CanOz,
I would recommend doing some research on dividend yield of the ASX20 compared to a "risk free return" such as a 1 year term deposit at a leading bank. When there is a large spread between the dividend yield and the risk free return, it is time to enter the market using an income based fund. When there is little or no spread between the dividend yield and the risk free return you want enter the market using a growth based fund. Or is the other way round?
Dividend yield is the fundamental key.
Cheers
odds-on
We are talking about long term fundamental investing? You can only do fixed fractional position sizing if you adopt a price based stop. IMO if I bought a share for a specific fundamental reason, I would not have a price based stop.
Thanks Oddson, i see your thesis...basically when fixed interest provides no benefit, then in theory the equity market should have good yields and capital growth potential, like an indicator of the stage in the business cycle yeah?
CanOz
I see it as a crude indicator of investor sentiment. The key is the spread compared to long term average spread. My research on the web indicates that it is a reasonable indicator, obviously DYOR. The contrarian in me thinks that an investor should buy the income based fund when the spread is low and the growth based fund when the spread is high - it would be interesting to do some backtesting over a few years.
Cheers
Oddson
I've done some testing on this already.
Short version:
Assume you split the ASX20 50:50 based on yield percentiles and end up with two baskets "growth" (low yield) and "income" (high yield). You can split the index into as many smaller baskets as you want and the phenomenon still is present e.g. using the 3 highest yield vs 3 lowest yield instead of 10 vs 10...
Your "sentiment indicator", along with similar measures like the dispersion of the ratio between growth/income baskets and ratio momentum, will provide better performance than the market benchmark.
However, this doesn't mean you aren't exposed to market price risk! Rather that you will lose a few % less than the market when it goes down and gain a few % more than the market when it goes up (largely due to beta factors though!!!). Your equity curve still largely resembles the index.
I've also done some testing on "market neutral" versions i.e. long growth/short income or short growth/long income depending on dispersion and these can outperform regardless of underlying market conditions, however due to market beta factors, these models seem better suited for long and short volatility trades (ratio chart resembles the VIX) than fundamental exposure.
View attachment 47577
Thanks for the discussion fellas...as you can see this fits my desire for some kind of a switch...Thanks Sinner,
Perhaps outperformance could be achieved by purchasing XSO based fund when the ASX20 dividend yield spread is high compared to 1 year term deposit rates. When the spread returns to average purchase a fixed income fund. Alternate capital between the two funds based on the dividend yield spread of the ASX20 and 1 year term deposits.
I do not have any experiencing applying these types of systems, just ideas i got from the web. I guess there maybe an edge of a couple of percentage.
Cheers
Oddson
Thanks for the discussion fellas...as you can see this fits my desire for some kind of a switch...
Joel, if I could manage our own super then we would employ the 20%flipper to either Australian or US equities as we do with our long term growth fund currently. It is because we cannot control the equities we purchase, only the sectors as listed on Mercers investment choices that I have thought of an alternative approach. Great book!
CanOz
Personally if that was the case for me I'd investigate "sector momentum", it's a well established phenomenon with better underlying rationale than single name momentum (i.e. if you account for sector momentum and/or futures momentum where applicable, single name momentum doesn't necessarily outperform).
Here's a well known example
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1585517
Agreed... I found that looking at the sector a stock is in and how that is moving relative to the rest of the market adds a few points in my favour. Sectors have different levels of popularity (sentiment) at any particular moment in time.
CanOz - this would help with the flipper strategy, I think.
The Australian market is probably too small for a sector by sector based strategy. Most sector weightings are dominated by a few big caps. It might work better in overseas markets.
I'm afraid my investigation into this logical hypothesis
Couldn't get me an edge.
By the time the sector showed signs of interest or out performance the stock ( at best a couple of stocks) had well and truly run their race.Often their moves were spectacular but by the time you found them and the index on the move there was little left going forward.
Has anyone done any walk forward testing on this.
I'm afraid my investigation into this logical hypothesis
Couldn't get me an edge.
Sinner
How on earth do you read that I don't understand sector momentum.
By the time the sector showed signs of interest or out performance the stock ( at best a couple of stocks) had well and truly run their race.
I looked at comparison of the All Ords v the various sectors.
Sure sectors out performed the comparison and within the
Sector stocks out performed the index --- dragging it above
The comparison.
Of course you can see it.
Have you FORWARD TESTED IT!
Or point me to any papers that have?
Run a walk forward test here
You'll soon see what I mean
Or perhaps we'll see what you mean
Thats a very interesting comment. How much money, especially retail money, chases "logical hypothesis". I reckon my "career" has been based on fading logical setups. The reason is twofold. One there is heaps of volume at the logical setups like breakouts. Two the first to spew up positions are those that act on "logical hypothesis" because they are surprised when they get taken off-side.
This article fills this gap, finding that ETFs representing sectors experiencing positive (negative) momentum have higher (lower) returns on days associated with the execution of this momentum strategy. It also finds that calendar days coinciding with the implementation of this rule are associated with increased trading volume in related sector ETFs, particularly on the buy side in more recent periods.
it's impossible to get 'taken off-side' and spew up a position on a momentum strategy, unless you aren't actually following the strategy.
Huh? So they have a 100% hit rate?
Huh? So they have a 100% hit rate?
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