Below are the changes to the mix of Market Signals strategies for next year.
The process of selecting strategies for the Market Signals ensemble focuses on two objectives:
- Generate reasonable risk-adjusted returns
- Provide a hedge during periods of elevated uncertainty
Below is the performance (backtest) of the ensemble before we introduced the commodity ETF long-short strategy last year. For more details, click here.
Our objective has been a high Sharpe ratio as close to 1 as possible, combined with a low maximum drawdown and annualized returns higher than 7%.
Going forward, we believe that a commodity ETF long-short strategy is no longer required, and on top of that, it could hurt performance. We believe that commodities will enter another period of stagnation and chop, and other than occasional spikes due to unexpected events, trend-following in that space could suffer. Therefore, we will replace the ETFLSW strategy with the DMSRM strategy.
DMSRM is a cross-sectional momentum strategy that invests in asset ETFs. The strategy is rebalanced on a monthly basis. Therefore, Market Signals subscribers will notice any changes to the holdings after the end of each month.
Below is the performance of the DMSRM strategy from January 3, 2007 to December 14, 2023 (backtest).
The DMSRM trading strategy uses a dynamic filter to switch between sector ETFs and short-duration bonds. Therefore, the strategy always invests in the markets. Note that despite the large drawdown in 2020 due to the pandemic selloff, the strategy recovered quickly and ended the year with a respectable gain. Year-to-date, the strategy has managed to trail the S&P 500 total return well, and this is what we are looking for in an environment where most strategies were unable to perform well.
When selecting strategies for the Market Signals ensemble, but also in general, we try to minimize bias by considering their economic value. An asset rotation strategy has economic value because it invests in the sectors of the economy with the best performance. Click below to subscribe to Market Signals.
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