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The Quantifiable Edges Duration Rotation Model is currently available to new subscribers. Subscription information can be found here , and a detailed webinar recording is also available . The webinar was given earlier this month. This post is follow-up information with additional research.
When I designed the Duration Rotation Model in early 2020, I did so using data up through 2019. I settled on 3 different durations with which to implement the model. Those durations, and the associated ETFs, can be found below:
20 year treasuries (TLT) 7-10 year treasuries (IEF) 1-3 month t-bills (SHV) One limitation of the design was that I could only run tests back to 2007. This is because SHV’s inception was January of 2007. Still, as I discuss in the webinar, I took care to make sure the system was robust, and even tested on alternative hypothetical data designed to mimic a bond bear market. I began trading the model near the end of May 2020. At the end of August I expanded the trading to many of my Eastsound Capital Advisors clients. Results thus far have been inline with what I had hoped for.
After attending the webinar, a prospective client sent me daily total return data for 30-year, 10-year, and t-bills since 1990, and asked me to see how the system might have worked using these instruments going back further in time.
The data showed close correlation to ETFs I use for the model, so it appeared to be a good way to test the effectiveness going back further. Before going back further in time, I decided I needed to compare returns using his data vs returns using the standard data and ETFs since 2008. The chart below shows growth of $1000 since 12/31/2007 for 1) 30-year bonds (blue), 2) Duration Rotation using the new proxy data (orange), 3) TLT (grey), and 4) standard Duration Rotation (yellow). Note for all tests I used the standard parameters for Duration Rotation. There were no adjustments made or optimizations run for any of these tests.
Several things to note about the chart:
30-yr and TLT show strong correlation. 30-yr outperformed very slightly over the long run. It certainly appears to make a suitable proxy for looking back further in time. DR-90, which is the Duration Rotation model using the proxy data back to 1990, outperformed TLT and 30-yr quite nicely. Keeping up with them while lowering the drawdown is an objective of the model, so this was encouraging. Drawdowns were larger using the proxy data than using the standard ETFs, which hurt returns, especially recently. In comparing the trades, it appears this is because SHV tends to trigger more often than the t-bill proxy. The outperformance during the live period over the last several months is primarily due to higher use of SHV. I find it encouraging that the actual securities manage to perform favorably vs the proxy in both backtested and live environments. I decided to look at drawdowns in the Duration Rotation Model using proxy data vs ETF data a little closer. A comparison can be seen in the chart below.
What we see here is that it is not just the “max drawdown” that improved, but nearly every drawdown has been reduced with the standard ETFs vs the proxy data. I don’t have a great explanation for why SHV tends to work more effectively than the t-bill proxy data, but it certainly seems to.
Overall, the proxy data appeared suitable, and the proxy model appeared comparable, though perhaps not quite as good, as the standard model. Therefore, I went ahead and ran the model back to 12/31/1990, and compared the returns to the 30-yr treasury data. (This was a nervous moment, since you never know what will happen when you add 17 years of new data to an already established model.) Results are below.
This was everything I could have hoped for. The Duration Rotation Model, even using the proxy t-bill data rather than SHV, would have managed to keep pace with TLT and provide reduced drawdown over the long run. Overall, these additional tests have provided me even greater confidence in the Duration Rotation Model.
A few days ago, I noted the seasonal bullishness around Thanksgiving, especially from Tuesday’s close to Friday’s close. One potential issue with seasonal studies is that they can sometimes get front-run, and then the edge weakens. It is now Tuesday, and the market is moving up strongly for the 2nd day in a row. So I decided to look back at other times where SPX closed higher on the Monday and Tuesday before Thanksgiving. The table below shows all instances since the inception of the modern S&P 500 in 1957.
In this case, it does not appear that the Monday-Tuesday rally has eliminated the seasonal bullish tendency. In fact, it appears that the momentum has carried well through the holiday. Happy Thanksgiving to you and yours!
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The time around Thanksgiving has shown some strong tendencies over the years – both bullish and bearish. I have discussed them a number of times over the years . In the updated table below I show SPX performance results based on the day of the week around Thanksgiving. The bottom row is the Monday of Thanksgiving week. The top row is the Monday after Thanksgiving.
Monday and Tuesday of Thanksgiving week do not show a strong, consistent edge. But the data for both Wednesday and Friday looks quite strong. Both of those days have seen the S&P 500 rise at least 70% of the time between 1960 – 2019. The average instance managed to gain about 0.3% for each of the 2 days. (This is shown in the Avg Profit/Loss column where $300 would equal a 0.3% gain.) That is a hearty 1-day move. Meanwhile, the Monday after Thanksgiving has given back a good chunk the gains that the previous 2 days accumulated. It has declined 65% of the time and the average Monday after Thanksgiving saw a net loss of 0.34%.
In 2018 I gave a few more thoughts on the Wednesday edge and the importance of Tuesday’s action for Wednesday .
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Monday saw a massive market rotation. It could be noted by the performance in the IWM vs the QQQ, or in looking at performance among S&P 500 sectors, where Energy beat Technology by 15% on Monday. But to really see how strong the rotation was, you’d need to take a look at individual stock performance within the SPX. Below is a list of the Top 10 S&P 500 stocks, ranked by YTD performance through Friday, 11/6.
Every one of the Top 10 stocks closed down on Monday, with 6 of the 10 losing over 5%. Now let’s look at how the worst stocks of the year did on Monday.
Every single one of these were up at least 14% on Monday, with most of them rising between 20% and 40%. That is a massive rotation. One way to play momentum is to get long strength and to get short weakness. That can be a profitable strategy. But on days like Monday, when the public thinks the “market” did well, you can really get served a world of hurt. Anyway, the rotation was enormous. I’m not sure what it means for the major averages going forward, but I certainly found it notable.
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After losing 5.6% this in the week ending 10/30/20, the S&P 500 completely reversed the losses this past week with a 7.3% gain. That is a fairly remarkable turnaround. Below is a look at all other times the S&P 500 lost 5% or more one week, and then made up for the losses and more the next week.
Instances are very few. Three in the 1930s, three in the 2007-2009 bear market, and then once in 2010 before this past week. Results are mostly mixed, with some struggles occurring over the next 13 weeks. Does not appear to be a great signal, but expecting the turnaround to continue to rocket higher from here would seem to be overly optimistic.
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