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September 06, 2008

Timing Portfolio Holding Lots of Cash
by Bill Rempel

Timing attempts to provide market equivalent returns over the long term, with a substantial reduction in variability of returns. The two components of the Timing program are EZ+Macro and Fear/Greed. This system trades rarely and splits its allocations between ETFs tracking the S&P 500, the intermediate-term U.S. Treasuries, and cash.

System Summary

Information is as of the close on September 5, 2008.

EZ+Macro

EZ Trend is still down. About three to four months ago, it looked as if the divergence had been reversing, but since then, the difference between the averages has gotten wider. That difference is now even wider than it was in March.

Macro Trend is still bullish for Treasuries. The averages had converged quite a bit, but have been at a steady distance for the last month. This comes into play only if the EZ Trend is not up.

Fear/Greed

The Fear/Greed model signaled a buy for the U.S. stock market in early November, and a sell in December, as the $VIX relative to actual volatility fell to a historically low level. For most of the last seven months, the current level of sentiment, as measured by the $VIX relative to actual volatility, has been at levels historically associated with complacency. It has only been for several weeks in June and July that the measurement was anywhere close to historical "norms." In the scale of the chart, 80% of the readings since 1990 have been between the red and green lines. The "sell" signals in July were meaningless, since this portion of the portfolio never saw a "buy" signal and remains on the "sell" from December of 2007.

This system is a ways away from signaling any change in position. It's comfortable riding out the volatility with a partial position in stocks and bonds, and a majority in cash.

Speaking of which, I need to address the issue of cash in tracking this portfolio. The backtests had an assumed 4% annual yield to cash (over a test period of 1994 through 2007), but I have not been adding any yield to cash from this portfolio.

Starting with this update, I will use for this portfolio, instead of the generic descriptor "cash," a position in the SPDR Lehman 1-3 Month T-Bill ETF (BIL) to simulate the cash position. Since a cash position is still in play for this portfolio, I will make a purchase of BIL in the tracking portfolio and henceforth include distributions from BIL in the returns.

Model Allocation

Based on beginning with a $100,000 portfolio at inception. The portfolio weights are shown behind the ticker symbol, and are rounded to the tenth of a percent.

S&P 500 SPDRs (SPY) 25.2% weight
iShares 7-10 Year Treasury Bond Fund (IEF) 23.5% weight
Cash 51.3% weight

Returns

Based on beginning with a $100,000 portfolio at inception.

Equity: $96,428.41
Gain, Last 4 weeks: -0.39%
Gain, Year to Date: -4.84%
Gain, Since Inception on 11/12/2007: -3.57%

These returns include the recent June distribution from IEF of $0.2954 per share. This system has been approximately 50% allocated to cash since December 21, 2007, and I have not been including gains from cash interest in the returns, but will, in the future, through the inclusion of BIL for the cash proportion of the portfolio.

Changes To Model Allocation

There are no changes to the basic model allocation since the previous message, with one exception: a holding of SPDR Lehman 1-3 Month T-Bill (BIL) will be substituted for "cash." Model allocation is listed below:

S&P 500 SPDRs (SPY) 25.0% weight
iShares 7-10 Year Treasury Bond Fund (IEF) 25.0% weight
SPDR Lehman 1-3 Month T-Bill (BIL) 50.0% weight

Tracking

Monday morning at open, the tracking portfolio will purchase 1078 shares of BIL to track the yield of cash. This transaction will be subject to the normal rules re: commission charges, that apply to other positions.

Keep in mind that the Timing system is mechanical, and will be tracked based on the signals it generates. The system went 50/50 stocks/cash on December 21, 2007, and then on January 18, 2008 went to 25/25/50 stocks/bonds/cash.

If you'd like to become of member of The Rempel Report, you can register here. At The Rempel Report, I track model portfolios for four different mechanical trading systems, as well as my personal portfolio, and disclose all results (good and bad) at regular intervals. Members receive email notification of new posts and can contribute to the site through comments.

Bill Rempel
The Rempel Report

Disclaimer: Nothing at The Rempel Report, or any communication from The Rempel Report or its author, should be construed as personal advice, on investing or anything else, and at all times you are responsible for your own actions and you should perform your own due diligence. I'm not an investment professional, and you should probably consult with one, in addition to doing your own due diligence, before making any investment decisions.

I may have a beneficial position in any potential investment I mention. My positions in, and opinions of, those potential investments may change over time. I have no obligation to reveal those positions, and if I should reveal those positions, I am under no obligation to notify you, though this site or through any other means, if I change those positions.

While I do try to verify much of the data presented, I can make mistakes. I rely on third party vendors for data, and sometimes that data could be incorrect. Therefore, I cannot and will not be held liable for incorrect or erroneous data presented in text, table, chart, or other format. This is one more reason why you should consult with an investment professional, in addition to doing your own due diligence, before making any investment decisions.

Modeling is prone to error, and no statistical model is perfect. The output from statistical or predictive modeling should be viewed with skepticism.

Fundamental analysis is based on examinations of company filings such as income and cash flow statements, balance sheets, quarterly and annual filings, proxies, and other such items. Even though a company appears fundamentally sound today, that doesn't imply they actually are, or will remain, fundamentally sound. Fundamentals can change over time, and there is always the possibility that the company filed information that was either fraudulent or incorrect. I might make an oversight or error when examining company filings. In many cases, I will rely on a third party's presentation of filing data, such as a stock screening program's output, without actually reviewing the filings personally.

Technical analysis is based on the study of historical price, volume, and sentiment data over time. Past performance is no guarantee, and there are no certainties hidden in patterns, charts, indicators, or formulae.

FundaTechnical analysis involves those items which mix elements of Fundamental and Technical analysis, including valuation metrics such as the Price/Book or Price/Earnings ratios. Therefore all the warnings for both Fundamental and Technical analysis apply.

Take responsibility for your own actions. You should consult with an investment professional, in addition to doing your own due diligence, before making any investment decisions.

Copyright © 2005-2008 Bill Rempel

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