Global momentum strategy with a low CAPE p/e bias

[farangster]

Recently the Dallas federal reserve chair said that the fed had created an artificial equity bubble in the u.s.with qe and low interest rates.......Hard to believe one of their own admitted this.  since all the important indicators- q ratio, cape ratio, buffett's market cap to gdp are all pointing towards the us market being overvalued and poor market returns in our future likely, I have decided on an experimental strategy with one third of my assets and new money invested based on a combination of the works of Gary Antonacci, Mebane Faber, and folks at the Cass Business school in London....you can download their white papers for free on papers.ssrn.com.  Meb's book on global value is a free download from his website.  I suggest reading their works before discounting my strategy, besides it is interesting work.

Conditions below for a global momentum strategy w/low CAPE ratio bias that I will review/rebalance at the end of the month-

- buy assets with the superior momentum (1,3,6,9, 12 mo mean).  If the asset is an equity, the country must have a CAPE ratio below 18 to be considered.

- sell if another asset has superior momentum or if the asset's momentum turns negative go to cash or a 1-3, 10 or 30 year gov bond fund (the bond fund with the highest momentum) and gold evenly if gold has positive momentum.  I will only hold one of these bond funds based on this criteria as more than one is not necessary to be rewarded for their negative correlation to equities in a bear market/correction.

- 15-20 positions in asset sub-components per the Cass Business schools study out of London shows the optimal results.  The components will by single country funds, individual commodities, bond funds and for the us style or sector funds.

- U.S. broad market must meet buy conditions before taking positions in u.s. sub-components.

I am not following Meb's sma 200 buy/sell signals as described in his work on GTAA as Paul Novell has done a nice job showing how this extra filter is not adding much value- http://investingforaliving.us/?s=gtaa 

Also, I believe Meb's GVAL etf has had inferior results since inception because it has been stuck in a value trap (been there done that) but momentum should help prevent this strategy from making that mistake.

I have 100 free trades per account per year (5 accounts- trad/roth IRA's for my wife and I and a brokerage) with Wells Fargo (no longer available), but I do not believe this strategy will require heavy trading after the initial phase in regards to costs.

I will update here periodically with results on this experiment.

p.s. go Trump......just kidding......not really

[sol]

If I was going to become a market timer, this sounds very close to the type of strategy I would adopt.  It's essentially globally diversified value investing, with a momentum component designed to overcome the catastrophic collapses that have plagued global CAPE investing over the past decade or so, since Meb started losing a ton of money using a good idea.

But like all momentum strategies, the key is in picking lookback periods for defining the current momentum that don't cause a bunch of unnecessary trading, but also don't miss the onset of longer secular trends.  Nobody seems able to do this so far, as the appropriate lookback period seems to always be changing.

Good luck with your investments.  It would be most helpful if you could tell us what you bought, at what price, for what fees.  Lots of the investments strategies I've looked into can match long term index performance, untill you account for the trading fees.

[farangster]

market timing requires making a guess where the market is going.  a momentum strategy is merely following the markets.  besides the people I have mentioned many others including nobel winners fama/french have acknowledged the momentum anomalies in markets. most momentum etf's are outperforming since inceptions but are also too new to really judge performance.  also in defense of faber's etf's- must global markets have tanked no matter your strategy, also his etf's are only a few years old.  must value strategies have been hit hard of late.  as stated before I get 500 free trades/year but do not expect a lot trades anyways.....I will update later on this

[StreetCat]

I am very interested to know how this strategy works out.  I follow the works of Meb, Gary and Paul among others.

farangster, have you done any backtests on the strategy that you mentioned?  If so can you share the results and where you found the global CAPE data for backtesting?

[farangster]

sorry I have not backtested this strategy and therefore only putting a third of my assets into it.  starcapital.de for cape ratio data

[sirdoug007]

So, for a country's equities to be considered, the country's broad stock market has to have a CAPE <18?

If this is your rule, you would have only been allowed to buy US stocks in the depths of late-2008/early-2009 when it bottomed at less than 1000 (666 was the intraday low).  Beyond that you have to go back to 1991.  The S&P500 in 1991 was at about 380.  Today the S&P500 sits at about 2000.  The S&P500 would have to drop to less than 1625 (a nearly 20% drop), without any drop in earnings, to allow you to buy US equities.

CAPE gets a lot of attention as a value signal, but there is a lot of research out there that seriously discounts it's predictive capability.  I would seriously look into that before basically writing off US equities as having any part of your strategy.

[Seppia]

CAPE gets a lot of attention as a value signal, but there is a lot of research out there that seriously discounts it's predictive capability.

Do you happen to have a few links you can provide? I'm seriously interested in digging deeper into this.
Thanks!

[sirdoug007]

This article talks about CAPE in terms of using it for asset allocation in personal finance, which is what we are talking about here.  In my opinion, CAPE has good correlation with long term returns (generally returns are higher when CAPE is lower), but is a horrible asset allocation tool if you anchor it to past CAPE numbers.  The way earnings is reported has changed a lot over the last 20 years and this obviously makes a big difference.  So take CAPE with a grain of salt and don't anchor it to "average" numbers from decades ago.

https://www.kitces.com/blog/shiller-cape-market-valuation-terrible-for-market-timing-but-valuable-for-long-term-retirement-planning/

[farangster]

The CAPE ratio is an excellent filter to avoid overvalued markets all over the world.  I suggest reading the works of nobel winner Robert Shiller, who developed this measurement tool and Mebane Faber for analysis globally.  In this particular strategy the shiller p/e is a filter to avoid overvalued markets and momentum is the driving force for buy/sell signals.  2009 was a great time to buy into the us market when momentum picked up and the shiller pe was around 15, fast forward to today when we are in the mid 20's and negative momentum......not such a good time.

[jaizan]

There is an article on StarCapital suggesting PriceBook is at least as effective as CAPE as a predictor of returns.

It's also more likely to filter out basket cases like Greece, where there has been a permanent structural change (for the worse).

[a plan comes together]

So load up on China/Russia right now?

What index funds/ETF's are you buying?

[farangster]

No I started as on end of Feb and long term bond and gold had the superior momentum per my original post and most equities around the world had negative or low positive momentum.