Jan 22, 2015 Update: I've also created an automatically updating Google spreadsheet for this strategy.
Here's a similar strategy as the "KISS Low Volatility Rotation" I presented a few posts ago.
It's based on an article on Seeking Alpha by Marc Cohn: "Return Like a Stock, Risk Like a Bond",
which TrendXplorer optimized on Amibroker. With pair switching between FDVLX (Fidelity Value Fund) - VUSTX (Vanguard Long-Term Treasury Fund), he backtested the strategy to give a CAGR of 16.54% and Max DD of 14.90% during the test period of 1991-2013, with the look-back period set to 65 days and a smoothing value set to 15 days. The funds can be replaced with ETFs: SPY-TLT, MDY-TLT, SCHM-TLO (commission free on Schwab) or for a leveraged combination SSO-EDV. Notice how before the recent volatility spike in October 2014, the allocation was switched to the bond fund (VUSTX). I've attached a modified version of TrendXplorer's TOS (ThinkOrSwim) script below, which I call "Simple Pair Switching".
Inspired by Marc Cohn's article, I also created a "Multi-Asset Performance Study" for TOS, which takes up to 10 user-specified assets and looks at the performance over a user-specified look-back period. The default settings for the assets are the ETFs in the screenshot below and for the look-back period, 85-days, which Marc used in his article. The cash proxy SHY is indicated by the white line in the middle. Note that the lines don't represent current price, but the return (for example SSO 1.09 means 9% return over the last 85 days).
There are several ways one could use this as a basis for a strategy, for example: invest in a balanced, diversified basket of all assets, unless an asset is under-performing the cash proxy SHY (i.e. below the white line), in which case substitute that asset with SHY/cash. This cash-protection measure ensures that if assets become too correlated, or we enter an extended bear-market, one is either partially if not totally out of the under-performing markets.
I also included a version with smoothing, defaulting to a 65-day look-back period and a 15-day smoothing.
Simple Pair Switching Google Spreadsheet
Multi-Asset Performance ThinkOrSwim Study
Multi-Asset Performance with Smoothing ThinkOrSwim Study
Did you by chance read Frank's new article on "Variable SPY-TLT allocations adapted to the market conditions"? It looks like he calculates the best SPY/TLT ratio (3 month look back period) to find the best Sharpe ratio and invests accordingly. Any thoughts?
ReplyDeleteKurt
Yeah I did, and thought it was very interesting. I'd have to team up with a mathematician to figure out the calculations though, and there would have to be a lot of testing involved, since he didn't provide the exact input values. I do like the premise though! -QH
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