Sunday, December 31, 2017

My 2017 report card

Preface: Explaining our market timing models
We maintain several market timing models, each with differing time horizons. The "Ultimate Market Timing Model" is a long-term market timing model based on the research outlined in our post, Building the ultimate market timing model. This model tends to generate only a handful of signals each decade.

The Trend Model is an asset allocation model which applies trend following principles based on the inputs of global stock and commodity price. This model has a shorter time horizon and tends to turn over about 4-6 times a year. In essence, it seeks to answer the question, "Is the trend in the global economy expansion (bullish) or contraction (bearish)?"

My inner trader uses the trading component of the Trend Model to look for changes in the direction of the main Trend Model signal. A bullish Trend Model signal that gets less bullish is a trading "sell" signal. Conversely, a bearish Trend Model signal that gets less bearish is a trading "buy" signal. The history of actual out-of-sample (not backtested) signals of the trading model are shown by the arrows in the chart below. Past trading of the trading model has shown turnover rates of about 200% per month.

The latest signals of each model are as follows:
  • Ultimate market timing model: Buy equities*
  • Trend Model signal: Bullish*
  • Trading model: Bullish*
* The performance chart and model readings have been delayed by a week out of respect to our paying subscribers.

Update schedule: I generally update model readings on my site on weekends and tweet mid-week observations at @humblestudent. Subscribers will also receive email notices of any changes in my trading portfolio.

Marking my 2017 calls to market
As 2017 draws to an end, it's time to mark my 2017 forecasts to market. Overall, the stock market in 2017 was remarkable. What if I told you that you could have had returns with a Sharpe Ratio of 3.2, using the 3-month T-Bill as the risk-free rate? As it turns out, you could have achieved that with a simple buy-and-hold long position in the SPX, whose Sharpe ratio is the second highest in its history in the last 59 years (via Vincent Deluard of NDR).

Indeed, US equities rose steadily in 2017. The drawdown was only 3% in the year, which is a feat that was last achieved in 1995.

With that in mind, I review my inner investor and inner trader calls of 2017. My inner investor gave himself a grade of B+, and my inner trader gave himself an C+ for the year.

The full post can be found at our new site here.

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