Lighthouse Financial offers this as a Portfolio Protection Strategy (PPS) at no cost to it's clients. It is a tactical overlay that allows us to sit on the sidelines when the market is volatile, and to be in growth mode when the market is in growth mode. The growth mode investment here is SPY which is an ETF (exchange-traded fund) that mirrors the S&P 500 index; and the bond investment is TLT which is a long-term treasury ETF. The purpose of this backtest is to demonstrate that using this PPS can give better performance than a "buy and hold" strategy. This is not to say that we are advising investing in SPY. We are simply using it as a proxy for the market. We like to think that the PPS offers a linear diversification - linear by time and not the broad diversification that comes from holding a basket of positions with multiple asset classes represented. This PPS has a very low corellation (<15%) to the markets, and as such, will not line up with the market performance on a monthly, or even yearly basis. There will be times when the market surges and this indicator has us sitting on the sidelines. There will also be times when the market is crashing and we are sitting in safe assets. The results shown are based on trading at the open on the first trading day of the month based on the closing price of the last day of the prior month. This protocol practically eliminates slippage - a risk inherent with back-testing. These results also have no deduction for trade fees. We currently are not charged trade fees at TD Ameritrade, but in the back-test time frame, there were fees being charged for trades.
This strategy (PPS) can limit our downside risk and is unique in that it looks at consumer spending to determine when we should take risk off the table. Specifically, we came up with a ratio built off of Consumer Staple versus Consumer Discretionary spending. This ratio is then tracked against its own moving average. When the ratio drops below its own moving average (checked every month), it signals for us to exit risk and get into long-term Treasury Exchange-Traded Funds. I am excited to announce that, out of all the technical indicators that I have tested over the last 20 years, it is the first indicator that I have tested that beats the "buy and hold" approach. Most technical indicators do not claim to outperform "buy and hold" - they simply limit the losses.
One of the difficulties we had with the prior PPS is that it used a delta of 6%. It would not sell until the S&P 500 dropped and closed to 3% below it's 200 day moving average. It would not buy back until the markets had ratcheted back up and closed to at least 3% above it's 200 day moving average. In an ideal world, this would represent "only" a 6% loss in re-growth, if the markets whip-sawed. In reality, this 6% delta ended up being 8% or more each time, as markets could close down 5% in a given day and exceed our 3% target. In the last 7 times that this signal generated protection trades, the markets whip-sawed at least 6 of those times and we lost in performance just by using the PPS.
The exciting part of this strategy is that it is not a crowded trade - not many people are even aware of this strategy. It has no 6% delta to prevent too-frequent trades, because it only trades monthly.
Here is a link to the Strategy performance:
https://factsheets.fundpeak.com/Report/51540B7055D4A793CF00B15A16FF0A8B5503B3A4669510F0CA57718036852BAF79BA4AA37CDBA08C8DAE29A33BC4043B
This strategy (PPS) can limit our downside risk and is unique in that it looks at consumer spending to determine when we should take risk off the table. Specifically, we came up with a ratio built off of Consumer Staple versus Consumer Discretionary spending. This ratio is then tracked against its own moving average. When the ratio drops below its own moving average (checked every month), it signals for us to exit risk and get into long-term Treasury Exchange-Traded Funds. I am excited to announce that, out of all the technical indicators that I have tested over the last 20 years, it is the first indicator that I have tested that beats the "buy and hold" approach. Most technical indicators do not claim to outperform "buy and hold" - they simply limit the losses.
One of the difficulties we had with the prior PPS is that it used a delta of 6%. It would not sell until the S&P 500 dropped and closed to 3% below it's 200 day moving average. It would not buy back until the markets had ratcheted back up and closed to at least 3% above it's 200 day moving average. In an ideal world, this would represent "only" a 6% loss in re-growth, if the markets whip-sawed. In reality, this 6% delta ended up being 8% or more each time, as markets could close down 5% in a given day and exceed our 3% target. In the last 7 times that this signal generated protection trades, the markets whip-sawed at least 6 of those times and we lost in performance just by using the PPS.
The exciting part of this strategy is that it is not a crowded trade - not many people are even aware of this strategy. It has no 6% delta to prevent too-frequent trades, because it only trades monthly.
Here is a link to the Strategy performance:
https://factsheets.fundpeak.com/Report/51540B7055D4A793CF00B15A16FF0A8B5503B3A4669510F0CA57718036852BAF79BA4AA37CDBA08C8DAE29A33BC4043B
