Global Market Rotation Model

Jan 8, 2015 Update: I've also created an automatically updating Google spreadsheet, which uses adjusted close prices.

Alright then, after the introductory post it's time to get to the meat of it all!

First up is a Global Market Rotation model, based on Marc Cohn's research, which is based on Frank Grossmann's research. If you want to read more about the models in detail, please follow the corresponding links on the right side of the page under "Sites I Follow".

The idea is to rotate between a basket of assets, switching allocations at the beginning of every month. The basket consists of 6 ETFs: SSO (ProShares Ultra S&P500), FEZ (SPDR Euro Stoxx 50), EEM (iShares MSCI Emerging Markets), ILF (iShares S&P Latin America 40), EPP (iShares MSCI Pacific excluding Japan), EDV (Vanguard Extended Duration Treasury).

At any given time, one is only invested in one of the aforementioned assets, based on whichever asset ranks highest at the end of each month. The previous asset is then sold and all the capital is re-allocated into the new asset.

The ranking is based on the logarithm of monthly performance over the last 3 months, and the asset rankings are compared to each other to determine the highest rank.

Also used is a cash stop filter, which determines the SSO/EDV correlation over the last 4 months. If the value is above 0.75 at the time of the switch, instead of investing into one of the assets, one would go to cash, or cash proxy SHY (iShares Barclays 1-3 Year Treasury). The idea of this is that in a global bear market, one would be invested in long-term bonds (EDV), except when the bonds are too closely correlated with the market.

It is worth noting that this strategy uses a leveraged asset SSO. Frank Grossmann suggested that the rotation strategies work better with a basket of assets that are similar to each other in their volatility, and SSO is more in line with the volatilities of the other assets in the basket than SPY.

I've created an Excel-sheet (the download link is at the bottom of the page) that I use to determine the rankings of the strategy. The data used are adjusted monthly close prices from "Yahoo Finance". My current version of the Excel sheet can automatically pull current price data from Yahoo; to do this, you'll need to go to the "Parameters" tab and click on "Get Data from Yahoo Finance".

Having created it, I'll be the first admit that the Excel-sheet isn't quite as smart as it could be.
After the allocation switch is done, I manually enter the final adjusted monthly close prices (instead of the function that refers to the current prices fetched on the "Parameters" tab). I also have to manually input the data from the previous month to the next month's table. If anyone wants to take a stab at making this more user-intuitive, go for it and please post a link to your creation!

As you can see in the screenshot below, at the moment I captured this shot, it looked
like EDV will be the clear contender for November. Of course there's still time for this to change,
since the ranks only matter at the end of the month, at the time of the switch.

The "St. Dev." column isn't used in this particular strategy.

Also included in the Excel sheet is my manual backtest from May 2008-May 2014, resulting in a +51% annual gain with -16% drawdown, or expressed in another way, a total return of 1203%.
I've also added in the months after May. As you can see, it's not all smooth sailing - the strategy also goes through troughs; the model is currently experiencing a -14% drawdown.

If you have access to ThinkOrSwim, I've also created a study that shows the current rankings of the different assets, the asset in green being the current top contender for the next month. Just add this study to any chart. The MC GMR refers to "Marc Cohn Global Market Rotation".

Please let me know if you notice any errors in any of the data, and feel free to leave comments below!

Links:
QH MC GMR Excel file
QH MC GMR ThinkOrSwim study
QH GMR Spreadsheet