https://app.hedgeye.com/feed_items/69145
hedgeeye is calling for quad4 (lower growth in gdp and lower Inflation) in q4 2018
they call for Longs in TLT, short EM, Long Reits.
I stay with my model and go only to cash if sp500 ma75 is broken and earnings trend down…
I like country ETF rotation. Not necessarily in US stocks. The model is currently in Sweden ETF EWD, since 6/25/2018 and up 5.8% since then.
https://seekingalpha.com/article/4190334-outperforming-u-s-market-im-country-rotation-system
Georg - Nice system. I just want to make sure you are aware that DXJ is currency-hedged whereas the other country ETFs are not. I’m not sure what difference it makes but for consistency, you might want to choose a Japanese ETF that is not currency hedged.
An alternative might be to choose only country ETFs that are currency hedged, but last time I checked (which was a couple of years ago), there was only DXJ (Japan) and HEDJ (European), and of course SPY wouldn’t need currency hedging as it is already in USD. In other words, a rotation based on one of DXJ/HEDJ/SPY might be another strategy you could look into.
Steve
Hi Andreas, Is Keith McCullough at Hedgeye one of your preferred sources for Macro? He claims calling major turns, and reading one of his slide shows I found from last year seems to call major themes correctly, although he called for lower inflation this year than we have seen. (On difference, lots of current conference calls are also mentioning inflationary pressures which runs counter to what he discussed in the video.)
Yes Among others, though not all macro; @Hedgeye @jposhaughnessy @OphirGottlieb @RayDalio @wesbury @KeithMcCullough @allstarcharts @CiovaccoCapital @jfahmy @ukarlewitz and @jsmian
What I like with hedgeeye is, that they have backtested their stuff and that they found out what works on what economic condition (eg. growth stocks when growth is accelarating and Inflation going down (they call that quad1) or growth accelerating and Inflation acceleration (quad2): then ist time to buy tech and consumer discreationary. That call worked out pretty good the last two years. Now they call for quad3 (decellerating growth and higher Inflation and in q4 they call for quad4 deceleration in growth and decelarating Inflation: so now they say ist time to buy TLT and Reits).
The Thing is, my modells (without market Timing) are very, very robust and only give in, in the most dire conditions (2008 and 2011, not 2000, they performed well 2000 without market Timing). Also you have to diferentiate of recessions: The one where Banks are not systematically in Trouble and the ones where they are in Trouble (then I believe no Long only Modell without market Timing is able to withstand).
So fore me to sell: my modells Need to make a lower high + sp500 75ma Needs to be broken and earnings Need to trend down.
So there might be very well a Peak in growth, but I see nowhere systematic Problems in the US, Banks are fine. Might be that
the fed inverts the curve, that might be lead to a recession, but nothing like 2008 in the book.
So therfore I sit tight and stay Long as Long the above conditions are not met.
For other modells this might be different, so I wanted to give a heads up of my bull case call.
Regards
Andreas
Steve, the country rotation model is based on your research from about 3 years ago. I used DXJ in preference to EWJ because annualized return was about 4% higher, about 30% instead of 26% from Mar-2009 to Jul-2018.
BTW, ETF UUP makes a very good hedge during down-market periods. Here is the model 3/1/2008 - 7/31/2018 market timed using UUP when not in country ETFs.
Geov - with regards to DXJ, I am suggesting that you may want to choose consistency of target ETFs over backtest results. I am making this statement because you are ranking based on currency strength. But you are eliminating currency as an influence in the price time series of one of the ETFs by way of currency hedge. Just my opinion. Nice system anyways!
Steve
Steve,
While you are correct that DXJ is currency-hedged, the hedge is meant to protect investors from a falling yen.
See the attached chart. Back to 2007, when FXY (the yen) is rising, EWJ does better. When FXY is falling, DXJ does better.
Geov’s system will invest in Japan when FXY/the yen is falling. So he picks DXJ.
Given his system of investing on currency weakness, that’s a great alternative.
Here’s a list of currency-hedged ETFs.
http://etfdb.com/type/investment-style/currency-hedged/
There appear to be several Germany-hedged ETFs. I don’t know how much history they have.
Miro,
Thanks for your analysis.
Here are the periods when the model was in DXJ. You can see that the 1st period coincides nicely with the falling yen and DXJ gained 50.9% over 421 days.
Symbol Open Close Days Pct
5 DXJ 06/19/2017- 11/20/2017 154 10.60%
4 DXJ 11/03/2014- 12/22/2014 49 -8.60%
3 DXJ 08/18/2014- 09/08/2014 21 2.20%
2 DXJ 06/23/2014- 07/07/2014 14 0.30%
1 DXJ 11/26/2012- 01/21/2014 421 50.90%
Miro - the system doesn’t protect from falling currency for country ETFs other than Japan. It is the lack of consistency in choice of ETF universe and how the ETFs will behave in US dollars that is my issue.
Georg - It’s a nice system and thank you for sharing. I have some questions on the market timing aspect of the system.
Geov
Here is how EWJ did during those same periods
5 = 9.5%
4 = -4.2%
3 = -1.2%
2 = -0.1%
1 = 33%
So DXJ outperformed 80% of the time.
It would be interesting to compare your Germany ETF (EWG) holding period returns to
DBGR since June 9, 2011 and/or
DXGE since Oct 17, 2013
These are the oldest Germany hedged ETFs.
There is now a Canada (HEWC - 7/1/15 inception, less than $6M) and Australia (HAUD - 7/13/15 inception, less than $2M) currency hedged ETF, but they are relatively new and have tiny AUM.
Still it would be interesting to see if they outpeformed EWC and EWA holding periods since the summer of 2015.
Steve - it’s hard to be consistent when there is no currency hedged ETF counterpart to his Swedish ETF, and none of the other options date back to the inception of his testing.
“Steve - it’s hard to be consistent when there is no currency hedged ETF counterpart to his Swedish ETF, and none of the other options date back to the inception of his testing.”
Georg/Miro - You may not have currency-hedged ETFs but you certainly know how the local currency performed while the ETF was being held. If you want a convincing argument, then analyze each position held with and without currency hedging. If you get better performance with a hedge in all or most cases, then I can believe in this strategy. Otherwise, it could be just luck as to how DXJ worked out.
Then it becomes a matter of how to implement the system so that currency hedging is applied across the board. Consider implementing a book of two ports. One port holding the Country ETF, the second port shorting the corresponding currency ETF. Use identical buy/sell ranking rules for both ports so the equity and currency ETFs are synchronized.
Steve
Thanks for the link. I watched the video last night and read some about him today. Apparently he’s a controversial guy. Macro is like voodoo to me so I like to see how different people look at it, and more specifically what measures and data they utilize. I keep an eye on unemployment rate and the yield curve, but for the most part realize I have no idea when it comes to macro. I guess I also pay attention to Jeff Miller’s writeups on Seeking Alpha where he keeps a summary of several recession risk indicators and synthesizes economic data, both pros and cons.
Geov - have you tried a long short model shorting the country with the strongest currency?
Probably a lower return profile, but maybe a better risk profile.
Miro and Steve,
Investing in currency ETFs based on the past 1-year performance of them, or based on the past 1-year performance of the corresponding country ETFs, produces at the most a 3% annualized return from 2009 to 2013.
For the model I have posted additional info on Seeking Alpha in the comment section.
https://seekingalpha.com/article/4190334-outperforming-u-s-market-im-country-rotation-system
Georg - I must confess I don’t fully understand your response or how it relates to my post(s). I have set up a ranking system myself to investigate further. I don’t claim to have replicated your weak currency ranking system but you can see my results. Over a ten year period I get similar bucket performance as your ranking system for country ETFs, albeit with a much lower annualized performance. When the ranking system is applied to the corresponding Currency ETFs (as opposed to the country ETFs) there is no uniform pattern (ascending or descending) among buckets. Thus I don’t find a convincing argument for choosing currency-hedged country ETFs (or concocted strategy to emulate hedged ETFs). This leads me to believe that the performance increase of DXJ versus EWJ is an anomaly which may not be seen in the future. The other possibility is to find a narrative which explains the currency-hedged behavior of DXJ and rationalization for its use. Perhaps there is an explanation based on global carry trade etc but it should probably be thought out and not just based on backtest giving slightly better results.
Currency-hedging, under certain circumstances, can result in disaster. The example that comes to mind was a Canadian ETF (for Canadian investors) invested in the S&P 500 with currency hedging. My recollection is that the ETF dropped to about 30% in the 2008 crash. The currency hedge compounded the stock crash.
Steve,
Thanks for taking the trouble to check this out. I think for consistency it would be better to use EWJ in preference to DXJ, as we cannot backtest with currency hedged ETFs only for longer than 3 years. As you say correctly the performance increase of DXJ versus EWJ may be an anomaly which may not be seen in the future.
The model still returns 26% as shown below.
Over the last 10 years, from 08/04/08 - 08/04/18 the model returns 18.6% with similar max D/D as for SPY of -49%. With market timing (in UUP) when not in market we get 27.3% annualized with max D/D of -18.6%.
What happens if you expand the testing to the ~18 years available on p123?
And I agree with Steve - picking a single currency-hedged ETF and leaving the others as is (because it backtests better), is the absolute definition of curve-fitting.
