S&P: new high, new buy

Two of the developed world’s most important equity indices are at all-time highs. The S&P 500 has reached 1,941 and Germany’s DAX 30 has crossed above 10,000 for the first time. Britain’s FTSE 100, meanwhile, has lately come within less than 1% of its record peak of 6951, which it registered back in the year 2,000. Is all this a cause for optimism? Continue reading

Sunburnt S&P

It is not hard to make a bearish case for the outlook for US stocks right now. The S&P 500 is very dear by historical standards. The boom in equities is more than five years old and long-term momentum is stretched. And, quantitative easing – the lifeblood of bullish speculation in recent years – is set to end within a few months. But does solar activity also point to tougher times to come on Wall Street?

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UK high-yield stocks: more bang for your buck

Buying stocks with a good dividend yield has been a winning strategy in the UK over time. Had you put £10,000 in the shares of the FTSE 350 High Yield index at the end of 1985 and reinvested all the dividends, you’d be sitting on more than £214,500 today. The same starting stake tied up in the wider FTSE 350 index would have become only £152,869. Continue reading

The 20% a year momentum strategy: risk-lite edition

Momentum investing works. As I explored in this recent article, simply buying the two sectors of the UK market that did best in the last 3 months would have consistently produced market-beating returns over the past half century. But is it possible to boost the returns yet further or at least to lower its risks?

To find this out, I’ve tested the effects of only pursuing this strategy at the most favourable times. So, instead of simply buying the best-performing two UK sector groups of the last quarter every month, I’ve looked at only buying when:

1)    The sectors in question actually went up, rather than merely beating the rest by falling by less.

2)    The wider UK stock market itself was above its 10-month moving average, a basic but powerful definition of an uptrend.

For periods when these conditions were not met, the portfolio is invested in cash at a rate equal to the Bank of England base rate.

The results are shown in this table.

%

Buy best 2

sectors last 2Q

Buy &

hold 

Buy best 2, if mkt >10M ave Buy 2 sectors, if positive
Return 20.1 13.0 19.5 14.7
Volatility 21.2 19.1 17.6 36.6
Worst drawdown -51.6 -63.0 -30.8 -56.8
Beat B&H (years)  30.0 0.0 31.0 27.0

Strategy 1 – only buying outperforming sectors that had actually risen – produced worse returns than simply buying the sectors irrespective of their absolute performance. It did beat buy-and-hold, but actually registered worse volatility.

Strategy 2 – only buying the two recently-winning sectors when the wider market was above its 10-month average gave almost as much return as the straightforward strategy but with less volatility and a much smaller worst drawdown.

I intend to use this very handy insight in my forthcoming momentum study on international stock indices.

The 20% a year UK momentum strategy

Buying recent winners is a proven strategy for success in the stock market. I’ve just been digging into the effect of investing in the best-performing industry groupings in the UK over the last half century or so. Had you bought the top two performing sectors of the last quarter every month since 1965, you’d have made an annualised total return of more than 20% a year to the end of 2013. Buying and holding the UK market would have earned you just 13% a year, by contrast.

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Is Wall Street really so dear?

US equities look very dear by some measures right now. Trading on 25 times its average earnings of the last ten years, the S&P 500 is valued at more than one standard deviation above its long-term mean of 16.5. It has only gone above 25 on three occasions in the past – 1901, 1929 and 2000 – and all of them ended hideously. But are historic valuations really that important to today?

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