14 April 2013
06 April 2013
To SPY or not to SPY?
Thanks to Aurelia's continuous support in the development of the TAA strategy I have the opportunity to present a variation of the rotation system. Let's postulate that the stock market has two states: greed against fear or "risk on" opposite to "risk off" mode. When risk is in vogue stocks tend to rise and bonds drop, while in corrections, the opposite happens: investors flee from stocks into bonds.
Aurelia observed that Kevin McGrath's basic TAA model (see prior postings) with EFA, IWM, SPY and TLT, reflects these two risk stages. When risk is "on", the strategy allocates into IWM (or EFA) and when risk is "off" funds flow into TLT. However when the strategy indicates to rotate to SPY, the market predominantly seems to be in the middle of a risk transition. Meaning the selection of SPY is indicative for a change in risk acceptance:
- risk shifts to "on": TLT > SPY > IWM or
- risk shifts to "off": IWM > SPY > TLT.
See the upper sub pane window on the chart. Notice the (negative) profit contribution for SPY too (9x: selection of SPY for 9 months, code snippet courtesy of ST. Thanks!)
Aurelia observed that Kevin McGrath's basic TAA model (see prior postings) with EFA, IWM, SPY and TLT, reflects these two risk stages. When risk is "on", the strategy allocates into IWM (or EFA) and when risk is "off" funds flow into TLT. However when the strategy indicates to rotate to SPY, the market predominantly seems to be in the middle of a risk transition. Meaning the selection of SPY is indicative for a change in risk acceptance:
- risk shifts to "on": TLT > SPY > IWM or
- risk shifts to "off": IWM > SPY > TLT.
See the upper sub pane window on the chart. Notice the (negative) profit contribution for SPY too (9x: selection of SPY for 9 months, code snippet courtesy of ST. Thanks!)
