After several delays to ensure they were as close to perfection as possible, we had planned to begin presenting promised revisions to several of our strategies on January 1. However, on that same day, Portfolio123, the firm that provides our Strategy design platform, high-quality databases, backtesting capabilities, and daily tracking of the Out-of-Sample (OOS) performance of our finished models – also announced a new feature – a specific capability for which we have been lobbying for years!
For some time, we had been close to exhausting the capacity of the feature set and databases available on Portfolio123 to build our proprietary investment models. The way P123 was configured, users could only access and use the databases included with a membership. While P123 had a significant number of high-quailty, point-in-time (PIT) databases, there are hundreds more that we would like to test and use in our models.
By making their system capable of using external data submitted by subscribers, this one new capability will open up an entirely new world of possibilities for our designers. This new feature allows us to use a virtually unlimited set of external third-party or proprietary data sets and analytical tools – which we can use to improve the accuracy of each of our model's Risk-ON/Risk-OFF signals and selection of the optimum ETF position for current conditions at any phase of the business cycle.
Therefore, this exciting development prompted us to put a hold on the strategy revisions we had planned to release only a few weeks ago – because the possibility to make them even better became available to us.
Now we have had several weeks to run tests on many of the ideas with which we had long hoped to experiment, and we are already seeing breakthroughs – with many of those ideas already paying dividends in increased performance. In fact, we have developed a new, exciting version of the S&P 500 Persistent Profits Strategy – for which we now have a simplified name – i.e. the…
'Persistent Profits (1 ETF) Strategy'
Notice that we dropped the 'S&P 500' from the name, and you'll see why in a moment...
Our revised version of the Persistent Profits (1 ETF) Strategy is complete and ready to go – and we were planning to make this revised model available today (January 26), but we were unable to squeeze enough hours out of recent days and nights to get the presentation finished. However, we are unable to get everything wrapped up without the risk of making mistakes in wording, instructions, or other critical details.
Therefore, we're going to slow things down, make sure we have crossed all 't's' and dotted the 'i's' and we'll release the Persistent Profits (1 ETF) Strategy next weekend – Sunday, February 2 – likely along with releasing our revised S&P 500 Bull/Bear Strategy, and more!
However, here's a tease that shows the sort of improvement you can expect to see from the ETFOptimize revised models in the coming weeks:
New, REVISED Version – Persistent Profits (1 ETF) Strategy
Selecting the Optimum Equity ETF During Bullish Periods
The revised Persistent Profits (1 ETF) Strategy will still switch between holding either a non-leveraged Equity ETF or a non-leveraged Fixed Income ETF at the appropriate time. However, when conditions are bullish, the strategy will no longer be reliant on only RSP (the S&P 500 Equal Weight ETF) and TLT (20-year Treasury Bond ETF) for its gains.
The Persistent Profits Strategy will select the optimum Equity ETF from a choice of about 15 different Equity-ETF options, including representative, robust ETFs from large-cap, mid-cap, small-cap, equal weight, value, growth, international, emerging market, and many other Equity market segments.
The reason for this approach is that different types and sizes of companies excel at different phases of the business cycle, and the Persistent Profits (1 ETF) Strategy will now choose an ETF that represents the optimum market segment at any given time – either the optimum Equity market segment when conditions are bullish – or the optimum Defensive market segment when conditions are bearish.
For example, at the beginning of this bull market, back in early 2009, the market segments that were providing the most robust performance were nimble, small-cap companies driven by hungry CEOs looking to make a name for themselves and take advantage of an enormous shift occurring in the corporate chess game – opportunities created by the recession.
The largest corporations – being giant behemoths – were slow to turn and adjust to the changing conditions – as is always the case. During the middle period of this business cycle – i.e., from about 2012-2018, we saw a number of different market segments that rotated in the market.
Today, the largest companies – i.e., the large-cap S&P 500 ETF (SPY) and large-cap Nasdaq 100 ETF (QQQ) have been dominating the stock market for the last two years, while smaller companies are falling by the wayside – neglected by investors who are now seeking both stability and performance as the business cycle may be coming towards its final phase.
Selecting the Optimum Defensive ETF During Bearish Periods
Similarly, the Persistent Profits Strategy will select the optimum defensive ETF from a selection of about a dozen Fixed Income, traditionally defensive sectors (such as Utilities), and some relatively new, nontraditional defensive ETFs, such as MNA (Merger Arbitrage ETF), MOAT (MorningStar Wide Moat ETF), USMV (iShares USA Minimum Volatility ETF) and DEF (Defensive Equity ETF).
EU residents will be glad to know that there is no leveraged or inverse ETFs used in this model, and the ETF selections should be usable by subscribers living in the European Union (where most US leveraged and inverse ETFs are not available for investment).
Since July 1, 2007, the model has produced an Annualized Return of 21.22% (a 48% improvement over the original version), with a Max Drawdown of only -11.60%, and 80% winning trades. With very stable performance and minimal drawdowns, as you might expect, the strategy has an exceptionally high Risk-Adjusted Return at a shockingly high 2.29.
From July 1, 2007, to present, the model produces a total return of 4,218%. This performance compares to a total return of just 1,271% for the original version of S&P 500 EW Persistent Profits. For comparison purposes, here is a chart of the original version of the S&P 500 EW (Equal Weight) Persistent Profits Strategy:
ORIGINAL Version – S&P 500 EW Persistent Profits Strategy
Why We Expect Excellent Out-Of Sample Performance from 'PP-1'
We are highly confident that this new version of the Persistent Profits (1 ETF) Strategy (abbreviated as 'PP-1') will produce excellent returns Out of Sample (OOS) because the primary change made was to eliminate the S&P 500 Equal Weight ETF (RSP) as the sole holding during bullish periods and eliminate the 20-year Treasury Bond ETF (TLT) as the only defensive position during market contractions. Instead, we are replacing those two individual ETFs by enabling the modelto make an assessment and choice of the optimum ETF from more than a dozen alternatives at any given time.
The actual market signals to determine Bullish or Bearish conditions – Risk ON or Risk OFF – will remain (nearly) identical compared to the original S&P 500 EW Persistent Profits Strategy. Simply by allowing the PP-1 model to always utilize the most appropriate ETF for conditions, it is – over the same period – able to attain a total return that is DOUBLE that of the original model. That's a total return of 2,447% compared to 1,271% – with no other changes made – while changing nothing except the ETF plugged into the holdings. In other words, this is not a new backtest of this model. It uses the same Out-of-Sample (OOS) signals as the original model.
However, with the addition of a key algorithm that uses the new feature mentioned at the beginning of this article, we can sligntly increase the accuracy of existing signals, and reduce the Maximum Drawdown (MDD) even more; from -15.69% to -11.60% (a 26% improvement), the Annual Return increases from 16.97% to 21.22% (a 25% increase), and the number of Winning Trades improves from 73% to 80%! Meanwhile, the model still switches positions with almost the same timing as the original SP500-PP Strategy, and with a long average hold time of 9.66 months.
This strategy is for long-term investors, and traders wanting more action will likely be frustrated, will over-ride the model, and run headlong into a proverbial brick wall. Sorry, but we can't be all things to all people.
This model attains about the same long-term Annual Return as Warren Buffett achieved, during his career that established him as the most successful investor of all time. The model makes trades only a little more than once a year.
Because it had a number of requests, we are working on a strategy that may use daily trading signals, but there is so much meaningless noise in the daily closes – not to mention the intraday milestones – that the probabilities of successful trades are dramatically reduced.
That's not an opinion – it's a fact. So we are not sure we are ever going to release that model. Live, it may end up being more trouble than it's worth to us, other than just being a challenge to see if it can be done. If you see us release a model with daily assessment and occasional daily trades, then you know we decided to release it.
How We Identified the Issue and Improved the Persistent Profits Strategy
It was easy for us to see that – while the S&P 500 Equal Weight ETF (RSP) had outperformed the S&P 500 Large-Cap ETF (SPY) for most of the last decade, over the previous two years that has not been the case.
The dynamic that changed and affected the performance of the S&P 500 EW Persistent Profits model was the fact that since early 2018, investors have poured their money into ever-larger, market-leading companies, and on a relative basis, eschewed less resilient smaller companies as worries have steadily accumulated about an impending recession.
This migration of money to the largest companies is a common characteristic of the late stages of bull markets. Seasoned, smart-money investors know that as fundamental measures deteriorate and macroeconomic indicators begin to roll over one after another, the day is drawing ever-closer that the longest bull market on record will be history. For the last two years, these experienced, savvy investors have been gradually moving their funds into more substantial stocks – businesses that are more likely to survive if confronted by another deep recession.
Here is the difference in how large-cap stocks, small-cap stocks, and equal weight stocks respond to market conditions both at the beginning and at the end of the business cycles.
How Different Segements of the Market Ebb and Flow and the Business Cycle Progresses
EARLY BULL MARKET – FIRST FIVE YEARS (from 2009 to 2014): These three ETFs – S&P 500 Large-Cap Stocks (SPY, blue), Russell 2000 Small-Cap Stocks (IWM, green) and S&P 500 Equal-Weight Stocks (RSP, red) are shown below from 2009 to 2014 – the first five years of the current bull market.
Notice the Equal-Weight S&P 500 (RSP) is leading these three ETFs higher, but the Russell 2000 small-company index (IWM) is closer in performance to leading RSP than the Large-Cap version of the same index – the S&P 500 index – is to the Equal Weight version of the S&P 500.
Bringing up the rear in the distance – more than 80 percentage points behind RSP and 60% behind the Small-Company ETF (IWM) is the S&P 500 Large-Company index (SPY). In the early years of bull markets, small company ETFs always lead the way higher, and larger companies bring up the rear. In this scenario, the original version of our S&P 500 EW Persistent Profits Strategy did quite well – which is the primary reason we chose that ETF for our Persistent Profits model.
First 5 Years: This chart shows that the Equal Weight ETF (RSP) led both the S&P 500 and the Russell 2000 small-company index in the first years of the bull market. In fact, it led for 85% of the bull market since 2009.
LAST TWO YEARS – 2018-2019: More recently, these same three ETFs – S&P 500 Large-Cap Stocks (SPY, blue), Russell 2000 Small-Cap Stocks (IWM, green), and S&P 500 Equal-Weight Stocks (RSP, red) have SCRAMBLED THEIR ORDER compared to what is shown above from 2009 to 2014 – the first five years of the bull market.
In the last year, the S&P 500 large-cap ETF (SPY, blue) has taken over and is leading the Equal-Weight S&P 500 ETF (RSP, red), and Small-cap stocks (IWM, green) are bringing up the rear in third – with a return that's less than half (10% vs. 25%) that of their large-cap stock brethren (SPY) produced over the last two years. At the end of bull markets, the scenario shown in the first chart above reverses, and investors want to own stable, large-cap stocks.
Generally, the S&P 500 represents America's largest companies – with the five largest businesses ranging in market capitalization (stock price times shares outstanding) from a phenomenal $1.378 trillion to $560 billion. The biggest five companies by market capitalization are currently 1) Apple (AAPL), $1.378 trillion, 2) Microsoft (MSFT), $1.26 trillion, 3) Alphabet (GOOG), $999 billion, 4) Amazon (AMZN), $915 billion, and 5) Berkshire (BRK.B), $560 billion.
The combined value of these top five companies totals a whopping $5.112 Trillion – an amount of money that is far beyond the human capacity to imagine.
An investor putting their money in these largest American companies can feel confident that those businesses are not going to close their doors anytime soon – even in the face of a recession that could be twice as bad compared to the one experienced in 2008-2009. Several of these companies have higher annual revenues than 90% of the countries in the world!
Why might the next recession be twice as bad as 2008-2009? Because in December-2007, when the Federal Reserve began to lower interest rates in the face of an imminent recession that ultimately became the second-worst of the last 100 years, the overnight Federal Funds Rate was 5.25%.
Today – with the Fed Funds Rate last determined by the Federal Reserve Board in December 2019, the overnight Federal Funds Rate is just 1.55%. So the Fed Funds Rate is about -70% lower today than it was 12 years ago when the last recession began. There is very little room to lower interest rates should a recession begin tomorrow.
The Federal Reserve has a whopping 1.55% that it can lower rates, so there is very little traditional ammunition with which to battle the contractionary forces of a recession. Just -1.55% lower and the Fed will be confronting a negative interest rate environment. Meanwhile, many countries around the world are already faced with negative interest rates and are trying to find alternative solutions to keep their economies afloat. The world has backed itself into this corner, and now we're going to find out what happens when the corner closes in on us. 2020 should be a very interesting, capped by a US presidential election in which literally anything can happen – and probably will…
Investing in America's largest, most stable companies at the end of bull markets is a traditionally rational choice in the face of increasing market risk. However, investors and the Federal Reserve will not be confronted with a traditional recession this time around. For this reason, ETFOptimize has worked diligently to develop investment strategies that offers our clients unique and innovative methods to protect their money and achieve capital appreciation.
We look forward to presenting these strategies to subscribers in the coming weeks.
So When Will the Bear Market Begin?
The previous discussion is not to say that the bull market is over. Again, we do not speculate. Period.
However, our models are saying that stocks have moved too far too fast, and there is now a substantial probability that many indices will at least pull back to their mean – i.e., a Correction. At least.
Amateur investors, seeing the smart money embrace large-cap equities as the bull market grows long in the tooth, are influenced by steadily increasing information about the deteriorating trends in fundamentals, and one-by-one those investors become more conservative in their choices. While they aren't ready to exit the market entirely, instead, investors choose to place their funds into safer, more well-established companies – companies that are more likely to survive in the face of a selloff associated with another recession.
The trend of investors moving their money into the most significant companies has taken place at the end of virtually every bear market since the 1960s. It is yet one more harbinger of the slowly-creeping approach of a recession/bear market combination. How long will it be before the collapse begins? ETFOptimize does not attempt to speculate about such matters. Instead, we allow our sophisticated signaling systems to make those determinations, and our models react appropriately when conditions begin to change.
However, those adjustments may already be starting to take place these days in our models, as our Equity+ (2 ETF) Strategy and Equity/Defensive (4 ETF) Strategy have held at least one conservative position in the last few weeks as the market nears a short-term top. Both of these models have continued to gain ground and move higher, while still positioned defensively for a sharp downturn that could occur at any time.
Unfortunately, we have also had several subscribers who have canceled their subscriptions and abandoned these prudent investment approaches – at a time when no one knows what the future holds. We won't chastise you for imprudence – after all, it's your money to lose. However, we urge you to please think twice before abandoning a winning investment approach.
A couple of our strategies may not be keeping up with the Joneses during the market's recent parabolic climb higher. Still, the reason is that our models are doing their job as designed – assessing dozens of data sets simultaneously, and determining that risk has rapidly increased. In these situations, the models will tactically position to protect against a quick reversal downward – and that downturn that may have gotten underway last week.
Our models will err on the side of caution, as erring on the other side can be financially devastating. When stocks enter into a rapid, waterfall selloff – there is often no possibility of finding a buyer on the other side of your proposed trade. You can sit helplessly as you watch the price on your 'hot stock' flush down the cold toilet.
Those investors who are stricken by the disease of FOMA are the ones who are most likely to be hit the hardest by the repercussions of their disease in the coming weeks and months. At times like this, the most successful investors are positioning their portfolios to survive for another day. They are not grasping for the hottest stock that has the most tweets – or whatever nonsense is leading investors around by the nose these days. There is a reason that we consistently advocate for subscribers to follow the recommendations of their strategy to the letter – they work!
Proof? Just look at their charts, and examine their statistical track records.
New Strategies Rolled Out Next Week
We will 1) unveil our revised Persistent Profits (1 ETF) Strategy for subscribers use beginning next weekend, 2) we are also likely to unveil exciting revisions to the S&P 500 Bull/Bear Strategy, and based on high demand, 3) we will begin offering our S&P 500 Conservative Strategy as a low-cost (<$10 per month) subscription model.
If there is a strategy that you have been considering, it would behoove you to sign up for it this week. Early warning: prices are going up next weekend for new subscribers. Existing subscribers will always be grandfathered in at their current price whenever there is a price increase. However, if the price of their model is reduced, they will reap that benefit.
In the subsequent weeks, we plan to introduce a high-performance US Sector Rotation Strategy, an International Sector Rotation Strategy, a true Asset Allocation Rotation Strategy, and several very unique and innovative Defensive ETF Strategies that we think will offer some breakthroughs for making money in the face of a recession in which interest rates are near the zero bound already.
Stay tuned ! Exciting times are ahead !
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The ETFOptimize Premium Investment Strategies have a proven track record of consistently high-performance success over long periods. Our premium model strategies have provided an average Annual Return of 30.53% since their inception – which is a multiple of more than quadruple (415%) the long-term Annual Return of the S&P 500, and more than eight times more than the index' return since 2000. The ETFOptimize strategies have never experienced a money-losing year, and collectively, have recorded 77 of 77 consecutive winning years!
One example of a Premium Strategy that were proud of is our Adaptive Equity+ (2 ETF) Strategy, which has an Annual Return since Inception of about 40%, an Annual Return in the last three years of 64%, and a 2019 Annual Return of 76%. Moreover, its Maximum Drawdown is just -7%, and it has a Risk-Adjusted Return (Sharpe ratio) of 2.58. So the model's performance is improving each year.
Here's the Adaptive Equity+ (2 ETF) Strategy's chart since inception:
The Adaptive Equity+ (2 ETF) Strategy provides exceptional returns with very minimal drawdowns.
The ETFOptimize strategies operate using our proprietary, quantitative financial-analysis programming that has been continuously upgraded and refined over the last 25 years, accompanied by the highest-quality, point-in-time investment and economic databases. As ETFs have become increasingly popular over the last 20 years, we've embrace these products, which offer investors instant-diversification – eliminating the individual company risk inherent in stocks.
Why not look over our strategy lineup now and see which if there's one that's a fit for you? It's actually very affordable to put a high-performance, quantitative investment strategy to work for you every week of the year. The ETFOptimize models are available by subscription starting at just $9.95/mo.
We even offer a Free strategy for those who would like a long-term, 90-day trial before subscribing (with no credit-card required).
Do some research; we don't think you'll find a superior approach to investing – offered at such an exceptionally low cost, and making consistently high-performance investment results affordable for even the smallest investor. You control your money in your own account and follow our clear instructions for trades, which occur an average of only about three-six times per year. We provide you with weekly updates of your strategy and an analysis of the market that always tells you what's critically important.
Plus, you can subscribe without risk because each model is backed by a 60-day, 100% Moneyback Guarantee if you decide that algorithmically based strategies are not your cup of tea. Our firm, Optimized Investments, Inc., and website, ETFOptimize.com, have an A+ Rating with the Better Business Bureau and a perfect record of satisfied customers – zero complaints – since the BBB began reviewing our firm, which was founded in 1998.
Take a moment to sign up for the strategy of your choice now – while all the benefits of a quantitative approach are fresh in your mind. You can get started for less than 50-cents a day with a very low-risk, high-profit investment strategy that produces solid performance through thick and thin – in any type of market environment.
Moreover, remember that you have nothing to lose – if you change your mind anytime in the first two months – for any reason (or no reason at all) – just let us know and we'll return every penny you paid! Visit our ETF Investment Strategy Suite today and select a quantitative strategy perfect for you:
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