1. Binary RS and
Dynamic Asset Allocation
Kevin G. Hockert, CMT
Prospero Institute for Investors
11.26.2012
Kevin@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
1971-2012
3000000
2500000
2000000
1500000 RS
SPX
RUT
1000000
500000
0
8. Variance in 13 Week Returns
Style and Market Cap
0.2
0.15
0.1
0.05
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
9/4/2010
10/4/2010
11/4/2010
12/4/2010
1/4/2011
2/4/2011
3/4/2011
4/4/2011
5/4/2011
6/4/2011
7/4/2011
8/4/2011
9/4/2011
10/4/2011
11/4/2011
RS Line IVW/IVE
12/4/2011
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
9/4/2012
10/4/2012
11/4/2012
11. Large Value vs. Large Growth
250000
200000
150000
RS
IVW
100000
IVE
50000
0
17. Stocks vs. Bonds
SPY vs. IEF
300000
250000
200000
150000 RS
IEF
SPY
100000
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