COMPOSITE TREND INDICATORS

Page Summary: Exponential improvement in tactical asset allocation by combining individually successful strategies
Click RouteMap icons below to view detailed analysis of simulated past performance

 See results for bonds     See results for foreign currencies     See results for stock markets     See results for investing styles

 

Reality Check
A full report on actual  performance of all strategies since going live in April 2000 is available by email for institutional investors and financial advisors only. Please include company name for verification

The benefits of combining strategies when investing in international stock markets

Investment Opinions

Buy = All components are unanimously bullish

Add = A majority of components are bullish

Hold = No signal generated

Trim = A majority of components are bearish

Sell = All components are unanimously bearish

Performance of Composite Trend Indicators for each RouteMap

 Please read the explanatory notes and qualifications
Please read the explanatory notes and qualifications

 

Our Hypothesis

Our hypothesis is that, when averaging results across all markets, modest success for individual strategies compounds when strategies are combined. Furthermore, exponential improvements in performance may be possible when winnowing out that minority of markets where the strategies are unanimously bullish or bearish.

We believe that such combinations should improve results, because the chosen strategies appeal to a variety of market participants motivated by different investment philosophies. Combinations may drive different groups of investors to make the same Buy or Sell decisions at the same time.

As illustrated by the XY scattergraph for international stock markets since 1977 alongside, the rationale for our hypothesis is that an individual strategy (One Strategy) may beat international stock markets (World Index) in the long term even though a substantial minority of its signals can be wrong in the short term. Thus if strategies are combined such that buy signals are only generated when a majority are bullish (Two Strategies), or even better only when all strategies are unanimously bullish (Three Strategies), this will both improve the chances for beating the markets (Horizontal Axis = Monthly Odds of Success) by eliminating a sizeable proportion of loss-makers and also increase the average gain (Vertical axis = Annual Returns in US Dollars).

While the combination of one, two and three strategies generates modest improvements in the monthly odds of success above 50%, the changes for profitable transactions are substantially higher, because the strategies are designed to hold positions for an average of six months, to minimise transaction costs. A couple of months may be loss-making, but if the majority of months are profitable, the trade should be profitable overall. Thus trading into and out of Wall Street since 1977 on the basis of Three Strategies would have been successful in 60% of the months, and in 14 out of 20 trades. However that is equivalent to 70% of trades succeeding, before dealing expenses.   

To be as fair as possible this hypothesis was further tested for relative performance to a global stock market index and measured in total returns, combining capital gains and dividends for monthly performance of average Buy and Sell recommendations, as shown in the second chart alongside. This shows how improving odds in this way can generate exponential differences in performance, when markets are grouped into bands as defined in the notes alongside.

Fortunately it has been possible to simulate performance by back-testing three of our four trend strategies to create Composite Indicators as shown in the chart alongside.

  • Fundamentally based, Liquidity strategies (or Key Indicators for the Styles RouteMap) are derived from interest rates, exchange rates, industrial condifence surveys and commodity prices all of which are published on a timely basis.

  • Chart technical Momentum strategies are themselves a combination of moving averages, rates of change and overbought / oversold indicators, all of which are based on long established national stock market indices, benchmark long term government bonds and exchange rates. These have been published for decades on daily, or at worst, month-end basis. Only in the Styles RouteMap has it been necessary to partially rely on retrospectively calculated indices.

  • Similarly Seasonal Trading Patterns are based on the same long established source data as the Momentum strategies.

  • Our fourth Trend Strategy is based on revisions of earnings expectations derived from changes in top-down economic forecasts. As full past records of forecasts are unavailable, this component is not included in the Composite Trend Indicator, illustrated in the chart. However there is a large body of academic research collated by I/B/E/S that has successfully tested the validity of this strategy for equity investing by using bottom-up earnings estimates, so it should also work top-down.

Investors should however be aware that following a Buy strategy on this basis may at times involve holding investments in very small numbers of markets, as shown in the notes to performance for each RouteMap accessed from the navigation bar below.

However to be conservative and comparable with individual strategies, the statistics in the table of each RouteMap for Buy includes both Add & Buy recommendations and for Sell includes both Trim & Sell recommendations. Thus all markets are included either on the Buy or on the Sell sides of this chart. As an example of cumulative disaggregated performance, a fan chart for performance of the Composite Trend Indicator in selecting world stock markets is shown below.

 

The Fairest Possible Test

25 Year database to eliminate risk of changing market conditions

50 countries and regions to eliminate risk of varing effectiveness

Log scales to show percentage changes the same size at all levels

Relative to a global benchmark in order to eliminate upside bias as world markets boomed

Unweighted average to remove bias when small markets diverge from larger markets

Total return including capital gains and income to level the playing field between markets

 

Performance of Composite Trend Indicator relative to global benchmark

Volatility

Volatility is higher at the extremes because on average 15% of markets are rated Buy or Sell while 35% are Add or Trim

Volatility for Composite Trend Indicators is seldom more than 1% higher than for benchmarks and often lower than for individual strategies.

(See details at links in navigation bar below) 

Volatility compared to benchmarks. For absolute figures in US$, click on RouteMap icons at top of page