Market Map update 12/30/2013

As we approach the end of 2013, we look to the components that make up the Market map model to give us a systematic indication of tactical asset allocation changes, if any.

Component #1 and #2 calculate:

1) the annual performance(s) of the SP 500 index versus calculation of an average of the 40 year CAGR ( compound annual growth rate ) of the SP 500 index ( total return basis ).

2) Rule set applied to mean variance / regression calculations performed on “consecutive” years of annual “overperformance” or “underperformance” that occur as calculated in # 1. See objective # 5.

The average of the 40 year CAGR calculation of the S&P500 up to 12/2013 is 10.3%

The return for the S&P500 for 2012 was 15.9%

The return for the S&P500 for 2013 has been 31.7%

2012 and 2013 have produced consecutive returns > the calculation of component #1.

Component #3  derives data from a time series analysis applied to strategic data points occurring over the months of November, December, and January segregated into performance scores. These scores have had high correlation coefficients relative to the following year’s market performance and are integrated with component #2.

Objective #5 does not apply for this year .

Since the requirement for 2 consecutive years for components #1 and #2 has been fulfilled, this indicates that the market has “overperformed” it’s mean as calculated by the algorithm. We now have an alert towards asset allocation action. We need to wait for the calculation of component #3, which occurs in the middle part of January. If component #3 calculation produces a “Favorable Risk Year 6 month” profile, then we will remain allocated in the equity ETF’s QQQ ( or the SPY ) until July 2014. If it produces a “Neutral” or “High Risk” reading, then we will allocate assets towards cash equivalents. The most recent asset allocation action was taken 12/30/2011; SPY @ 125.5 and QQQ @ 55.8.
If “brand new” capital is to be put to work, then allocation towards the QQQ or SPY ETF would be performed, near the end of the last trading day of the year.

Table 1,2  show previous instances of the current scenario:

Table 1
Deploying brand new cash last trading day of year. Component #3 indicates “Favorable 6 month”:

favorable-6-mo

Table 2
Deploying brand new cash, last trading day of year. Component # 3 indicated “Neutral” or ” High risk”:

Whipsaws Map

 

Market Map component described here:  https://stockmarketmap.wordpress.com/2013/08/

http://seekingalpha.com/article/1725902-market-map-model-1-tactical-asset-allocation-using-low-expense-index-etfs
Market Map risk profiles: https://stockmarketmap.wordpress.com/2013/10/10/market-map-model-1-risk-profiles/ http://seekingalpha.com/article/1738582-market-map-model-1-risk-profiles

We are long QQQ

Market Map  ….. Think different(ly)

 

Market Map Model : Using Small Cap Value Weighted Portfolio

This article examines Market Map model applied to a portfolio with a tilt towards a small capitalization “value weighted” methodology.  The portfolio constructed using this methodology is based on the Fama/French “factor” model  http://portfoliosolutions.com/latest-learnings/fama-french-three-factor-model; the factors being beta, size, and value. The DFA US Small Cap Value (DFSVX), a mutual fund whose composition utilizes the factor model, was created through the efforts of Dimensional Fund Advisors http://www.dfaus.com.

Additionally, the analysis combines MMap model with a “Sell in May” component, both of which are applied to the small cap data. The initial details of Market Map model (as applied to the S&P500 index) are covered here https://stockmarketmap.wordpress.com/2013/08/29/market-map-model-sp500/ and the “Sell in May” primer is here https://stockmarketmap.wordpress.com/2013/11/01/using-market-map-model-1-with-sell-in-may/ .

The Small Cap indices and historical performance data compiled for the analysis and calculation for the tables below come from:

1) the DFA US Small Cap Value I and Vanguard Small Cap Value Index * 1999 – 2013

2) the “Small capitalization Average Value Weighted” portoflio formed on size and momentum (1927-1998 ) from the Kenneth R. French data libraryhttp://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html#Developed

3) the Nasdaq 100 index (1989-1999) / Powershares QQQ Trust ETF (QQQ) (2000-2013) and

4) Barclays iShares 20+ Year Treasury Bond ETF (TLT) / Vanguard Long-Term Treasury Fund Investor Shares (VUSTX) / or 30 year bond rate.

Table 1

Market Map model + Sell in May allocation dates using Small cap indices data and 30 yr. Bond proxy  1927 – 2013   Notice cash dates starting at the ends of April vs. cash dates starting on 3rd week of Jan with the MM model using SPY / QQQ in previous posts  …

SV signal dates Map sell in May 1927- 1973   SV trade dates Map 2 Sell may SV 1974 - 2013

Table 2

Statistics for table 1 :

Small Cap stats 1927 - 2013

Table 2 shows that over an 86 year period,  both the Market Map model and MM model with the addition of the  “Sell in May” component outperformed the Small Cap value buy an hold with less risk, with the “Sell in May ” component outperforming by a wide margin.

Table 3

Historical statistics comparisons based on small cap value Buy & Hold, MM model with small cap value, MM model with small cap value using “Sell in May”,  and MM model using Nasdaq 100 / QQQ 1989 – 2013  :

Small cap stats 25 years

Table 4

Annualized returns 5, 15, 25, 86 years

Small cap matrix 1927 - 2013

 

In viewing tables 1–4, the Market Map model combined with “Sell in May” component (table 4 item c) outperformed items a & b. We believe that, when used in conjunction with the MMap model / QQQ,  the MM model + Sell in May applied the small cap value portfolio, is valuable in providing diversification across two different stock style universes.

As the work of Fama and French has proven that small cap value  are dominant factors ( size and value) in compound return the performance of the other Morningstar style box classifications http://www.investopedia.com/articles/basics/06/stylebox.asp, an interesting aspect of this study is that the QQQ ETF, while representing a “large cap growth/blend” classification in the style box, has returns comparable to items b and c in table 4 with similar risk characteristics when the Market Map model is applied.

The “Sell in May” component improved the performance of the series when applied to the Small cap value portfolio, but didn’t provide performance improvement when applied to the Nasdaq 100/QQQ index (analysis not shown). The reason for the performance superiority of “Sell in May” when applied to the small cap value universe vs. other indices / stock universes is unknown. Over 90 years, when the extra 3 months of small cap equity exposure  (Feb, Mar, Apr ) occurred within the model signaling heuristics, they produced positive outcomes, in aggregate, vs. when other indices when subjected to equity exposure during the same periods.  Chart 1 below.

Chart 1

 

ScreenHunter_890 Oct. 15 08.11

Chart 2

Recent 20 Year Rolling Compound Growth Rate vs. small cap buy & hold
20 yr CGR Small Cap Value

Chart 3 illustrates the effect of the Map model on reducing drawdowns

Chart 3

Worst Drawdowns 1927 – 2013

Drawdn small cap value

Charts 4 – 8 show 20 year growth vs. MM model using S&P 500 and small cap Buy & Hold

Chart 4

Small Cap 1294 - 1943

Chart 5

Small Cap 1944 - 1963

Chart 6

Small Cap 1964 - 1983

Chart 7

Small Cap 1984 - 2003

Chart 8

Small Cap 2004 - 2014

 

*  The use of the Vanguard Small Cap Value exchange traded fund ( VBR ) ( replicated from Vanguard Small Cap Value Index ( VISVX ) ) can be used as proxy for small cap value as it’s performance is comparable to the DFA US Small Cap Value fund. Similar to the QQQ, the Vanguard Small Cap Value ETF also offers low management fees and tax ratios compared to those of the DFA US Small Cap Value.

” When everyone is looking for the needle in the same haystack, go look in a different haystack”