Posted By Barry Ritholtz On May 16, 2012 @ 7:00 pm In Investing,Quantitative | Comments Disabled

Back in the beginning of the year [1], I mentioned that Mebane Faber and I were exploring updating his Spring 2007 Journal of Wealth Management paper titled “A Quantitative Approach to Tactical Asset Allocation [2].” (He is the Chief Investment Officer of Cambria Investment Management [3]).

As we discussed back earlier, Meb reviewed a simple timing model — the 10-month moving average — as a signal to enter and exit various asset classes. He demonstrated a notable performance improvement across all asset classes versus traditional “Buy & Hold” investing.

Given the asymmetrical nature of market tops and bottoms, I thought that we could improve the returns of the 10 month MA sell/buy model by tweaking the re-entry signal. The description of markets as asymmetrical is based on both data and personal experience — tops take longer, seem to be more of a process, and develop over a longer time line, while bottoms tend to be more of a shorter, sharper event.

Asked in a different manner:

Assume an investor exits equity markets at the downward break of the 10 month MA; How do the following re-entry signals compare to using the 10 month MA alone? Are there any other signals worth reviewing to as a re-entry?

This is what we will be testing over the next few weeks:

 

1. TREND

  1. BUY:  Price > 5 Month MA (test 6-7-8)
  2. BUY:  Price > 40 week ma (20/25/30, etc.)

2. REVERSION

  1. BUY: Drawdown > 50%
  2. BUY: Price > 20% from 200 day SMA  (25%?)
  3. BUY: % of NYSE stocks above 200 day MA < 15% (12.5%, 20% ?)

3. VOLATILITY

  1. BUY:  VIX > 50
  2. BUY: When more than 50 of the trailing 90 trading days > 1% moves

4. SENTIMENT

  1. AAII Stock Asset Allocation 25 year mean of a 60% — BUY: Allocation > 15% below mean
  2. AAII Bull/Bear Sentiment Ratio –BUY: < 30%

5. MARKET Returns

  1. BUY: Trailing 3 year returns < 5%
  2. BUY: Monthly Return < -7%
  3. BUY: Annual Return < -10%

6. VALUATION

  1. BUY:  Mkt Cap/GDP ratio falls > 40%
  2. BUY: US Dividend Yield > 3%
  3. BUY Tobins Q: Equity Value/Book Value < 0.6
  4. BUY:  Shiller CAPE < 10

7. ECONOMIC (Data to 1948)

  1. BUY: GDP falls > 2% year-over-year
  2. BUY: Coincident-to-lagging indicator falls 10 points from highs

8. INSIDERS

  1. BUY: Insider buying > 20% of 5 year mean
  2. BUY: C-level insiders (CEO/CFO etc) > 15% 5 year mean

9. EARNINGS

  1. BUY: Earnings < -25% Year-over-year
  2. BUY: Earnings revisions > -9% (negative 9% or worse)

 

Based on some preliminary research, suggestions from friends and colleagues, and a dollop of gut feel, this is what we are going to be back-testing.

I would appreciate any suggestions, comments or ideas on the subject.


Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2012/05/mebane/

URLs in this post:

[1] beginning of the year: http://www.ritholtz.com/blog/2012/01/revisiting-quant-approach-to-tactical-asset-allocation/

[2] A Quantitative Approach to Tactical Asset Allocation: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=962461

[3] Cambria Investment Management: http://www.cambriainvestments.com/firm/team/

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