1 / 52

Dr. Gary J. Harloff, Ph.D. Harloff Capital Management (HCM)

Market Timing: Important Again 9-3-2009, Porter Library, Westlake, Oh. Dr. Gary J. Harloff, Ph.D. Harloff Capital Management (HCM) Registered Investment Advisory Firm, 1994 Monthly newsletter: The Intelligent Fund Investor, 1993 795 Sharon Dr., St. 226, Westlake, Oh 44145

waseem
Download Presentation

Dr. Gary J. Harloff, Ph.D. Harloff Capital Management (HCM)

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Market Timing: Important Again 9-3-2009, Porter Library, Westlake, Oh Dr. Gary J. Harloff, Ph.D. Harloff Capital Management (HCM) Registered Investment Advisory Firm, 1994 Monthly newsletter: The Intelligent Fund Investor, 1993 795 Sharon Dr., St. 226, Westlake, Oh 44145 Meetings by appointment 440-871-7278, www.harloffcapital.com

  2. Disclaimers • Educational, not investment advice • not actual performance • past performance does not insure future performance • thought to be accurate and not guaranteed

  3. Educational talk outline • Harloff background & what he does • Why market timing • Market timing overview • Business cycle and market timing • Technical Analysis indicators: Pro & Con • Example of HCM’s advanced technology • Current market conditions • Summary and conclusions

  4. Harloff background • Specialist in tactical portfolio management: significant original investment research, 1970-2009 • regional and national contests in 1980s,1990s • authored “Dynamic Asset Allocation: Beyond Buy and Hold”, 1-1998 Stocks & Commodities (on web site) • author book : Active Investing Wealth-Management for High Net Worth Individuals, 2007, 2008 • Ph.D. AeroSpace Engineer, 27 years, 100+ papers/ reports; 2 international papers, ....rocket science • 1970 jet engine coworker in S. Florida said “nobody can model the stock market”- personal challenge

  5. Harloff does • Tactical portfolio management, fee-based • Time markets, countries, sectors, funds, ETF’s • Alternate investment for accredited investors • Monthly timing newsletter for self managers: “The Intelligent Fund Investor”: time funds, S&P500, bond, & gold, examples • Investment speaker at AAII chapters: Louisville Ky, St. Louis, Mo, and Fl West Coast, Fl Central, and Fl SouthWest: Sept. 2009 • Post Modern Quantitative Analysis: not TA

  6. Average investor compound return is 9.24%/yearLESS THANS&P500 compound return %/year* BEFORE COMMISSIONS & FEES 1984- 1984- 1984- 1984- 1987- 1988 1997 1998 2000 2002 2007 2008 Avg. investor,% 6.7 7.25 5.32 2.57 4.5 1.87 S&P500,% 17.1 17.90 16.29 12.22 11.8 8.35 Avg. -S&P500 -10.4 -10.65 -10.97 -9.65 -7.3 -6.48 *source: Dalbar Inc. Financial Services of Boston, Ma., Quantitative Analysis of Investor Behavior Study 1997, 1998, 2000, 2003, 2008, 2009 updates

  7. Professional Money Managers • 5 to 10% beat S&P500 in any given year • Question- who do you want managing your portfolio?

  8. Investing is hard because: • Markets change • change inconsistent with buy-and-hold • companies fail over time (GM stock => zero) • capital leadership shifting from US to Asia • manufacturing already exported from US • service jobs being exported from US • new industries born/die every 3 years • Who makes ongoing asset allocation changes for you?

  9. Why market timing? • Bear markets: investor losses $ and faith in buy-and-hold strategy/advisor • When buy-and-hold performs there is less interest in market timing • Bull market asset allocation different than bear market asset allocation • Need for ongoing asset allocation • Business cycle aspect important

  10. Market timing overview • Old as Dow theory: buy (sell) when transportation and industrials are both going up (down) • Buy/sell = timing; opposite of buy-and-hold • Big question is what to buy/sell and when • Most planners/brokers: timing is a waste of time • Most mutual funds have trading constraints • ETF’s- no limitations: will overtake mutual funds

  11. Market timing, cont’d • Form of risk management (not insurance) • No single method or product; many approaches • Time consuming, sometimes works/doesn’t • Not taught in MBA programs at university • Not taught to CFP/CFA pass-exam designees • Planners/brokers are generalists and not portfolio managers; mostly buy-and-hold diversified portfolios for long term. No market timing. Product sales may lead to conflict of interest.

  12. Timing is all about: • Buy low and sell high • identifying what to buy/sell when • invest in up markets and not (or short) in down markets • invest in good sectors, indexes, countries when they have profit potential and not when they don’t

  13. Markets • Don’t have laws of motion...not predictable • Quantitative systems of HCM • Many try to build “logical systems” • Many look for patterns to repeat • Technical analysis is used by many

  14. Timing is advanced technology • Many planners/brokers: timing is irrelevant • Investors feel the pain of buy-and-hold during bear markets. • May lose faith in buy-and-hold stay-the-course advice • Many investors wonder if advisor knows anything more than investor knows • Recent bear market losses, so timing is back in favor as an investment strategy

  15. One approach: Technical Analysis (TA) indicators, pros & cons • Price higher/lower than 20 week ave (MA) • 21 day moving average, 30 week MA, etc. • What MA or EMA to use when? • momentum = price (t)/price (t-dt) • Relative strength index, RSI= [p(t) / P(t-dt)] /[ S&P500(t) / S&P500(t-dt)] • The Encyclopedia of Technical Market Indicators, Robert W. Colby, McGraw-Hill, 2003, 820 pg. >100 technical indicators

  16. TA indicators: Pros & Cons, cont’d • Qualitative: people read same chart differently • Many use TA, ubiquitous, on-line graphs • Sold in many cities through infomercials • Fun: lots of indicators to discuss and review • Graphics appealing and requires judgement; beauty in the eye of the beholder • Indicators may not work for different markets, sectors, indexes, (ex. gold or bonds)

  17. TA indicators: Pros & Cons, cont’d • Usually relative, rarely absolute: may ride down when market goes down • Empirical: don’t know when TA will stop working • Gives hope ........that individual can compete with professions with much more sophisticated analyses and computer power • Individual up against Ph.D.’s, banks, hedge funds • To win, need better tools or intuition than banks! • Doesn’t account for business cycle concepts

  18. HCM gave up on TA as an investment system • In early 1990’s Harloff found computerized back-testing of TA indicators not profitable • Graphs different than back-testing indicators • Indicator overload: one says buy another sell • TA: may lead to false sense of capability • One index illustrative even if it lags

  19. Vix index: 11 month delayed risk surrogate, recession started Dec. 2007

  20. Other strategies • Buy-and-hold a diversified portfolio: usually cite MPT:1952 method (Nobel prize) • MPT all in all for planners/brokers • Some count Morningstars: based on 3 year averages=> not profitable in bear market • 60/40, 40/60 equity/bond ratio (buy-hold) • Age dependent: older- buy more bonds • Endowment practices • Business cycle concepts

  21. Buy-hold a diversified portfolio Nobel prize method- problems • 1952 technology called “modern”: pre computer • Markowitz in 1952 developed “MPT” • MPT (buy-hold)=> not useful in bear market • Non-correlated assets supposed to lower portfolio risk, but don’t, assets highly correlated today • Statistics input into computer programs are assumed constant........ but aren’t

  22. Return vs. Risk is time dependent (HCM analysis)

  23. 60/40, 40/60... ratio • Many retail advisors: 60/40 equity/bond ratio w/o regard to market conditions • May be optimum ratio if correctly forecast: (1) market return vs. risk, & (2) risk tolerance • 60/40 not optimal in bear or bull market • Market return vs. risk always changes • Ivy league endowments use 86/14, see next slide

  24. Ivy League endowment allocation 86/14(source Barrons, 6-29-09)

  25. Market timing & business cycle (BC) sector rotation(source: S. Stovall’s S&P’s Guide to Sector Rotation)

  26. Sector rotation model

  27. Does sector rotation outperform business cycle investing? Relative performance from 1948-2006(source:J.Stangl, B. Jacobsen, N. Visaltanachoti, Massey U., Dept of Commerce) • Optimal sector rotation (20/20 hindsight) timing business-cycles stages earned 2.01% alpha • Apparent out performance is quickly dissipated without hindsight and transaction fees • Alternate strategy switch to cash as business cycle enters a recession: superior returns to sector rotation • Market timing invests fully for all periods except the first period of a recession when only cash is held. • The terminal value for market timing is slightly higher than sector rotation at $1,142 and $1,094 respectively.

  28. Does sector rotation outperform business cycle investing? Relative performance from 1948-2006 (cont’d) • Overall, market timing (0.18) also outperforms sector rotation (0.15) from a Sharpe ratio perspective. • Market timing advantage: forecast 1 business-cycle stage rather than 5 stages & lower transaction fees • Market timing: better diversification than sector rotation. Even for an investor with the ability to correctly time business cycles, a simple market-timing strategy would be optimal to sector rotation. • Conclusion: contrary to conventional market wisdom, rotating sectors over business cycles is not an optimal investment strategy and question the widespread acceptance of sector rotation.

  29. Business Cycle Timing: source:(J.Stangl, B. Jacobsen, N. Visaltanachoti, Massey U., Dept of Commerce paper)

  30. Harloff & Eacott business cycle study • “U.S. Business Cycle Math Quantification”, Harloff and Eacott • Need reliable real time analysis as to when recession starts, NBER often 12 months late • Analyzed 32 business cycles • Developed new equations for expansion and recession cycles

  31. Used NBER dates and duration of 32 complete expansion and recession from 1854 to 2001 • Home-work for later BC math modeling • Free paper on web site, www.harloffcapital.com/articles.html • and • www.scribd.com/doc.../US-Business-Cycle-Math-Quantification

  32. Harloff BC math model: system of 9 ODE’s, cycles about 5 years, preliminary

  33. HCM math model of BC • Looking for unpaid researcher to join me in math modeling b.c. (8-16 system of stiff ODE’s). • HCM has running computer program, call me! • Need to be able to solve stiff system of ODE’s

  34. HCM 3 new quantitative systems (not TA) • Significant resources expensed over many years by Ph.D.: HVI, trade, and vector. • Quantitative calculations and statistics to manage portfolios • Universal indexes, absolute momentum • Compute, rank, sort funds • 1) Harloff Value Index (HVI) system (>16 yrs) • 2) Vector system (> 16 years) • 3) Trade system (several years)

  35. Current Market Conditions • The Intelligent Fund Investor monthly newsletter, 8-21-09 issue • employs Harloff Value Index (HVI) for all funds and indexes

  36. The Intelligent Fund Investor Newsletter, employs HVI; Current Market Conditions • Performance of portfolios and timing calls • History of portfolios and trades • Timing S&P500, NDX, gold, bonds • HVI used to select portfolios • Example how to use newsletter analysis

  37. The Intelligent Fund Investor, 8-21-09 Portfolio Performance_ ________________YTD, % Ave of three portfolios (-11.54% 2008)........ 47.18 Dynamic Frontier portf. ( -3.20% 2008)......... 26.61 No-Load Agg Gr portf. ( -0.45% 2008)......... 56.13 Rydex portfolio...............(-30.97% 2008)......... 58.81 S&P500 index.2009......(-38.49% 2008).......... 13.60 NDX100 index.2009.....(-41.89% 2008)........... 35.17

  38. The Intelligent Fund Investor timing signals,8-21-09 Market Timing, long termgain,% S&P500: 08/21/09 1026.13 33.51 last signal(e): buy 03/20/09 768.54 NDX100: 08/21/09 1637.78 37.96 last signal(e): buy 03/20/09 1187.18 Gold, XAU: 08/21/09 147.37 -1.42 last signal(e): buy 07/24/09 149.50 US10 yr bnd yield %: 08/21/09 3.56 0.00 last yield signal(e): sell 08/21/09 3.56

  39. The Intelligent Fund Investor absolute momentum, 8-21-09 Table 3, HVI, change, nav, 4wk % change, 13 wk % change, risk, risk adjusted, HVI/risk, 13 wk/risk, risk level (high, medium, low), and buy/sell 8-21-09 R-F obj HVI %ch nav 4wk 13w rsk rsk HVI 13w rsk b/ adj rsk rsk lvl s INDEX FUNDS 1 ProFunds INV:Banks Ultra BKPIX g 544. 0. 6.94 36.9 43.1 7.7 4.6 1.4 5.6 h b 2 ProFunds INV:UltraSector REPIX sr 464. -9. 12.86 23.8 42.6 7.9 1.8 1.1 5.4 h b 3 ProFunds INV:UltraSector FNPIX sf 411. -4. 6.83 23.5 37.1 4.7 3.9 1.7 7.9 h b 7 ProFunds INV:Ultra MidCa UMPIX i 311. -10. 22.68 12.3 41.7 2.9 -0.1 2.1 14.4 h b 8 Rydex LargeCap Value-H RYZAX i 309. -5. 64.30 15.6 28.7 3.2 2.6 1.9 8.9 h b 9 ProFunds INV:Ultra Small UAPIX i 309. -8. 11.48 12.2 45.3 2.9 -0.7 2.1 15.8 h b 10 Rydex SmallCap Value RYAZX i 306. -9. 24.51 14.6 45.7 2.1 1.6 2.8 21.4 h b 11 ProFunds INV:Basic Mater BMPIX g 293. -13. 29.20 10.9 27.7 3.3 -0.6 1.7 8.5 h b 13 Rydex Real Estate-H RYHRX i 282. -9. 19.81 14.6 27.3 4.6 1.6 1.2 6.0 h b 14 Rydex Titan 500-H RYTNX i 269. -7. 18.77 10.5 34.6 1.9 0.5 2.7 17.9 h b 15 Rydex Long Dynamic Dow 3 RYCVX i 260. -9. 14.57 9.6 32.2 2.2 -0.1 2.3 14.9 h b 16 ProFunds INV:Ultra Dow 3 UDPIX i 258. -9. 18.70 9.5 31.4 2.2 -0.1 2.3 14.5 h b 17 ProFunds INV:Ultra Bull/ ULPIX i 256. -8. 27.63 9.7 32.5 2.0 0.0 2.4 15.9 h b 18 Rydex MidCap Value-H RYAVX i 252. -11. 23.88 11.7 30.8 2.4 0.9 2.0 12.8 h b 19 ProFunds INV:Ultra Secto IDPIX g 248. -9. 22.25 10.9 26.6 2.2 0.8 2.2 12.3 h b 20 Rydex INV:Banking/242 RYKIX sf 243. -5. 45.99 15.2 19.9 3.8 2.8 1.2 5.2 h b

  40. Current market conditions, cont’d, S&P500 buy signal

  41. The Intelligent Fund Investor Monthly Newsletter: 3 Portfolios,8-21-09may differ from managed account portfolios Dynamic Frontier , Ticker % Direx Latin Am, DXZLX 34 Rydex SmCp Vlu, RYAZX 33 Rydex Titan, RYTNX 33 No-load, Aggressive, Ticker % ProFnds U Bank, BKPIX 34 ProFnds U Real Est, RYPIX 33 ProFnds U MdCp, UMPIX 33 Rydex Portfolio, Ticker % Rydex LgCp Vl, RYZAX 34 Rydex Sm Cp Vl, RYAZX 33 Rydex Real Est, RYHRX 33

  42. Optimal timing with HCM’s “trade” system • Trade: single system that times S&P500, oil, bonds, .... All funds • Trade computes optimal timing for each fund and index • Trade system: different signals for each

  43. HCM S&P500 optimal timing: 167%

  44. HCM Oil optimal timing: 123%

  45. HCM 30-year yield (inverse bond) optimal timing: 211.%

  46. Summary and conclusions • average individual under-performs S&P500 by 9.24% before commissions and fees; may need professional help beyond planner/broker • Market timing needed over full investment cycle • Asset allocation should change with market condition • Business cycle awareness important • MPT isn’t modern or useful in bear market

  47. Summary and conclusions, cont’d • Timing is difficult and opposite of buy-and-hold • TA doesn’t add value when put to computerized back testing test. Graphics are deceptive • “Intelligent Fund Investor” monthly timer newsletter: good performance • Timing illustrated for S&P500, gold, bonds, funds • Current market conditions: new bull market March 2009. Good areas now are emerging markets, value, commodities, real estate, and banks

More Related