Project Summary

Client: Subscribers

Project: Stock Market Timing Model

Situation

The decade of the 2000s has seen enormous swings in equity markets. After one of the strongest bull markets in history, the decade has seen two of the worst bear markets (2000-2003 and 2007-2009) with an intervening bull market. In an attempt to improve investment performance for corporate accounts and on behalf of a client, in 2004 and 2005, Paul Cormier expended considerable effort studying market movements and developing technical models aimed at better timing long-term and short-term market entry.

Goal

To develop a system which would objectively predict future movements in the S&P 500 and provide clear trading signals as to when to increase or decrease equity exposure based on predicted movements in the market. This system would be expected to outperform the S&P 500 on a substantial and sustained basis.

Activities

Paul Cormier conducted a series of tests using historical data to determine the predictive power of movements in the S&P 500. Using regression analysis he determined that certain market data could be used to predict future movements in the index. That data was used to determine a long-term trend for the market. The long-term trend state determined how much exposure to the equity market one should maintain. He then developed another independent model using movements in the Volatility Index (VIX) to determine whether additional short-term trades should be made. These models were combined to develop an enhanced trend indicator. The model provides a target equity weighting for the US market with a range of -100% to +200%. The model was run live for nearly four years post-development to ensure that it would work in real time.  It has subsequently been updated, improved and expanded upon.

Results

From public launch to subsribers in January 2009 to May 8, 2014, the two main model portfolios (Canadian and US) delivered annulized returns of 23.9% and 25.3% per annum versus an annualized return of 18.6% (including dividends) for the S&P 500 index, representing more than 500 basis points per year of out-performance for our system. The system has accomplished this return while having an average equity weighting of 84%, meaning it has achieved return in excess of market levels with less risk.