Fooled by Data-Mining: The Real-Life Performance of Market Timing with Moving Averages
Valeriy Zakamulin (University of Agder) | April 2013
In this paper we advocate that the reported performance of the simple moving average market timing strategy proposed by M. Faber (“A Quantitative Approach to Tactical Asset Allocation” (2007) published in the Journal of Wealth Management) is contaminated by data-mining. In order to deal with the data-mining bias, we perform an out-of-sample simulation of the simple moving average timing model over the period 1930 to 2012. We then examine the real-life performance of the market timing strategy and assess the extent of the data-mining bias. Finally we revisit the myths about the superior performance of the market timing strategy and provide an unbiased estimate of its future performance.
Monthly Archives: April 2013
Chicago Fed: “Slower Economic Activity In March”
US economic growth slowed last month, expanding at a rate that’s moderately below the historical trend, according to the March release of the Chicago Fed National Activity Index, a weighted average of 85 indicators. But the index’s three-month moving average (CFNAI-MA3) posted a somewhat brighter reading: -0.01 for last month. That’s in line with expectations and a signal that the economy is still expanding on par with its historical trend. Nonetheless, CFNAI-MA3 slipped a bit from the revised February reading of +0.12, a change that reflects evidence that the pace of US economic growth slowed last month.
Q1:2013 US GDP Nowcast Update | 4.22.2013
US GDP is expected to increase 3.2%, according to The Capital Spectator’s average econometric nowcast. That’s unchanged from the previous nowcast, published on April 8. (GDP percentage changes are quoted as real seasonally adjusted annual rates.)
Book Bits | 4.20.13
● Down the Up Escalator: How the 99 Percent Live in the Great Recession
By Barbara Garson
Interview with author via The Leonard Lopate Show (WNYC)
Barbara Garson talks about the human costs of our economic recession and slow recovery. In Down the Up Escalator: How the 99 Percent Live in the Great Recession Garson interviewed an economically and geographically wide variety of Americans to show how loss and insecurity is affecting their lives. She looks at the consequences of the stagnation of wages and our growing reliance on credit.
Chicago Fed Nat’l Activity Index: Mar 2013 Preview
The three-month average of the Chicago Fed National Activity Index (CFNAI) is expected to decline slightly, to +0.03 in the March report, according to The Capital Spectator’s average econometric forecast. That compares with CFNAI’s +0.09 three-month average for February. A value below -0.70 indicates an “increasing likelihood” that a recession has started, according to guidelines from the Chicago Fed. Based on today’s estimates, CFNAI’s three-month average is projected to remain at levels that historically are associated with growth in the update for March, which is scheduled for release on Monday, April 22.
US Economic Profile | 4.19.13
“It’s not the healthiest recovery,” but “we believe that we have avoided the worst, and the economic world no longer looks quite as dangerous as it did,” says the International Monetary Fund’s managing director. That roughly sums up the state of the US economy too, as suggested in today’s update of The Capital Spectator’s Economic Trend Index (ETI) and Economic Momentum Index (EMI). Both indexes, which reflect a diversified set of economic and financial indicators, remain at levels historically associated with economic expansion. In addition, the near-term projection for these indexes also looks encouraging, based on econometric estimates for next several months.
Jobless Claims Are Stuck In Neutral… For Now
No news is good news at the moment for weekly jobless claims. Today’s update shows a small rise in last week’s new filings for unemployment benefits, and that’s a good thing, for now, considering what might have been. Recall that the numbers in March showed a disturbing tendency to rise, and rather sharply by the standards of recent history. It all looked quite dark after considering the wobbly data for March in payrolls and retail sales. Those worrisome signs are still with us, of course, but the good news is that jobless claims pulled back from the brink for the week through April 6 and today’s report suggests that the retreat is holding.
Yet Another Study On The Wonders Of Momentum
Momentum is one of the oldest and most persistent anomalies in the financial literature. The tendency of positive or negative returns to persist for a time seems like a ridiculously simple predictor, but it works. There’s an ongoing debate about why it works, but the results in numerous tests speak loud and clear. Unlike many (most?) reported sources of alpha, the market-beating and risk-lowering results linked to momentum strategies appear to be immune to arbitrage. Assets dedicated to exploiting this risk factor keep rising, but momentum’s results continue to impress. That’s a high standard, and one that trips up most strategies. Momentum, however, seems to be an exception.
Housing Starts & Industrial Production Rose In March
Today’s updates on housing construction and industrial production for March bring mostly good news for growth, but with some caveats. First the good news: housing starts climbed more than expected, rising to the highest levels since 2008. Industrial production also increased last month, advancing 0.4% and beating expectations slightly. But the generally upbeat news was tempered by the downturn in new housing permits in March and a modest slide in the manufacturing component of industrial output. What’s going on? Let’s sort it all out with a closer look at the numbers.
Another Golden Lesson For Asset Allocation & Rebalancing
Maybe it’s the sell recommendation from Goldman Sachs. Or perhaps the trigger is the general fear of a sharp slowdown in China’s economy that will take a toll on global GDP. Whatever the reason, the price of gold yesterday suffered it’s biggest drop in 30 years. For gold bugs who loaded up on the precious metal, it’s been a rough 24 hours. Of course, if you really believed the seers who say gold’s going to $5000, you’d be buying more after yesterday’s price crash. But that’s a tough call for the simple reason that estimating expected return for gold—and commodities generally—is unusually tough compared with stocks, bonds and real estate. Gold, after all, has no income, produces no earnings, and has no fundamental economic value beyond its limited industrial applications.