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% |
|
1.5% |
4.9% |
28.6% |
35.5% |
56.2% |
|
|
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% |
|
2009 |
2.8% |
0.2% |
26.6% |
26.6% |
33.9% |
|
|
|
|
|
|
|
|
Start |
$100,000 |
$100,000 |
$100,000 |
$100,000 |
$100,000 |
|
End |
170,949 |
210,275 |
481,827 |
741,333 |
839,128 |
|
Return |
2.7% |
3.8% |
8.2% |
10.5% |
11.2% |
|
|
|
|
|
|
|
|
Years to Double |
25.9 |
18.7 |
8.8 |
6.9 |
6.5 |
|
|
|
|
|
|
|
|
Risk |
|
0.0% |
5.3% |
2.4% |
2.7% |
|
Standard Deviation |
|
|
19.7% |
13.2% |
17.4% |
|
Max Drawdown (Yearly) |
|
|
37.0% |
13.0% |
14.0% |
|
Max Drawdown (Weekly) |
|
|
18.2% |
8.3% |
12.6% |
|
|
|
|
|
|
|
|
Max Return (Yearly) |
|
|
37.5% |
35.5% |
56.2% |
|
Max Return (Weekly) |
|
|
12.0% |
12.0% |
18.0% |
|
Risk-Adjusted Return |
|
|
1.5 |
4.5 |
4.1 |
|
Sharpe Ratio |
|
|
0.22 |
0.51 |
0.43 |
|
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 10.5%
would double an investment in about 7 years. Its risk of 2.4% 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 that same 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 $260 thousand (54%), with less than half the risk. Its risk-adjusted return, favored by many
analysts, triples that of buy & hold, based on Morningstar
risk. Using the Sharpe ratio, its
risk-adjusted return exceeds buy & hold’s by more than double. Its intermediate to long-term perspective
issued just 29 signals over 20 years, or about three every two years on
average.
The
aggressive strategy 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.
Year 2008 was particularly
demoralizing. 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 2010 now incorporates the unprecedented volatility that
characterized the past two years: In 2008 alone, 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, a lost decade, the worst performing ten years in
the S&P 500 index since its inception in the 1920s. Surprisingly,
the economically-devastating 1930s just about broke even for a buy and hold
investor, a much better performance than the recent decade’s cumulative 9% loss, which works out to a 1%
annualized loss. A passive portfolio of $10,000 based on
the S&P 500 Index at the start of 2000 would have ended with $9,075 at the
end of last year, including reinvested dividends. Compared to the discredited
buy-and-hold strategy, cash was king. A portfolio invested in three-month
treasuries (our money-market benchmark) would have ended with a value of
$13,069, or about 44% more than the stock portfolio. The standard
portfolio beat buy & hold by about 75% ($15,840 v $9,075) and the
aggressive version outpaced buy & hold by roughly 100%. The
aggressive portfolio more than doubles the buy-and-hold portfolio. And
keep in mind that these are actual results, not theoretical results
based on back testing.
It is worth repeating: Buy
and hold based on the popular benchmark S&P 500 index is down a cumulative 9% over the ten years of the past 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 -3.5% 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 lost decade, standard and aggressive strategies 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.
Live Market Timing Phases
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.
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 |
Sell |
Cash/Short |
2603-2516 |
335-315 |
451-355 |
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 |
Buy |
Stocks |
2516-3593 |
315-439 |
355-727 |
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 |
Sell |
Cash/Short |
3593-4198 |
439-507 |
727-821 |
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 |
Buy |
Stocks |
4198-5350 |
507-630 |
821-1060 |
Good buy signal, with solid gains each index. In hindsight, this buy phase should have continued. |
|
07/14/96 |
Sell |
Cash/Short |
5350-5674 |
630-660 |
1060-1121 |
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 |
Buy |
Stocks |
5674-6556 |
660-762 |
1121-1251 |
Profitable, with okay gains all indexes. Ideally, this buy phase should have been continuation of preceding buy phase. |
|
04/06/97 |
Sell |
Cash/Short |
6556-7214 |
762-830 |
1251-1339 |
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 |
Buy |
Stocks |
7214-8787 |
830-1112 |
1339-1851 |
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 |
Sell |
Cash/Short |
8787-8466 |
1112-1062 |
1851-1649 |
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 |
Buy |
Stocks |
8466-10861 |
1062-1348 |
1649-2619 |
Nine-month buy signal very profitable, especially Nasdaq gain. |
|
07/25/99 |
Sell |
Cash/Short |
10861-11008 |
1348-1402 |
2619-4096 |
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 |
Buy |
Stocks |
11008-10941 |
1402-1394 |
4096-3940 |
One-week switchback shows small losses. |
|
01/30/00 |
Sell |
Cash/Short |
10941-10815 |
1394-1468 |
3940-3822 |
Eighteen week sell signal okay for Dow and Nasdaq, but foregone gain for S&P. |
|
06/04/00 |
Buy |
Stocks |
10815-10543 |
1468-1455 |
3822-3912 |
Small losses in big caps, small gain in techs, in volatile markets. |
|
06/25/00 |
Sell |
Cash/Short |
10543-10647 |
1455-1476 |
3912-3980 |
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 |
Buy |
Stocks |
10647-10522 |
1476-1430 |
3980-3767 |
Three-week signal yields moderate losses as model gets whipsawed by trading-range behavior. |
|
07/30/00 |
Sell |
Cash/Short |
10522-11080 |
1430-1499 |
3767-3953 |
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 |
Buy |
Stocks |
11080-10808 |
1499-1439 |
3953-3741 |
Continued trading range promotes another losing trade. |
|
09/24/00 |
Sell |
Cash/Short |
10808-11338 |
1439-1313 |
3741-2306 |
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 |
Buy |
Stocks |
11338-10645 |
1313-1208 |
2306-1989 |
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 |
Sell |
Cash/Short |
10645-9921 |
1208-1140 |
1989-1992 |
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 |
Sell |
Cash/Short |
9885-8863 |
1112-935 |
1847-1485 |
Ten-months
sell signal avoids substantial losses in S&P and Nasdaq, less so in Dow. |
|
12/01/02 |
Buy |
Stocks |
8863-7990 |
935-847 |
1485-1325 |
Badly-timed
two-month signal; 90% of damage in last two weeks, as geopolitical and
earnings worries tank market. |
|
01/26/03 |
Sell |
Cash/Short |
7990-8472 |
847-915 |
1325-1462 |
Three-month
sell signal gives up gains all indexes, mostly over last two weeks. |
|
04/27/03 |
Buy |
Stocks |
8472-12827 |
915-1416 |
1462-2499 |
Record-long
buy signal shows solid gains. |
|
01/06/08 |
Sell |
Cash/Short |
12827-12825 |
1416-1388 |
2499-2408 |
Fifteen-week
sell signal is a wash for the Dow and slightly successful for the S&P and
Nasdaq. |
|
04/20/08 |
Buy |
Stocks |
12825-12280 |
1388-1362 |
2408-2459 |
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 |
Sell |
Cash/Short |
12280-9388 |
1362-1003 |
2459-1844 |
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 |
9388-9744 |
1003-1028 |
1844-2094 |
Twenty-one
month buy signal yields unimpressive results as market sinks 16% from
recovery high over 10 weeks. Buy
signal given over weekend with S&P 500 at 899. As bad luck would have it, 12% rally on
Monday marked purchase at 1003. With
reinvested dividends the respective returns were 10, 8, and 16%. |
|
07/04/10 |
Sell |
Cash/Short |
9744-10525 |
1028-1115 |
2094-2296 |
Three-week
switchback gives up sharp gains in volatile, bipolar market. See fast sell signals in 1996, 1997, and
2000 for subsequent historical results. |
|
07/25/10 |
Buy |
Stocks |
10525-? |
1115-? |
2296-? |
Current
signal. |
Distribution
Copyright © 2010 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!