Review of the Quantified Market Psychology Strategy

At the suggestion of one in all his subscribers, Willi Bambach requested impartial evaluation of his 1g QMP [Quantified Market Psychology] technique, tracked since December 2007 on TimerTrac, To facilitate a evaluation, he supplied a quick description of the technique and a medallion (https://timertrac.com/personal/medallion.asp?mlid={CDD4AEE6-2A1D-4917-A571-DF23C884D1D3}) to allow public entry to the technique on TimerTrac (very sluggish to load and should not work). The technique has asset universe, asset allocation and place leverage elements as follows:

  • Asset universe:
    1. Cash in a cash market fund (with assumed 2% fastened yield).
    2. SPDR S&P 500 ETF Trust (SPY)
    3. iShares 20+ Year Treasury Bond ETF (TLT).
  • Allocations as signaled largely per the next three steps:
    1. Examine variations between FactSet consensus analyst earnings forecasts and precise earnings for S&P 500 shares.
    2. Relate these variations to earnings launch value reactions of respective shares.
    3. Translate this relationship right into a sentiment sign that specifies allocations for Cash, SPY and TLT.
  • Leverage (with assumed 0.5% fastened financing value) for SPY and TLT positions added in 0.5 increments so long as three circumstances maintain for inception-to-date knowledge (because the pattern grew, this strategy advanced to fixed 2X leverage during the last 5 years ):
    1. Standard deviation of 1g QMP returns is decrease than that for the S&P 500 Index.
    2. Downside commonplace deviation of 1g QMP returns is decrease than that for the S&P 500 Index.
    3. 1g QMP Ulcer Index is decrease than that for the S&P 500 Index.

Data obtainable through this medallion embody an inventory of 1g QMP allocation adjustments by date (see the desk on the finish). For testing 1g QMP, we don’t try to copy allocations. Instead, we apply a set of tractable assumptions to them and check variations of 1g QMP with 1X (no leverage) and 2X leverage. We use SPDR Bloomberg 1-3 Month T-Bill ETF (BIL) for money to approximate cash market yields and keep away from estimating settlement delays. We provide 2X leverage by substituting ProShares Ultra S&P500 (SSO) for SPY and ProShares Ultra 20+ Year Treasury (UBT) for TLT. We concentrate on web common every day return, commonplace deviation of every day returns, every day return/danger (common divided by commonplace deviation), compound annual growth rate (CAGR), maximum drawdown and annual Sharp ratio, We use common end-of-month 3-month US Treasury bill (T-bill) yield throughout a 12 months because the risk-free charge for that 12 months in Sharpe ratio calculations. We don’t embody partial years in Sharpe ratio calculations. Using the record of technique allocation adjustments and every day dividend-adjusted costs of BIL, SPY, TLT, SSO and UBT throughout 1/25/2008 by 11/30/2023, we discover that:

The following chart, extracted from TimerTrac through the medallion, tracks 1g QMP technique cumulative return because the finish of 2007, with S&P 500 Index cumulative return proven as a benchmark. Notable factors are:

  • The indicated CAGR is about 11.8%.
  • Determining actual intervals is problematic since three years seem twice within the chart.
  • Total return for SPY throughout 12/29/2006 by 11/30/2023 is 346%, a lot greater than proven for the S&P 500 Index within the chart. It seems index numbers ignore dividends.
  • A method utilizing leverage ought to arguably have a benchmark utilizing leverage.

For testing of 1g QMP, we:

  • Track the technique every day as a result of irregularity of reallocations and shut proximity of some reallocations.
  • Reallocate on the shut on listed dates (don’t rebalance between reallocation dates).
  • If there may be multiple reallocation per date, use the later one.
  • If the reallocation date just isn’t a buying and selling day, commerce on the subsequent shut.
  • Debit 0.1% of the quantity traded as buying and selling frictions.
  • Reinvest all dividends within the paying asset instantly and frictionlessly.
  • For the 1x leverage model, use buy-and-hold SPY because the benchmark.
  • For the 2x leverage model, use buy-and-hold SSO because the benchmark. Since UBT inception is 1/21/2010, use TLT within the 2X leverage model earlier than that date.

The following desk summarizes web efficiency statistics for SPY and the 1X model of 1g QMP. Notable factors are:

  • 1g QMP suppresses volatility and drawdown in comparison with SPY at the price of materially decrease returns, such that its Sharpe ratio is decrease.
  • Including partial 12 months 2008 (2023) would increase (decrease) Sharpe ratio for 1g QMP.

1g QMP is considerably delicate to the assumed degree of buying and selling frictions. Eliminating frictions boosts CAGR from 5.9% to six.2%. Increasing frictions from 0.1% to 0.2% reduces CAGR to five.6%.

For perspective, we take a look at cumulative performances.

Review of the Quantified Market Psychology Strategy

The subsequent chart tracks the web worth of $1.00 preliminary investments on the shut on 1/25/2008 in SPY and 1g QMP with no leverage. 1g QMP outperforms early within the pattern interval by avoiding the 2008-2009 crash, roughly matches SPY throughout the remainder of the primary half of the pattern interval by being 100% in SPY after which lags SPY for practically all of the second half of the pattern interval. however with a lot decrease volatility.

For one other perspective, we take a look at annual returns.

Review of the Quantified Market Psychology Strategy

The subsequent chart summarizes annual web returns for SPY and 1g QMP with no leverage. The latter avoids giant drawdowns however usually considerably underperforms.

Next, we take a look at the 2X model.

Review of the Quantified Market Psychology Strategy

The subsequent desk summarizes web efficiency statistics for SSO and the 2X model of 1g QMP. It consists of outcomes for SPY from the above desk for reference. Notable factors are, once more:

  • 1g QMP suppresses volatility and drawdown in comparison with SSO at the price of materially decrease common returns, such that its Sharpe ratio is decrease.
  • Including partial 12 months 2008 (2023) would increase (decrease) Sharpe ratio for 1g QMP.

1g QMP is considerably delicate to the assumed degree of buying and selling frictions. Eliminating frictions boosts CAGR from 9.6% to 9.9%. Increasing frictions from 0.1% to 0.2% reduces CAGR to 9.3%. SSO and UBT are doubtless extra expensive to commerce than SPY and TLT.

For perspective, we once more take a look at cumulative performances.

Review of the Quantified Market Psychology Strategy

The following chart tracks the web worth of $1.00 preliminary investments on the shut on 1/25/2008 in SSO and 1g QMP with 2X leverage. 1g QMP outperforms throughout the first half of the pattern interval by avoiding the 2008-2009 crash. During the second half of the pattern interval, it virtually all the time lags SSO however with a lot decrease volatility.

For one other perspective, we once more take a look at annual returns.

Review of the Quantified Market Psychology Strategy

The closing chart summarizes annual web returns for SSO and 1g QMP with 2X leverage. Again, the latter avoids giant drawdowns however usually considerably underperforms.

Review of the Quantified Market Psychology Strategy

In abstract, Tests that approximate 1g QMP efficiency in a sensible setting recommend that risk-averse traders could recognize its return-risk outcomes, whereas long-term risk-tolerant traders could favor the benchmarks.

Cautions relating to findings embody:

  • Given the excessive variabilities of returns, particularly for SSO and 2X 1g QMP, the pattern interval is brief for dependable inference. The begin date, firstly of the 2008–2009 monetary disaster, is fortunate for market timing methods.
  • Results don’t embody the price of subscribing to TimerTrac for entry to technique indicators.
  • Results don’t account for tax implications of buying and selling. In taxable accounts, the benchmarks would generate a lot decrease taxes.
  • Using margin quite than SSO and UBT could produce completely different outcomes, however sustaining leverage could also be cumbersome and incurs frictions. Cost of margin varies by dealer.
  • This evaluation could impound attention bias since these providing methods not ostensibly doing effectively are unlikely to request an impartial and public evaluation.

After previewing the efficiency statistics within the tables above (and prior concurrence with assumptions), Willi Bambach said: “I respect your analyzes though I don’t agree with you.” He has not responded to a request for specific factors of disagreement.

Because entry to TimerTrac through the medallion is spotty, we embody right here the record of QMP reallocations (197 observations over 15.8 years throughout January 2008 by November 2023), with no reallocations recorded after 7/28/2023:

Review of the Quantified Market Psychology Strategy

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