Dec 16, 2019
in Relative Strength, Mean Reversion, Video
Layering 2 strategies on top of each other for better return -- and importantly this can improve the consistency on a year-to-year basis. The mean reversion strategies tend to add more return when things are volatile -- but less relative to the benchmark when the market is rising on low volatility. That said, low volatility uptrends are often an excellent environment for absolute gains anyway and you will naturally participate in such a market because mean-reversion has zero market timing associated with it. That is, sometimes you will just track rather than outperform a low-volatility uptrend.... and that is a good thing.
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Nov 04, 2019
in Mean Reversion
A video to demonstrate mean-regression on ETFreplay.com and some concepts on trading -- for example, many small gains cumulatively add up over time when you buy at wholesale and sell at retail prices.
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Aug 27, 2019
in Mean Reversion, Video
A video to demonstrate mean-regression on ETFreplay.com and some concepts related specifically to ETF mean-regression.
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Jul 09, 2019
in Backtest
Maintaining a well diversified portfolio is a time-tested way to protect against going all-in on what turns out to be a terrible investment. Diversification can also be employed at the strategy level for the same reason. An example of this is the core-satellite framework, where a rebalanced core portfolio is mixed with different strategies that focus on Relative Strength and Moving Average trend following etc.
It is also possible to diversify across different versions of a single strategy, to reduce the risk of parameter choice misfortune. For example, rather than relying solely on 12-month returns, for instance, the backtest below equal weights 4 variants of the same model: a 6-month version, 8-month, 10-month and one using 12-month returns all on the same ETFs: EFA, IEF and VTI (the constituents of BNCH).
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Just as a well diversified portfolio means that at least some part of it will always be a drag, a composite made up of different model variants will always underperform the best version of the strategy....but it also avoids being exclusively in the worst.
May 07, 2019
in Regime Change
Back in 2010 we created our first multiple strategy module, the Advanced Relative Strength backtest, allowing subscribers to combine together different models into an overall portfolio. To illustrate the backtest, we produced a simple example that employed two sub-strategies; a basic US equity model (MDY, IWM, SPY and QQQ) and an international model using smaller developed country funds (EWA, EWC, EWH and EWS).
The example below uses the same ETFs as that original illustration, but this time, rather than running each model concurrently, we have employed the SPY / EFA ratio moving average as a regime switch to dynamically alternate between the two portfolios. When the SPY / EFA ratio is trending upwards (i.e. above its MA), the backtest invests in the US equity portfolio. When the opposite is true, it switches to the International stock portfolio. This regime approach is then mixed with a solid fixed income core portfolio (IEF and LQD) to form an annually rebalanced 60-40 strategy.
The Core-Regime Portfolios backtest is available to pro subscription members.