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Improving on Buy and Hold: A Buy Signal

December 13, 2011

by Georg Vrba, P.E.

Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

In my August 2010 article I advocated a market timing strategy, to sell or significantly reduce one’s stock holdings in anticipation of a recession or slowdown in the economy and switch into cash or a low-beta Treasury bond fund, and then reverse the process ahead of a recovery. I presented a model to determine the timing of each move.
I have updated this model and a type-A buy signal was generated on December 9, as shown in figure 1.

Since publication of the original article two previous signals were generated: a buy signal in October 2010 and a sell signal in May 2011. Both signals provided the expected results. The S&P 500 index gained about 13% from the date of the buy signal to the date of the sell signal and has since lost about 7% to the date of the new buy signal.

I have made some changes to improve the model. Figures 1 and 2 incorporate these changes and have been updated to December 9, 2011.

2009-11 Fed Funds Rate

Figures 2 shows the returns for investments made using the starting value of the S&P in 1966 and 1980. Following the model’s signals, one would have obtained about double the average annual return than from a permanent investment in the S&P, and the value of one’s investments now would have been about 15 and 7 times higher than the current value of the S&P for each of the two starting dates, respectively.

Recessions, Weekly leading Index Growth