Binary RS and Dynamic Asset Allocation

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Binary RS and Dynamic Asset Allocation

  1. 1. Binary RS andDynamic Asset Allocation Kevin G. Hockert, CMT Prospero Institute for Investors 11.26.2012Kevin@AskProspero.com 320-762-0175
  2. 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. 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. 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. 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. 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. 7. S&P 500 vs. Russell 2000 1971-20123000000250000020000001500000 RS SPX RUT1000000 500000 0
  8. 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. 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. 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. 11. Large Value vs. Large Growth250000200000150000 RS IVW100000 IVE 50000 0
  12. 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. 13. Large Value vs. Large Growth Long Term Trend Filter250000200000150000 RS IVW100000 IVE 50000 0
  14. 14. Mid Growth vs. Small Value450000400000350000300000250000 RS200000 IJK IJS150000100000 50000 0
  15. 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. 16. EFA vs. SPY300000250000200000150000 RS EFA SPY100000 50000 0
  17. 17. Stocks vs. Bonds SPY vs. IEF300000250000200000150000 RS IEF SPY100000 50000 0
  18. 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. 19. For more informationcontact: Kevin G. Hockert, CMT Kevin@AskProspero.com 320-762-0175

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