Monday, December 2, 2013

Testing Weekly Update

Taking a page from Mr. Doug Short, who does something similar monthly (lastest end Nov update here) regarding the Ivy Portfolio by Mebane Faber, here is my weekly updates moving averages chart.

Meb Faber also actually has a page where he has made it fantastically easy to see where the 5 asset classes are in relation to their moving average.

Sidenote: I just got a copy of his book, The Ivy Portfolio, after seeing so much about it and with DShort promoting it. I will do a review soon!

This is just the rough table that I am thinking of updating every week. Hopefully I can dabble into the remaining funds, so that the format will not change. Actually, what's stopping me from tracking funds that I don't own now, but intend to own? Haha, I will include my intended funds next week!

I have sorted the listed to what I think are the most sensitive classes that will benefit the most from market timing. The bottom 3 funds, US Agg Bonds, Global Bonds and Global Inflation Bonds are AAA, A and AAA rated respectively, which means that they are relatively stable in their returns and preserving capital. The GTAA paper by Meb Faber also shows that timing bonds and a very marginal effect on returns and volatility. No doubt it helps, but when transaction costs come in, I question the benefits when compared to the cost and effort put in.

These 3 bond funds will actually just be held throughout a "cash" period. Given that I see that the downside seems to be over (which should not be more than 10% anyway), I intend to use the cash saved up during that holding period and slowly step in quarters as each of the signals turn green in sucession.

However, for the group of funds listed above, I intend to follow buy and sell rules more strictly. In fact, the 50 SMA turning yellow or red is there to alert me to be mindful of that asset classes, and not to go for more than a week without internet.

The main indicator that I shall be following will be a weekly close under the 200 SMA. However, in circumstances which only seem like a whipsaw and no fundamental long term risk or steep correction, I might wait until the 50 SMA crosses below the 200 SMA, which will definitely be my confirmation signal to sell, unless price has already cleared back above the 200 SMA, which I would think would be a very rare scenario.

Finally, the slope of the 200 SMA gives confirmation of the underlying trend bias.

I am still undecided how to use these signals to constantly value average and add in capital to my fund. I am toying with the idea of setting aside "cash" accounts for each of the asset classes, and "cash" account money can only be added into positions when an additional buy signal is generated, for example, if price crossed under the 50 SMA, but has just crossed above the 50 SMA again. The only other option that I can think of is using discretion to decide when is the best time to add to positions. Of course, the drawback to this is opportunity cost of sitting out of a performing asset class.

I am though, quite interested to adopt the (Cash / Invested) binary option that the Ivy Portfolio uses, which DShort tracks. In fact, I think I would like to start segmenting my portfolio now, to show what is invested, and what is "Cash" dry powder that I am holding on to, for that specific asset class.

However, I am thinking of scaling in positions. Perhaps, if the asset class has no positions, price clearing the 50 SMA might warrant a 20% position. If the price continues to clear the 200 SMA, add a 50% position. Once the 50 SMA crosses the 200 SMA, add in 20%. Finally if the 200 SMA turns positive, allocate the remainder of the money sitting in the "Cash" account.

Thinking about it, that would actually mean that I am using 4 different kinds of moving average triggers, which I don't know if that is a good thing.... Anyway, surfed around the net and I found a site from Turnkey Analyst talking about the exact thing I am doing, which is tactical asset allocation, equal weight, based on moving averages here. Linked around here and there and found a great backtest on risk parity, momentum and moving average strategies applied to and benchmarked against an equal weighted asset allocation basket. The conclusion is that diversified, equal weighted, moving average strategy has similar CAGR to a 60/40 or the S&P, but with greatly reduced volatility, and also a much reduced drawdown (15%).

Honestly though, I'm just hoping to find a moving average strategy, either price action or a cross, which has been sort of optimized for different asset classes based on their historical volatility, to reduce whip-saws and have better timing on entries and exits. Well these were the best that I could find, a table comparing the different MA crosses between simple and exponential, and more about the golden 50/200 cross explained. So far, it looks like the 50/200 SMA is the most simple and straightforward crossover method, though just the simple 200 SMA and price action strategy does do well too. Sadly, there is no comparison between a crossover or price action strategy that I can find from the same independent source, so the testing method would be similar, therefore results can be compared.

Actually, after reading all the different research articles and backtests by so many different sites, I think perhaps a simple 2 strategy method might work, which is 50% based on 200 SMA price action, and 50% based on the 50/200 SMA crossover. If both signal green, 100% invested. If both signal red, definitely 100% out of the woods. Hmmm.... I shall ponder this whether it really makes sense or not.

Anyway, this was a huge post on my simple tactical allocation strategy that I'm trying to work out by year-end. I'm actually pretty psyched about it now that I think about it! Look forward to updates, because this is going to be sweet!

No comments:

Post a Comment

Observe the house rules.