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Binary RS and Dynamic Asset Allocation

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  • 1. Binary RS andDynamic Asset Allocation Kevin G. Hockert, CMT Prospero Institute for Investors 11.26.2012Kevin@AskProspero.com 320-762-0175
  • 2. Important financial market relationships• Bonds – Yield Curve• Treasury Bonds vs. Invest. Grade Corporate• Invest. Grade Corporate vs. High Yield• Stocks vs. Bonds• Large vs. Small• US equity vs. International Equity• Value vs. Growth
  • 3. Applications of RS• Optimize returns available from a broad universe of securities Ranking/Rotation - universe of growth stocks i.e. IBD, Sector Rotation• Dynamic Asset Allocation• Binary – isolate 2 markets that encompass important market relationships
  • 4. Components of TrendScore• Short term trend• Intermediate term trend• Long term trend• Intermediate term momentum• Long term momentum• Intermediate term relative strength• Long term relative strength
  • 5. Definition of components• Trend – position of price relative to past• Momentum = acceleration or deceleration in trend• Relative Strength = performance of a security relative to a market index and/or universe of securities
  • 6. Binary RS• Data set is confined to 2 markets & encompasses IMPORTANT market relationships• Utilize Intermediate or Long Term RS• Long Term Trend• Price divided by Price• Smooth data (exponential moving averages)• Relationships• Level and direction = Momentum of RS
  • 7. S&P 500 vs. Russell 2000 1971-20123000000250000020000001500000 RS SPX RUT1000000 500000 0
  • 8. Variance in 13 Week Returns Style and Market Cap 0.20.15 0.10.05 Mid Value-Mid Growth 0 Mid Growth-Small Val Small Value-Small Growth-0.05 Small Value-Large Value Large Value-Large Growth -0.1-0.15 -0.2
  • 9. 13 Week Correlations & Standard Deviation of Variance• Mid Value-Mid Growth 90.65% • Mid Value-Mid Growth 4.7%• Mid Growth-Small Value 85.78% • Mid Growth-Small Value 5.9%• Small Value-Small Growth 92.89% • Small Value-Small Growth 4.2%• Small Value-Large Value 91.96% • Small Value-Large Value 4.2%• Large Value-Large Growth 87.34% • Large Value-Large Growth 5.1%
  • 10. 0.985 0.990 0.995 1.000 1.005 1.010 1.015 1.020 1.025 1/4/2010 2/4/2010 3/4/2010 4/4/2010 5/4/2010 6/4/2010 7/4/2010 8/4/2010 9/4/201010/4/201011/4/201012/4/2010 1/4/2011 2/4/2011 3/4/2011 4/4/2011 5/4/2011 6/4/2011 7/4/2011 8/4/2011 9/4/201110/4/201111/4/2011 RS Line IVW/IVE12/4/2011 when direction is up 1/4/2012 2/4/2012 3/4/2012 growth outperforming value 4/4/2012 5/4/2012 6/4/2012 7/4/2012 8/4/2012 9/4/201210/4/201211/4/2012
  • 11. Large Value vs. Large Growth250000200000150000 RS IVW100000 IVE 50000 0
  • 12. Large Value vs. Large GrowthYear RS IVW IVE 2001 -11.16% -11.11% -10.95% 2002 3.75% -24.80% -21.93% 2003 32.43% -6.96% 2.28% 2004 11.51% 7.65% 16.76% 2005 5.37% 5.54% 7.53% 2006 14.89% 7.69% 16.17% 2007 2.68% 5.34% 1.97% 2008 -37.96% -37.54% -42.71% 2009 37.22% 36.90% 27.25% 2010 16.66% 13.94% 12.91% 2011 9.77% 4.79% 0.40% 2012 14.66% 13.41% 13.52%
  • 13. Large Value vs. Large Growth Long Term Trend Filter250000200000150000 RS IVW100000 IVE 50000 0
  • 14. Mid Growth vs. Small Value450000400000350000300000250000 RS200000 IJK IJS150000100000 50000 0
  • 15. Mid Growth vs. Small ValueYear RS IJK IJS 2001 3.55% -7.16% 13.16% 2002 -12.45% -20.37% -15.91% 2003 15.50% 3.64% 18.38% 2004 15.65% 13.51% 22.73% 2005 16.24% 15.82% 7.99% 2006 9.45% 3.60% 14.87% 2007 12.67% 13.55% -4.90% 2008 -13.30% -40.87% -33.21% 2009 51.29% 49.70% 30.43% 2010 27.75% 28.86% 23.47% 2011 -1.20% -1.06% -1.19% 2012 14.13% 13.72% 10.49%
  • 16. EFA vs. SPY300000250000200000150000 RS EFA SPY100000 50000 0
  • 17. Stocks vs. Bonds SPY vs. IEF300000250000200000150000 RS IEF SPY100000 50000 0
  • 18. References• Cooper, Tony; 2011, Optimal Rotational Strategies using combined Technical and Fundamental Analysis• Fama, Eugene F.; French Kenneth R. 1992, Cross Section of Expected Stock Returns, Journal of Finance• Fama, Eugene F.; French Kenneth R. 1993, Common Risk Factors in the returns of stocks and bonds, Journal of Financial Economics
  • 19. For more informationcontact: Kevin G. Hockert, CMT Kevin@AskProspero.com 320-762-0175