Market Musings 290325: Stock Market ETF Timing With The High Yield Spread

29th Mar by Edmund Shing

28 comments 1562 reads

Market Musings 290325:
Stock market ETF timing with the high yield spread

This week, we are returning to the challenge that my friend Tony gave me. He is looking for a simple, fairly reliable system for investing for the long term without incurring high trading costs.

In designing an ETF portfolio system for Tony that can be easily followed month by month, we first need to set the objectives of any system that we're going to use consistently.

The biggest challenge for investors is typically themselves, and in particular their behavioural biases. Many people believe that they can time the markets, but this is in reality very difficult to do.

1. The goal of the system is not to optimise performance necessarily, but more to keep in line, or generate performance in line with the major stock indices when they're going up, but To reduce risk at times when the stock markets are going down. Simply said, the idea is to capture the majority of uptrends when they occur and to avoid the bulk of down trends when they occur. The idea of this is then to allow the investor to stay invested, using this system rather than panic.

The problem is that once you sell in a falling market, it's very difficult psychologically to buy back in, especially when that market may have risen back above the level you sold it at. However, using a system, firstly, hopefully reduces the times when you sell, and then also makes it easier to buy back in because you're following the system rather than trying to use your own judgement

2. It has to be easy to use.

3. It should use indicators that are easily available and don't take long to check.

The choice of indicators can be either economic or financial market-based indicators. Economic indicators seem seductive, because in general, stock bear markets occur around economic downturns, typically around economic recessions when the economy is contracting (shrinking) rather than growing.

4. We should not see too many transactions in a 12-month period, because we want to keep the costs of running such a system low.

Economic indicators: a timing issue

The difficulty with using economic indicators to time the stock market is that the stock market itself is a predictive…

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Dragon

30th Mar

Thanks Ed.

Paul Walton

31st Mar

Maybe a better timing signal is when 100MA crosses 200MA on the high yield spread rather than a fixed value (or another MA combination). When it crosses up appears to be a good time to be out of the market, down step back in

Douglas1971

Thanks Ed. Looking forward to the next thought provoking instalment.

Archer

1st Apr

Excellent analysis and very useful to have this insight. Thanks

Edmund Shing

2nd Apr

Fair point Paul,

you may be right, I havent tested that one yet but may well be an improvement.

Edmund

The Phoenix

Hi Edmund I'm halfway through your book the idle investor a great read so far with impressive performance figures for the three lazy portfolios outlined, out of interest do you know what the annual rates of return would average now given the book was written several years ago ?

Regards

Andy

A good question Andy. Not off the top of my head, but I can have a look as it shouldnt be too hard to calculate

Edmund

Thanks Edmund that would be great if you have the time.

I have been getting rid of most of my direct stock holdings over the last two months and gradually been building my low maintenance ETF portfolio in the current market dip.

I aim wto build about 15-20 positions in the asset spread you recommend, thankfully I already had a full position in I Shares Physical Gold.

I must admit looking at how indices have done over the years I am beginning to wonder why I ever bothered putting so much time and effort into individual stocks plus you won't wake up one day and find the Eurostox 50 ETF off 15-20% in a single move.

David Talbot

Fascinating Edmund. I look forward to your next, follow-up article

Dave R

4th Apr

Whilst I've never been a fan of SMA signals in the past I've been playing recently with using the 100d and 200d SMA on SPY. It's an adaption of a risk on/off strategy I read in a book that simply used the SPY price being above/below it's 200d SMA as the trigger for being in/out of the market. They tweaked the 200d SMA rule by using 2% below the 200d SMA as the risk off (out of market) trigger to minimise being whipped in/out out of the market.

Very simple to implement and surprising difficult to beat.

Rather than using "above 200d SMA" = risk on and in the market I'm using "price above 100d SMA and 100d SMA above 200d SMA". Switching between SPY and GLD as risk on/off produce an additional 1.76% CAGR when compared to staying in SPY continually since 1/1/2009 (12.62% v 10.68%). Hardly earthshattering but good for such a simple strategy (28 trades in about 15 years).

Has it been triggered to say get out of markets 2-3 weeks ago Dave ?

Yes it did. Date depends on if you use close prices or low of the day (as in a stop-loss triggered). Using close it switched out of SPY on 11/3 and if using low of the day then it's 10/3. Using the low (stop-loss) rather than close always seems to get you out a bit earlier. Happy to post the dates changes have occurred in the past if anyone is interested.

Thanks Dave just interested to hear that it worked at a time when you really needed it to be accurate.

Here's a chart showing the 100/200d SMA approach against what I have guessed at Pauls suggested method. Pauls are the boxes and the SMA are lines. Red boxes out of the market, green in the market. Red lines exit the market, green enter then market.

General impression is that SMA gets you in/out sooner but at the expense of more trades.

Here's a close up of recent times showing exit on 11/3

Not sure what the performance of Pauls method would be as I haven't modelled it. Also note that I'm only researching this at present, and haven't adopted it in real trading yet.

Use the O'Neil disciples method. If closes below the MA don't exit but if next days low is lower than the previous days low then exit. If over 35 days it's been above 100ma then use that else 200ma. Market is risk off at the moment so goto cash equivalent if can

Could you do a basic outline of the rules Paul or link to a video ?

Thanks Andy

5th Apr

Gil Morales & Chris Kacher worked for Bill O'Neill and developed the pocket pivot system outlined in a couple of books. Basically in terms of staying in a trade they use either the 10 or 50MA. If the close stays above the 10MA after 7 weeks then use the 10MA for exiting a trade else the 50MA. Only exit if the close is below the chosen MA and the next days low is lower than the previous days low. Prevents being whipsawed out of trades. They made 16000% or so but use leverage quite alot.

Thanks for posting the link Paul.

6th Apr

Hi Paul can the above metrics be recreated on Stocko I found the isin for the high yield index but it doesn't seem to be recognised on Stocko.

Thanks

I doubt it. I think you can use Tradingview for free but it's very limited. Chart very noticeable inverse correlation last few days

Market Musings 290325: Stock market ETF timing with the high yield spread