Mojena Market Timing Live Model

Mojena Market Timing
Reality Check

The performances in Timing Model are theoretical in the sense that the model's structure is tested and revised annually (at the end of each year) to optimize return based on historical data. The revised model is then used "live" the following year. At the end of that year the model is revised once again, for use the following year. This page checks reality by describing the timing model's actual or live performance, starting with its first complete year in 1990.

Live Timing Model Performances

	Inflation	T-Bills	Buy & Hold	Standard	Aggressive
1990	6.1%	7.5%	-3.2%	11.9%	18.1%
1991	3.1%	5.4%	30.4%	30.4%	40.8%
1992	2.9%	3.5%	7.6%	7.6%	6.5%
1993	2.7%	3.0%	10.0%	10.0%	10.5%
1994	2.7%	4.3%	1.2%	-2.0%	-13.6%
1995	2.5%	5.5%	37.5%	25.6%	20.9%
1996	3.3%	5.0%	22.9%	17.4%	16.3%
1997	1.7%	5.1%	33.3%	22.7%	19.1%
1998	1.5%	4.9%	28.6%	35.5%	56.2%
1999	2.7%	4.7%	21.0%	12.8%	3.0%
2000	3.4%	5.8%	-9.1%	-3.8%	-14.0%
2001	1.6%	3.4%	-11.9%	-4.3%	-9.4%
2002	2.4%	1.6%	-22.1%	-7.3%	-0.3%
2003	1.9%	1.0%	28.6%	18.9%	15.4%
2004	3.3%	1.4%	10.9%	10.9%	13.3%
2005	3.4%	3.2%	4.9%	4.9%	4.2%
2006	2.5%	4.7%	15.7%	15.7%	20.7%
2007	4.1%	4.4%	5.4%	5.4%	4.6%
2008	0.1%	1.5%	-37.0	-13.0%	2.9%

Start	$100,000	$100,000	$100,000	$100,000	$100,000
End	166,381	209,941	380,721	585,772	626,556
Return	2.7%	4.0%	7.3%	9.8%	10.1%

Years to Double	25.9	17.8	9.9	7.4	7.2

Risk		0.0%	5.6%	2.5%	2.8%
Standard Deviation			19.9%	13.1%	17.2%
Max Drawdown (Yearly)			37.0%	13.0%	14.0%
Max Drawdown (Weekly)			18.2%	8.3%	9.0%

Max Return (Yearly)			37.5%	35.5%	56.2%
Max Return (Weekly)			12.0%	12.0%	18.0%
Risk-Adjusted Return			1.3	3.9	3.6
Sharpe Ratio			0.17	0.44	0.36
Return is total annual percent return, including any reinvested dividends, but not including expenses or taxes. Each account was updated (compounded) on a weekly basis. Risk is average under performance relative to the three-month T-Bill's annual return, a la Morningstar. Max Drawdown is the worst paper loss, based either per year or per week. Risk-Adjusted Return is return divided by risk (return per unit of risk). Standard Deviation is a statistical metric that describes variability, the standard measure of risk in financial analysis. Sharpe Ratio is another measure of risk-adjusted return, defined as excess return over risk-free return (T-bill return in this case) divided by standard deviation. Buy & Hold is buying and holding the S&P 500 Index through thick and thin, including reinvested dividends. Standard (model) is 100% in the S&P 500 during buy signals, including reinvested dividends, and 100% in T-Bills during sell signals. Aggressive is 150% long the S&P 500 (dividends not received) during buy signals and 100% short the S&P 500 (dividends not paid) during sell signals. The model's signals are based on week closings, but returns are calculated on next-day closings when switches are implemented, to more closely approximate the use of mutual funds and conform to reporting standards.

The timing model's standard portfolio returned more than a buy-and-hold strategy since 1990… and with much less risk. The standard model's annualized return of 9.8% would double an investment in about 7.4 years. Its risk of 2.5% is less than half that of buying and holding. It was also much less risky from a drawdown perspective. On an annual basis, its maximum loss was 13% (in 2008) versus the 37% loss last year for buying & holding. Maximum weekly drawdowns were 8% for the standard model and 18% for buying and holding.

Over the actual life of the model (since 1990), the standard model versus buy and hold ends with a larger portfolio, by about $205 thousand (54%), with less than half the risk. Its risk-adjusted return, favored by many analysts, more than triples that of buy & hold, based on Morningstar risk. Using the Sharpe ratio, its risk-adjusted return exceeds buy & hold’s by more than two-and-one-half times. Its intermediate to long-term perspective issued just 29 signals over 19 years, or about three every two years on average.

The aggressive model can substantially boost a year's return, as it did in 1998, but the price paid is higher volatility. The 14% drawdowns in 1994 and 2000 very much hurt its performance. Still, its performance leads the other alternatives, but at the expense of higher risk, as expected. Its risk-adjusted return and Sharp Ratio under-perform the standard strategy, but easily outdistance buy and hold.

Last year was a particularly demoralizing year. The buy & hold 37% loss for the year far exceeded previous high losses since 1970: 22% in 2002 and 27% in 1974. Back to 1926 (the start of the S&P 500), the 2008 loss is second only to the 43% Great Depression devastation in 1931, edging out the 35% hammering in 1937. The 13% loss for the standard portfolio, while meaningful, was well below the buy & hold 37% loss. Moreover, the model's loss for the year was almost entirely due to the misfortune of buying at the end of Monday's 12% surge following the weekend's buy signal. The aggressive portfolio ended the year in green at nearly 3%. Too late for sure, but the revised and re-optimized model for 2009 now incorporates the unprecedented volatility that characterized 2008: The S&P 500 experienced daily moves of 5% or more 17 times, a feat that took 50 prior years to match.

The hallmark of a very good timing model is to match or exceed its benchmark index over an extended period of time, but with much less risk. Sounds good, but it’s the rare money manager or newsletter writer that manages this feat. The standard and aggressive models have achieved this goal easily in actual use.

The shortage of severe corrections during the 1990s favored buying and holding strategies over timing systems. The length of the expansion from October, 1990 to April, 1997 was without precedent in not experiencing so much as a 10% correction. In April, 1997 we finally got an 11% correction in the S&P 500, but it lasted all of one day! On a weekly-closing basis, the correction was 9%, a nonevent from the model's perspective. The nearly 20% S&P 500 declines in 1990 and 1998, the 49% S&P 500 bear market in 2000-2002, a 52% encore decline in 2007-2008, and the Nasdaq's bear markets of 35% in 1998 and 78% in 2000-2002 all underscore the benefits of capital preservation strategies. Note that years in which there were substantial selloffs (1990, 1998, 2000, 2001, and 2002, 2008) are the years that the model's standard portfolio beat the buy and hold strategy.

The breakdown by decades in the accompanying tables tells the story. The standard strategy under-performed buy & hold by about 1.5% annualized percentage points per year during the 1990s, ending with a portfolio amount some $6200 less, a cumulative 12% deficit. Timing strategies simply can’t beat a disciplined buy & hold strategy during an exceptionally strong bull market. Adjusted for risk, the standard model’s return exceeds buy & hold’s return by 100% during the 1990s, but this does not translate into real dollars, unless risk scares off the buy & holder from practicing this tough, emotionless discipline. Research shows that real buy-and-holders don’t exist: emotion short circuits the required discipline.

And then came the new millennium. As in the 1970s, cash has been king in the 2000s, although the standard strategy falls just short of and the aggressive timing strategy beats cash invested in 90-day Treasury Bills. The total loss of an S&P portfolio over 2000-2008 was 28% compared to a 25% gain for the standard model and 38% gain for the aggressive option. A $10,000 S&P portfolio at the beginning of 2000 would stand at $7,171 by the end of last year; the standard portfolio would have ended at $12,517, or about 75% better off; the aggressive portfolio’s ending value outperformed buy and hold by about 92%. Unless we have a remarkable rally in 2009, this decade is the worst decade in the history of the S&P 500, surprisingly, even worse than the 1930s, which just about broke even.

It is worth repeating: Buy and hold based on the popular benchmark S&P 500 index is down a cumulative 28% through nine years of this decade, a devastating performance that has served to finally discredit the buy and hold strategy. Buy and hold actually marked a negative real return of -6.1% per year over the current decade, after accounting for a 2.5% annualized inflation rate. That is to say, the buying power of a buy-and-hold portfolio is less now than it was at the beginning of 2000. Cash has been king for the past nine years, aggressive model excepted.

Strongly cyclical markets are tailor-made for a good timing system to decisively beat buy and hold, as seen in the second table at right and by the previous secular bear market that spanned 1966-82, as the Dow flirted with 1000 for 16 bruising years. The model's genetic heritage easily gives it a decisive edge over the theoretical buy and holders during prolonged declines; over extended increases, as in the 1980s and 1990s, the model either slightly trails or slightly leads buy and hold, depending on the time period.

Note:
The model's signals use week-end (usually Friday) closings but the reported live performances are based on next-day (usually Monday) trading, to more closely approximate the reality of mutual fund trading and better conform to performance reporting standards.

Live Market Timing Phases

Note:
Each signal date in the table is a Sunday. Each index is a next-day closing. These are actual (not theoretical) results. See download page for Excel workbook that includes time series of S&P 500 and model histories.

Timing Model Signal Phases
Dates	Signal	Positions	DJI	S&P 500	Nasdaq	Comment
10/29/89 09/30/90	Sell	Cash/Short	2603-2516 -3%	335-315 -6%	451-355 -21%	Stood aside during 13% S&P 500 rally from February to July, but avoided 20% bear-market decline into October. Overall, dodged 6% loss in S&P 500 and stiff 21% pummeling in Nasdaq.
09/30/90 04/03/94	Buy	Stocks	2516-3593 +43%	315-439 +39%	355-727 +105%	Missed bear-market bottom by 15 S&P 500 points (on next-day closing basis) and two weeks. Rode primary bull market for about 3 1/2 years. Nasdaq was rocket over this period.
04/03/94 04/09/95	Sell	Cash/Short	3593-4198 +17%	439-507 +15%	727-821 +10%	Poor sell signal. Up in air for nine months as markets traded within narrow ranges, but missed powerful rally that took averages to new highs in first quarter, 1995. Back to drawing board. Model substantially revised July, 1995, based on data through end 1994. New model would have given timely and LIVE buy signal in mid January, 1995.
04/09/95 07/14/96	Buy	Stocks	4198-5350 +27%	507-630 +24%	821-1060 +29%	Good buy signal, with solid gains each index. In hindsight, this buy phase should have continued.
07/14/96 08/04/96	Sell	Cash/Short	5350-5674 +6%	630-660 +5%	1060-1121 +6%	Unsuccessful switch-back signal, lasting only three weeks and giving up gains of 5-6% in indexes. Looked good for two weeks, but strong rally in third week flipped signal back to buy. Current model's technical indicators very sensitive to market's volatility.
08/04/96 04/06/97	Buy	Stocks	5674-6556 +15%	660-762 +15%	1121-1251 +12%	Profitable, with okay gains all indexes. Ideally, this buy phase should have been continuation of preceding buy phase.
04/06/97 05/04/97	Sell	Cash/Short	6556-7214 +10%	762-830 +9%	1251-1339 +7%	Another short sell signal with gains regretted. The 9% lost opportunity gain in the S&P 500 is higher than previous 5% worst case for this version of model. Stunning last week accounts for just about all gains, a lesson not lost in next revision of model.
05/04/97 08/02/98	Buy	Stocks	7214-8787 +22%	830-1112 +34%	1339-1851 +38%	Fifteen-month phase yields good gains all around, although Dow significantly lags behind Nasdaq. In hindsight, this buy phase should have been extension of preceding buy phase.
08/02/98 10/18/98	Sell	Cash/Short	8787-8466 -4%	1112-1062 -4%	1851-1649 -11%	Eleven-week sell signal modestly successful as 4 to 11% losses are avoided, while nestled in safety of money market during very volatile period that included bear market in Nasdaq.
10/18/98 07/25/99	Buy	Stocks	8466-10861 +28%	1062-1348 +27%	1649-2619 +59%	Nine-month buy signal very profitable, especially Nasdaq gain.
07/25/99 01/23/00	Sell	Cash/Short	10861-11008 +1%	1348-1402 +4%	2619-4096 +56%	Did a good job of identifying summer's 12% thirteen-week decline in its early stages, but overlooked subsequent 18% eleven-week reversal to the upside ending December 31. Gave up small gains in the Dow and S&P over its 26-week sell signal, but missed the Nasdaq blow out.
01/23/00 01/30/00	Buy	Stocks	11008-10941 -2%	1402-1394 -2%	4096-3940 -1%	One-week switchback shows small losses.
01/30/00 06/04/00	Sell	Cash/Short	10941-10815 -1%	1394-1468 +5%	3940-3822 -3%	Eighteen week sell signal okay for Dow and Nasdaq, but foregone gain for S&P.
06/04/00 06/25/00	Buy	Stocks	10815-10543 -3%	1468-1455 -1%	3822-3912 +2%	Small losses in big caps, small gain in techs, in volatile markets.
06/25/00 07/09/00	Sell	Cash/Short	10543-10647 +1%	1455-1476 +1%	3912-3980 +2%	Another short signal gives up small gains as model reacts to tape changes while looking to be on right side of any sustained move.
07/09/00 07/30/00	Buy	Stocks	10647-10522 -1%	1476-1430 -3%	3980-3767 -5%	Three-week signal yields moderate losses as model gets whipsawed by trading-range behavior.
07/30/00 08/20/00	Sell	Cash/Short	10522-11080 +5%	1430-1499 +5%	3767-3953 +5%	Model once again on wrong side of three-week trade, as momentum falters in continued trading range. Market reminiscent of 1994 market, but this model more sensitive than earlier version, reacting to head fakes, while likely ensuring early detection of persistent market direction.
08/20/00 09/24/00	Buy	Stocks	11080-10808 -2%	1499-1439 -4%	3953-3741 -5%	Continued trading range promotes another losing trade.
09/24/00 05/20/01	Sell	Cash/Short	10808-11338 +5%	1439-1313 -9%	3741-2306 -38%	Sell signal lasted eight months, during which S&P lost 9%. Bear market confirmed during this signal, at 28% below high. Nasdaq plunged 38% during signal. Its bear-market low stands at 68% below high. Dow was star here, actually rising 5%, recovering from near-bear market low of almost 20%.
05/20/01 06/17/01	Buy	Stocks	11338-10645 -6%	1313-1208 -8%	2306-1989 -14%	Poor buy signal, with significant losses all around. Strong counter-trends, lasting just weeks, give model grief, until clearer intermediate to long-term trends emerge.
06/17/01 12/09/01	Sell	Cash/Short	10645-9921 -7%	1208-1140 -6%	1989-1992 +0%	Six-month sell signal moderately successful, although subsequent buy signal missed bottom of ten-week tradable rally from bear-market lows of Dow 8236 (-30% from high), S&P 966 (-37%), and Nasdaq 1423 (-72%) following 9/11.
12/09/01 02/10/02	Buy	Stocks	9921-9885 -1%	1140-1112 -2%	1992-1847 -7%	Two-month buy signal incurs small S&P loss, continuing pattern of losing short-lived buy trades dating back to beginning of bear market in early 2000.
02/10/02 12/01/02	Sell	Cash/Short	9885-8863 -10%	1112-935 -16%	1847-1485 -20%	Ten-months sell signal avoids substantial losses in S&P and Nasdaq, less so in Dow. During this signal the indexes hit multi-year lows in October, 2002, from peaks in Q1, 2000: 11723 to 7286 (-38%) for Dow; 1527 to 777 (-49%) for S&P; 5049 to 1114 (-78%) for Nasdaq.
12/01/02 01/26/03	Buy	Stocks	8863-7990 -10%	935-847 -9%	1485-1325 -11%	Badly-timed two-month signal; 90% of damage in last two weeks, as geopolitical and earnings worries tank market.
01/26/03 04/27/03	Sell	Cash/Short	7990-8472 +6%	847-915 +8%	1325-1462 +10%	Three-month sell signal gives up gains all indexes, mostly over last two weeks. Trading-range-bound market since last December catches model on wrong side of last two trades.
04/27/03 01/06/08	Buy	Stocks	8472-12827 +51%	915-1416 +55%	1462-2499 +71%	Record-long buy signal shows solid gains.
01/06/08 04/20/08	Sell	Cash/Short	12827-12825 0%	1416-1388 -2%	2499-2408 -4%	Fifteen-week sell signal is a wash for the Dow and slightly successful for the S&P and Nasdaq.
04/20/08 06/08/08	Buy	Stocks	12825-12280 -4%	1388-1362 -2%	2408-2459 +2%	Ten-week buy signal shaves 2% from our benchmark index and splits results on the Dow and Nasdaq. Spike in oil prices and poor jobs report tank recovering market and trip new sell signal as recession fears grow. Increased volatility associated with more frequent switch signals.
06/08/08 10/12/08	Sell	Cash/Short	12280-9388 -24%	1362-1003 -26%	2459-1844 -25%	Four month signal avoids significant losses all indexes, as market enters bear market and slow-motion crash prior to surge on Oct 13.
10/12/08 ?	Buy	Stocks	9388-? ?%	1003-? ?%	1844-? ?%	Current signal. Buy signal given over weekend with S&P 500 at 899. As luck would have it, 12% rally on Monday marked purchase at 1003.

Last revised 02/05/2009

Distribution
Copyright © 2009 Richard Mojena. All rights reserved. The information presented here may not under any circumstances be resold or redistributed for compensation of any kind without prior written permission from Richard Mojena at mojena.com.

Disclaimer
Specific and personalized investment advice is not intended by this communication. Its contents are for the public record as a free public service. Information is based on the analysis of past data and assessments by the models. Future performance may not reflect past performance. Profitable trades are not guaranteed. No system or methodology ensures stock market profits. No guarantee is made regarding the reliability or accuracy of data. In other words, use this stuff at your own risk!