Bear Market Strategies
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Introduction
A Bear Market Strategy selects safe harbor
investments during a market crash.
Wall Street uses the terms risk-on
/ risk-off to describe
a move to riskier investments with potentially
higher yields during bull markets and a move to
safer investments with typically lower yields
during bear markets.
When a market direction indicator (such as
StormGuard
or the
Death Cross) signals that conditions have become
bearish,
a Bear Market Strategy automatically takes charge and selects from a list of
trusted safe harbor investments, such as cash,
money market funds, bond funds, gold bullion,
or US treasuries.
Numerous market direction and sentiment
indicators have been developed over the years to
help determine when to flee to safety. Although
the basis for many of them sound promising, many
are only poorly correlated with future
performance, and
none
of them come
close to the performance provided by
StormGuard-Armor.
(Some of
the better ones are compared
HERE). The remarkable difference between the
yellow equity curves in the three Strategy
charts below illustrate the combined importance
of
StormGuard-Armor and Bear Market Strategies. ![]() The yellow
equity curve, compound annual growth rate (CAGR) and
Sharpe Ratio (risk-adjusted return) in each chart above
illustrate why Bear Market Strategies matter. All three
investment Strategies rely on the True Sector Rotation
algorithm to determine which one of the eight
candidate SPDR sector ETFs to own each month during bull
markets.
However, the left-most
Strategy has no market crash protection, the
center Strategy additionally utilizes
StormGuard-Armor to determine when to exit the market to
the safety of cash, and the right-most Strategy further
utilizes StormGuard-Armor in combination with Bear Market Strategy
BMS-4 to
select the best trending ETF during bear markets from among
safe harbor
candidates
UST,
TLT,
BND,
MBG,
MUB,
CORP,
SH,
and GLD. Avoiding Hindsight Selection Bias is Critical
Investment Candidates for Bear Market StrategiesIn order to reasonably model the performance of a BMS (Bear Market Strategy), its candidate investments must have performance data that spans at least one major market crash. Although most ETFs that might provide safe harbor during a bear market were originated only recently, most are based on indexes having much longer histories that can be used to artificially extend the ETF's data history for purposes of improved strategy modeling. The table below contains excellent candidates from these asset classes: long-term treasuries, bonds, inverse markets, gold bullion, and a hybrid mix of the inverse S&P500 index with gold bullion. Additional documentation and a list of numerous other extended ticker symbols can be found HERE.
Bear
Strategy Candidate ETFs: Extended History Ticker
Symbols
• Note 1: Extended ticker
symbols have a "-" added as a suffix to indicate they are
the extended data version.
Ready-made Bear Market Strategies
The table below
details 11 high performance, ready-made Bear
Market Strategies that eliminate hindsight
selection bias and integrate
easily with StormGuard for use with any
Strategy. The first seven are ETF-based and are
increasingly aggressive in their approach. The
last four are designed for use with Strategies
based on Vanguard, Fidelity, T.R.Price and Columbia mutual funds
respectively. Any of them can be
imported and customized to better
suit your objectives.
Note: Bear-R and Bear-SD values are as of 9/1/2016
• Note 1:
DSD
column in the above table
refers to the
Decision Shift Days advanced option. It is
presumed that: (a) BMS-5 and BMS-6 will be primarily associated
with some of the narrower sector ETFs and 2x ETFs that generally perform
better with
a DSD setting of -1, and (b) that BMS-7 will be
primarily associated with 3x ETFs that often perform
better with a DSD setting of -2. Creating a Custom Bear Market Strategy
The best way to create a custom Bear Market
Strategy is to start by importing and modifying
an existing one. Examples include: (1)
BMS-Vanguard may be more suitable if the ETF duo
SHGD- were deleted, (2) BMS-Fidelity may perform
better if it were more aggressive and included
UST-,
(3) A BMS could be modified to incorporate
UGL- or GDX- directly, or (4) ETFs not
considered above may be found to further improve
performance while still reasonably addressing
hindsight selection bias.
How to Specify StormGuard and a Bear Market Strategy
Examples Speak for Themselves
Below are a set of Strategy pairs showing the
stark contrast between using: (a) the well-known
and respected
Death Cross a algorithm to determine when to
move to the safety of a money market fund,
versus (b) the better performing
StormGuard-Armor algorithm, which determines when to
switch to a Bear Market Strategy. In the charts
below, the Strategy equity curve is
multi-colored to show which of the candidate
funds was owned at any particular time. The
equity curve is white when the Death Cross or
StormGuard algorithms have triggered and have
commandeered the investment decision. |
Example 1: Mainliner
Selecting the trend leader from among the broadest of market
index ETFs.
Death Cross triggers exit to money market fund. |
StormGuard-Armor triggers Bear Market Strategy. |
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Example 2: SPDR Sectors
Selecting the trend leader from among SPDR sector ETFs.
Death Cross triggers exit to money market fund. |
StormGuard-Armor triggers Bear Market Strategy. |
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Example 3: ETF Countries
Selecting the trend leader from among iShares country ETFs.
Death Cross triggers exit to money market fund. |
StormGuard-Armor triggers Bear Market Strategy. |
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Example 4: 2X Regions
and Sectors
Selecting the trend leader from among 2X leveraged world
region and sector ETFs.
Death Cross triggers exit to money market fund. |
StormGuard-Armor triggers Bear Market Strategy. |
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