John HolmesNelson Freeburg, editor of Formula Research, did some studies on asset allocation and sector models with S&P and Russell moving average crossovers that looked promising. He does some limited testing of the ideas, but unfortunately makes the error of curve-fitting to make the maximum return going forward. We know that doesn't work. He fails to test the results statistically. For these reasons I do not recommend the newsletter. He does consider maximum drawdowns and time to recovery. Too bad I didn't save my issues, as there are some thoughtful ideas to test, submitted by various money managers, including some of the more illustrious Daily Spec contributors.

Kim Zussman investigates:

The quarter ending 9/30/07 SP500 return was about +1.5% and RUT (Russel 2000 small cap) was about -3%. Usually they dance together, but this time Mrs. Small and Mr. Big pirouetted across the floor, away from each other.

Looking at index quarterly returns 3/88-9/07, what happens in the next quarter if SP500 up and RUT down?

One-Sample T: sp_1, rut_1

Test of mu = 0 vs not = 0

Variable  N  Mean     StDev   SE Mean          95% CI          T      P
sp_1     8  0.04919  0.08826  0.03120  (-0.02459, 0.12297)  1.58  0.159
rut_1    8  0.03954  0.11686  0.04131  (-0.05815, 0.13724)  0.96  0.370

Both up insignificantly, SP500>RUT

What about the opposite, RUT up and SP500 down?  Next quarter ret:

One-Sample T: sp_2, rut_2

Test of mu = 0 vs not = 0

Variable  N       Mean     StDev   SE Mean      95% CI           T      P
sp_2     4  -0.04714  0.07524  0.03762  (-0.16687, 0.07258)  -1.25  0.299
rut_2    4  -0.03733  0.08112  0.04056  (-0.16641, 0.09175)  -0.92  0.425

Again insignificant, but this time both down, and again SP500 is the leader.

Kind of a bullish dance?


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