We're Moving to Cash

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With the close of markets on May 23rd, the primary holding, C-Fund, has signaled a move to CASH.  S-Fund is still LONG, and F-Fund is still LONG.  Since the C-Fund is 97% of our holdings at the present time, I see no compelling reason to remain in any of the funds.

The problem here is that we have used our two transfers this month, so to be on the safe side, I'm moving 100% over to the G-Fund.

Today will most likely be an up day, so we will recover some of the losses incurred yesterday.  Since my crystal ball is as good as yours, I wouldn't try to anticipate what the week holds; of course, you're in control of your own world.

Make your changes by 12:00 noon to have them effective at the close of business on May 24th.

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Remember, you are responsible for your own investment decisions, and I am not.  Please do your own work, and please take ownership for your actions.

Regards,

pgd

Weekend Update for May 20

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In a nutshell, no changes.

Had we done equal-weighting into the TSP funds on this last allocation (equal weight assigns equal portions to the available funds and is recommended by many financial advisors for "diversification"), we would have experienced the following changes in the specific funds:

F-Fund:  +0.796%
C-Fund:  -1.971%
I-Fund: -5.833%
S-Fund:  -2.59%

Ouch.

As it turns out, we're getting beat up, but here's our realized performance since the signal on 5/2:

F-Fund:  +0.008%

C-Fund:  -1.912%

I-Fund: 0%

S-Fund:  -0.052%

I chose this allocation simply because of the desire to reduce volatility in the present market, and because I was anticipating a growth in volatility, which makes everybody nervous.

Note that the timer has the I-Fund in CASH.  You absolutely should NOT be in the I-Fund at this time.

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Staying the Course

I'm getting asked about why we're in the market right now if we're down 2%?

Well:

1. The adaptive timers have only fired the I-Fund as CASH, all the others are still LONG.
2. 2% drop in equity is not a great deal of drop.  Historically, my timer system has dropped me nearly 10% in this portfolio.  If this gives you heartburn then you should simply increase your ratio into the G-Fund
3. Volatility, while increasing, isn't indicating a terrible breakdown in the markets.  We should continue to march along nicely here.

As evidence of 3) take a look at the following chart:

I've presented this chart in previous write-ups so you can look back and read about it.  Bottom line, anticipated longer-term volatility (as measured by the ETF VXZ) compared to the next 30d anticipated short-term volatility (as measured by VXX) is still well above the 7w trend line, and although the trend line is falling, we're still above it, and this is still indicative of a bullish market.

Stay the course.

Current plans are to reallocate on May 31st if we don't get moved to cash prior to that date.

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Remember, you are responsible for your own investment decisions, and I am not.  Please do your diligence, take ownership for your actions, and understand that nobody can predict the future.

Regards,

pgd

I-Fund Confirms CASH, but We Are Not In This Fund, So No Worries ...

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I run two independent models for the GGT-TSP portfolio.  One of them is an adaptive timer that uses the daily change in the funds to help determine what to do the next day, and another is based purely on moving averages, specifically moving average crossings and slopes.

With the close of 5/19, the I-Fund has confirmed using both methods that you should not be in the market in this fund.  The I-Fund is in CASH.

There is no question, the C-Fund, which tracks the S&P500, and the S-Fund, which tracks the market ex-S&P500, are both experiencing tremendous pressure to the downside.  It's important to note that neither the C-Fund nor the S-Fund are signalling a move to CASH.  What is important with these two is that

1. the slopes, which indicate $/day gain, are still positive.  On a 65-day basis, the S&P500 is in an uptrend, 
2. the 5d and 65d moving averages are still bullish, e.g., the 5d > 65. These are in a long-term uptrend.

What is problematic is that both of these funds are within a whisker of moving to CASH.  A whisker.

What is further problematic is that we only have one more transfer to accomplish for the month (we are allowed 2 transfers per month), and we have 98% in the S&P500 fund, 2% in the ex-S&P500, and 1% in the   2-5 year bond fund.

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Here is my plan for going forward: stay the course in the C-Fund, S-Fund, and F-Fund.  No changes.

This could certainly change with Friday's close, Monday's, or Tuesday's.  Your crystal ball is as good as mine.

Relax folks.  Yes, we're down -1.1% since our entry.  It may go down more, it may go up.  If you're still working and contributing to your TSP, then you are accumulating shares a bit cheaper than if you were in cash.  This is good, if we believe that in the future the markets will go up.  I believe that they will.  If you are retired, then you certainly can go to cash and nobody would fault you.  Your risk tolerance decides your course from here.

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Remember, you are responsible for your own investment decisions, and I am not.  Please do your own diligence, and please take ownership for your actions.

Regards,

pgd

May 6 Weekend Update - Volatility as an Indicator

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Summary

• Stay the course for now.  None of the TSP funds are indicating a move to cash, but yes, they are pulling back somewhat.  Let the markets decide what we should do, do not try to anticipate.
• Since I went long on 5/2, my account has dropped a total of -1.565%.  By reference, the C-Fund has dropped -1.526%, the S-Fund has dropped -2.222%, and the I-Fund has dropped -3.748%.  The F-Fund, which is a bond fund, has increased +0.528% in this time.
• The present allocation of 97% C-Fund, 1% F-Fund, and 2% S-Fund is keeping us in the most stable portfolio combination as of May 6.  Any deviation from this portfolio will introduce more volatility at a greater rate than recent gains (taking more risk for the same or less gains, not advised).
• For the record, the 12-month personal rate of return on this portfolio is 10.38%.  Note that this includes the period 4/22/10 to 9/7/10, where I sat the market out in cash due to taking some time off.  Drawdown has been low single digits over the past year, yielding a Calmar Ratio of just over 3.0.

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Volatility as an Indicator

Volatility is a measure of how much a stock moves in a given time frame.  It's a squirrelly beast when it comes to the markets, because future volatility over the next 30 days and beyond has a big influence on option prices, and correspondingly, to money flow within the markets.  

The ETF VXX gives a reasonable view of volatility as reported in the market.  I say "reasonable", because it's not a perfect match.  The Yahoo! symbol ^VIX is the CBOE index for volatility for the next 30 days, but we can't trade it directly.  VXX is the closest ETF to "the VIX", with a coefficient of regression of 0.82 (R^2 = 1.00 = perfectly correlated).  VXZ is related to "the VIX" in that it is a tradeable instrument that is an estimate of volatility beyond 30 days.

For the last several weeks, the VIX has been really low, as in multi-year lows.  This means that folks think that the markets are going to hum along nicely with low volatility.  Correspondingly, VXX and VXZ have been very low too.

When the markets begin to jump around, VXX moves faster than VXZ.  The two are close (R^2 = 0.93), but VXX jumps faster.  This allows us to compare the two, and when we do, we get a view of the market in general.

Take a look at the following picture:

This picture is available here; you can bookmark the link.

What is shown in the lower graph is the ratio of VXZ (longer-term expected volatility) divided by VXX (shorter-term expected volatility).  The scale is a weekly scale.  The blue line is a 7-week moving average.

When the bars are trading below the blue line we can expect rougher roads ahead.  Right now the most recent week saw a drop, but not a penetration below the blue line.  This is bullish overall.

When the blue line is pointing upward, we typically can expect the markets to move upward.  The eye has a hard time discerning this, so I included a slope line at the top of the graph.  The slope line tells us with more detail about what the ratio VXZ:VXX is doing.

Right now, the slope is positive at +0.06 -- VXZ is growing faster than VXX, -- OR -- VXX is getting smaller at a faster rate than VXZ.  Either way, the markets are still in an up trend, as far as FUTURE expectations are concerned.  

The dropping VXZ:VXX ratio simply means that we are slowing -- but because the value is positive at +0.06, we are still in an up trend.

We can still move upward in the markets if the slope line is pointing downward.  The key aspect is whether the slope line has a positive value -- it is presently +0.06 -- or if it has a negative value.  It should be clear that once the VXZ:VXX ratio crosses below the 7w average line, OR the slope line turns negative, that we should be out of the markets.  

Until then, stay the course.  Remember though, your crystal ball is as good as mine.

Check this chart as time allows -- use the link provided above.

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Remember, you are responsible for your own investment decisions, and I am not.  Please do your own diligence, and please take ownership for your actions.

Regards,

pgd

Moving Long as of Monday, May 2nd

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A series of unfortunate events occurred last Thursday/Friday which precluded my ability to review the TSP funds at the critical end-of-month time frame.  Given this, we'll move long today.

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Summary

• New Allocation as of close on Monday, May 2nd:
  
  C-Fund:  97%
  S-Fund:  2%
  F-Fund:  1%
  
• Make the allocation switch by 12:00 EST to be effective 5/2.

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TSP Review

With some frustration, the news from Bernanke last Wednesday caused my latest move-to-cash signal to whipsaw, and with Thursday's action, we had a confirmed LONG call across the board.  I missed this signal on Thursday/Friday due to events beyond my control, and the weekend review has caught the change in signal.

Allocation into the funds begins with a 100d lookback on daily price changes.  I use the actual TSP fund prices, not ETFs.  One aspect I am concerned about is risk -- "sell in May and go away" comes to mind, so an analysis of marginal risk contribution is required.

Marginal risk contribution is the anticipated change in volatility if we start with an index (in this case, the S&P500), and then add 1% (arbitrary) of Fund X to the portfolio.  The difference in volatility is useful because we can see what the impact of adding each fund will be to daily swings in value, averaged over 100 days:

Here's the results:

• I-Fund:  +0.141%/day
• S-Fund: +0.112%/day
• C-Fund: +0.095%/day
• F-Fund: +0.002%/day

As a reference, the S&P500 has a volatility of +0.101/day over the last 100 days.

These results show us that the I-Fund has been extremely volatile as of late, and addition of shares of the I-Fund and S-Fund, because they have an above-average volatility compared to the S&P500, need to be weighed in terms of their returns.

The Sharpe Ratio is a good way to value this, simply because we now know the volatility, and simply need to calculate the returns over the past 100 days.  Doing so produces the following Sharpe Ratios, using a risk-free investment of 0.25% annualized: 

• I-Fund:  1.96
• S-Fund: 2.14
• C-Fund: 2.20
• F-Fund: 0.18

What these results tell me is that by-and-large, the C-Fund is the best candidate for the majority of our funds, as it has the greatest reward/risk ratio over the past 100 days.  Furthermore, the S-Fund comes in a close second, so some portion of the portfolio should most likely contain the S-Fund.  The fact that the F-Fund is well under the rest of the funds simply tells me that 

Through the magic of math, it's possible to find the combination that produces the best reward/risk ratio of the portfolio above.  Surprisingly, I-Fund lands a big, fat goose-egg in terms of allocation -- 0%.   This tells me that the marginal contribution of 1% of I-Fund is worse than the combination of some form of S-Fund and F-Fund, hence, we have the stated allocations above. 

Here's the target Efficient Frontier, as I know many of you are interested:

From the picture above you can see where the four funds lie on the "perfect" solution curve -- the blue curve. 

For you more aggressive, the I-Fund is sitting PERFECTLY on the curve -- but the higher reward is offset by far more risk -- see how far the I-Fund is deviating from the red line?  This means that if you invest in the I-Fund, you are taking on a disproportionate amount of risk, e.g., risk is growing faster than gain.  This is bad.

At the end of the day, I've selected the allocations shown above:

• C-Fund:  97%
• S-Fund:  2%
• F-Fund:  1%

I don't normally invest in the F-Fund but I think bond yields will be stable here for the next month or so, resulting in an ability to offset the volatility in the S-Fund but still see some upside.  Note that over the past 100 days that the F-Fund has a 0.8% gain, so it is somewhat positively correlated with the markets (which is rare in general).

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Remember, you are responsible for your own investment decisions, and I am not.  Please do your diligence, and please take ownership for your actions.

Regards,

pgd