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!)

On the next chart this observation has been elaborated into a "no SPY" version. Whenever the strategy wants to rotate into SPY, instead it will "leapfrog" SPY and switch immediately into the new risk state: EFA/IWM > SPY > TLT or EFA/IWM > SPY > TLT. The improvement for total profit is by no means negligible: the already impressive 10 year results get boosted by nearly another 200%.

Aurelia's analysis shows that during the backtest period of 10 years, there were drawbacks indeed, but not a single April to April year with a negative yearly return on investment. Even for 2008 with the September crash the "No SPY" strategy managed to print a black annual return of 2.85% (download pdf here).

The dedicated "NoSPY" thinkscript studies are in the comment section for copy/paste into your TOS desktop.
NB! For the studies to work properly it is essential not to change the ETF selection!