A MOMENTUM STRATEGY FOR BEATING THE MARKET and A NEW EQUALLY WEIGHTED S&P 500 INDEX

Transcription

1 A MOMENTUM STRATEGY FOR BEATING THE MARKET and A NEW EQUALLY WEIGHTED S&P 500 INDEX Presented December 28, 2004 at NYC QWAFAFEW by Stanley Levine QED International Associates, Inc. 300 Central Park West #3D2 New York, NY stan.levine@qedinternational.com

2 How About? A timing strategy for the S&P 500 Index that historically has beaten the index performance by over 1.5% per year with only 2/3 of the volatility. This is a strategy that is invested for the long uptrends and is out of the market for the long downtrends. That is easily implemented with ETF s But may underperform the market during periods of uncertain trend.

3 The Monthly S&P 500 LEADER * Strategy Buy the S&P 500 at December close price. If January close is above December close then hold. If January close is below December close then sell. In any subsequent month, if month end close is above previous December close then hold if portfolio is in market from previous month. If not buy S&P 500. When out of the S&P 500 buy 90 day T bills. 0.1% transaction charge every time there is a buy into or out of the S&P 500 Index. *Leader is a term coined by GNI Capital for this type of strategy.

4 RESULTS through Nov 2004 Ann Return Std Dev Leader 7.96% 13.15% S&P % 19.40% RESULTS through Nov Ann Return Std Dev Leader 9.61% 11.70% S&P % 14.67%

5 S&P 500 LEADER STRATEGY 1925 to ,306 42,416 13,009 1,719 12/31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/2003 with.1% transaction cost NO transaction costs S&P 500 Index 3 Mo treas yield

6 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul S&P 500 Leader Strategy 1989 through Nov 2004 Jan-93 Jul-93 Jan-94 Jul-94 Jan-95 Jul-95 Jan-96 Jul-96 Jan-97 Jul-97 Jan-98 Jul-98 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jul-92 Leader S&P500 Jan-91 Jul-91 Jan-92 Jan-90 Jul-90

7 Does the LEADER Strategy work with Other Indexes? It worked with the QQQQ s. RESULTS 2000 through Nov Ann Return Std Dev Leader -2.71% 13.97% QQQQ s % 36.40%

8 QQQQ Leader Strategy vs. Buy and Hold Leader Strategy QQQQ Dec-99 Feb-00 Apr-00 Jun-00 Aug-00 Oct-00 Dec-00 Feb-01 Apr-01 Jun-01 Aug-01 Oct-01 Dec-01 Feb-02 Apr-02 Jun-02 Aug-02 Oct-02 Dec-02 Feb-03 Apr-03 Jun-03 Aug-03 Oct-03 Dec-03 Feb-04 Apr-04 Jun-04 Aug-04 Oct-04 Dec-04

9 The Equally Weighted S&P 500 Index S&P 500 is the most popular index for investing. Represented by a number of ETF s and Index Funds, e.g., SPY, VFINX. Rydex recently introduced the Rydex S&P 500 equally weighted ETF, RSP. I tested an alternative, do it yourself approach, to an equally equally weighted S&P 500 index which I dubbed SWI, Sector Equally Weighted Index. This can be run using the ETF s based on the 10 S&P sectors.

10 The 10 S&P 500 Sectors 1. Energy 2. Materials 3. Industrials 4. Consumer Discretionary 5. Consumer Staples 6. Health Care 7. Financials 8. Information Technology 9. Telecommunications Services 10. Utilities

11 S&P 500 Cap Weighted vs. Equal Weighted vs. Equal Sector Weights 1990 to Aug 2004 Dec-89 Apr-90 Aug-90 Dec-90 Apr-91 Aug-91 Dec-91 Apr-92 Aug-92 Dec-92 Apr-93 Aug-93 Dec-93 Apr-94 Aug-94 Dec-94 Apr-95 Aug-95 Dec-95 Apr-96 Aug-96 Dec-96 Apr-97 Aug-97 Dec-97 Apr-98 Aug-98 Dec-98 Apr-99 Aug-99 Dec-99 Apr-00 Aug-00 Dec-00 Apr-01 Aug-01 Dec-01 Apr-02 Aug-02 Dec-02 Apr-03 Aug-03 Dec-03 Apr-04 Aug-04 SP500 Sector Weighted SWI 3 mo rebal ewi

12 EWI Tilts to Mid Cap, Not SWI R 2 SWI to S&P 500 Index.95 EWI vs. S&P S&P 400 mid cap vs. S&P SWI vs. S&P EWI vs. S&P LEADER Strategy does not seem to work well with EWI or SWI

13 Findings The equally weighted index, EWI, tilts toward midcap. The sector weighted index, SWI, provides some of the protection from excessive concentration, while, retaining the large cap weightings. The SWI tracked the S&P 500 more closely than the EWI. Achieving almost all of the gains during the bubble toward the end of the 90 s and performing below the EWI in the subsequent period.

14 Dec-02 Jun-03 Dec-03 Jun EWI vs. LEADER Strategy (no transaction cost no interest) 1990 through Nov 2004 EWI LEADER Strategy Jun-91 Dec-91 Jun-92 Dec-92 Jun-93 Dec-93 Jun-94 Dec-94 Jun-95 Dec-95 Jun-96 Dec-96 Jun-97 Dec-97 Jun-98 Dec-98 Jun-99 Dec-99 Jun-00 Dec-00 Jun-01 Dec-01 Jun-02 Dec-90 Dec-89 Jun-90

15 Dec-03 Jun SWI 3 mo rebalance vs. SWI LEADER (no transaction cost no interest) 1990 through August 2004 SWI LEADER SWI Dec-90 Jun-91 Dec-91 Jun-92 Dec-92 Jun-93 Dec-93 Jun-94 Dec-94 Jun-95 Dec-95 Jun-96 Dec-96 Jun-97 Dec-97 Jun-98 Dec-98 Jun-99 Dec-99 Jun-00 Dec-00 Jun-01 Dec-01 Jun-02 Dec-02 Jun-03 Dec-89 Jun-90

16 Conclusion The LEADER strategy represents a viable lower-risk alternative to a buy and hold strategy for the S&P 500 and probably for other broad based cap-weighted indexes. SWI also is a preferable alternative to EWI when mid-cap tilt is not desirable but the safety of equal weighting is desirable. I surmise that LEADER strategy does not work well with EWI and SWI because rebalancing of the EWI and SWI damps market momentum which attenuates the long-term trends that enhance the LEADER strategy. During choppy markets or sudden reverses like in 1987, the LEADER strategy offers no protection but which strategy does?