Adaptive Momentum Investing – NEW Risk-On/Risk-Off Factors – Seeking Alpha

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My investing philosophy is to be fully invested in stocks during periods of market price uptrends (risk-on), and to switch to safe assets, namely treasury bonds or cash, when markets are in deep price corrections (risk-off).
My investing strategy is simple. It is composed of two steps: (1) at a macro level, I monitor the state of the markets and decide if the market is in risk-on or risk-off, and (2) I adjust the composition and weightings of portfolio assets based on which stocks or ETFs are doing best – i.e., those with the best momentum.
During market risk-on periods I track four portfolios. Here are their asset composition and a link to a relevant article where you can find simulation results starting with January 2008.
Bond portfolio – Top 2 bond ETFs from this list: ANGL, JNK, CWB, ICVT, MUB, HYD. Here is a link to an article where you can read more about it.
Non-leveraged ETFs – Top 4 non-leveraged ETFs from this list: QQQ, SPYG, SPYV, SMH, XRT, XLF, XHB, PPH, IJJ, IJK, IJS, IJT.
Leveraged ETFs – Top 4 leveraged ETFs from this list: SPXL, TQQQ, RETL, FAS, NAIL, SOXL, PILL, URTY, WEBL, SSO, QLD, MVV. Here is a link to an article where you can read more about it.
Large Cap Stock portfolio – Top 6 stocks in both S&P 500 and Nasdaq-100. Here are two links (LINK1, LINK2) to articles where you can read more about it.
During market risk-off periods, all the funds are invested in a 20+ years ETF, TLT. This choice is the same for all four portfolios.
Simulations for all four risk-on portfolios were done under two scenarios:
Two conditions have to be simultaneously satisfied for switching to risk-off. The transition back to risk-on happens as soon as any one of the two conditions is not satisfied.
The two conditions are the following:
(1) the total return of a base metals ETF, DBB, minus the total return of the USD ETF, UUP, is in the lower 40 percentile of its distribution.
(2) the total return of the consumer discretionary sector ETF, XLY, minus the total return of the consumer staples ETF, XLP, is in the lower 40 percentile of its distribution.
Three conditions have to be simultaneously satisfied for switching to risk-off. The transition back to risk-on happens as soon as any one of the three conditions is not satisfied.
The first two conditions are the same as in the old procedure. The third condition is the following: the total return of the S&P 500 over the evaluation period is less than 5%.
Here are four charts:
Adaptive Momentum Investing – NEW Risk-On/Risk-Off Factors - Seeking Alpha
Adaptive Momentum Investing – NEW Risk-On/Risk-Off Factors - Seeking Alpha
Adaptive Momentum Investing – NEW Risk-On/Risk-Off Factors - Seeking Alpha
Adaptive Momentum Investing – NEW Risk-On/Risk-Off Factors - Seeking Alpha
And here are two summary tables:
TABLE #1 OLD RISK-OFF: DBB-UUP and XLY-XLV
Portfolio 2008-21
Initial Balance
Final Balance
CAGR
Std Dev
Max DD
Avg DD
Sharpe ratio
Top 2 BOND ETFs
$1,000
$10,791
19.07%
12.41%
-18.35%
-3.21%
1.49
Top 4 Non-Lev ETFs
$1,000
$14,489
21.65%
18.85%
-27.17%
-5.10%
1.10
Top 4 Lev ETFs
$1,000
$251,870
50.04%
41.43%
-56.06%
-13.86%
1.16
Top 6 Large-cap stocks
$1,000
$185,852
46.73%
28.69%
-47.90%
-8.44%
1.58
Equal Weight COMB
$1,000
$115,740
41.72%
26.19%
-36.54%
-6.97%
1.54
SPY, for comparison
$1,000
$4,045
10.74%
18.44%
-51.75%
-6.00%
0.48
TABLE #2 NEW RISK-OFF: DBB-UUP and XLY-XLP and S&P 500 NOT IN STRONG UPTREND ( total return < 5%)
Portfolio 2008-21
Initial Balance
Final Balance
CAGR
Std Dev
Max DD
Avg DD
Sharpe ratio
Top 2 BOND ETFs
$1,000
$11,635
19.73%
12.46%
-18.31%
-2.73%
1.53
Top 4 Non-Lev ETFs
$1,000
$17,789
23.52%
18.83%
-27.14%
-4.39%
1.20
Top 4 Lev ETFs
$1,000
$376,691
54.54%
41.84%
-55.90%
-12.58%
1.25
Top 6 Large-cap stocks
$1,000
$272,588
50.91%
29.33%
-40.76%
-7.81%
1.69
Equal Weight COMB
$1,000
$169,675
45.75%
26.92%
-36.80%
-6.44%
1.65
SPY, for comparison
$1,000
$4,045
10.74%
18.44%
-51.75%
-6.00%
0.48
In the two tables, we show the summary performance of six portfolios: our four portfolios that are tracked in real time are maintained in a live Google Sheet. In addition, we show the performance of a composite portfolio, where the four portfolios starting on 20 July 2021 are added together. The initial allocation on 20 July 2021 was the same for all the portfolios.
Table 1 shows the simulation results for the old procedure with two conditions for determining the risk-off periods. Of the total of 3,434 trading days, 794 days were risk-off and 2,640 risk-on.
Table 2 shows the simulation results for the new procedure with three conditions for determining the risk-off periods. Of the total of 3,434 trading days, 701 days were risk-off and 2,733 risk-on.
For all the portfolios, the performance with the new procedure has produced significantly better results, higher CAGRs and higher Sharpe ratios.
In addition to the maxDDs, we also computed the average daily drawdowns. It is worth mentioning that the new procedure produced lower average drawdowns for all four portfolios.
In conclusion, the new procedure for determining the risk-off/risk-on status of the market contributes consistent performance improvements, and therefore we decided to apply it to all portfolios under management.
Adaptive Momentum Investing – NEW Risk-On/Risk-Off Factors - Seeking Alpha
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This article was written by
Disclosure: I/we have a beneficial long position in the shares of TQQQ, SPY, SPYG either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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