Jan

4

This time of the year people often consider rebalancing their portfolio. So naturally the question comes up how to rebalance.

Should a person bet against last years trends, a "reversion to the mean" strategy?

Or should a person do the opposite?

That is should a person continue to follow the trends? To quantify this question, first I had to determine what is a "good trend" and "what is out of favor".

I started with the SPY (S&P spider) and compared each sector to it. However, a direct 1 to 1 comparison is not fair to the less volatile sectors such as utilities to compare them to the faster moving sectors such as tech or financials since 2007. To find the speed of each sector I used the prior years daily log normal returns compared to the SPY daily returns. These speeds are usually relatively constant, but since the crisis, the "financial sectors" speed has changed considerably from year to year.

Once I had a relative speed I was able to look at and "actual less predicted" comparison for each year for each sector to determine if its performance was "trending" or "out of favor" compared to the S&P. The predicted = the "speed X SPY return for year. The "actual" was the sectors log normal return for the year. If the sector out performed, the "actual - predicted" should be positive. And if its out of favor negative.

Since following a trending sector or not, is basically is a yes or no question, if it was totally random the chance of a trend continuing or not should be 50/50 like a coin toss. Therefore, I used the cumulative binomial distribution to test if it is statistically significant to follow the trend or bet on reversal. if the results of the binomial dist. are close to 0% a reversal strategy is statistically significant. If the distribution is close to 100%, a trending strategy is statistically significant.

Ok,

A little about me: currently I am taking a break from the markets, except for managing my own money. This is after 25 years at 2 different insurance companies as a investment actuary specializing in risk analysis. I am teaching high school math, from 8th grade to 12 grade pre calculus. I may teach some night classes next year at NWOSU, once I get 12 credit hours of teaching courses. With the 5 lesson plans everyday I prepare and the college courses I am pretty busy when classes are in session. Within my course, I am trying to introduce the markets to the students. This semester I will have the all classes invest about $2,000 of my money and give the classes any profits for their Senior year prom.

My future aspirations would be to set up a insurance company that has cost effective delivery system and meaningful yet meaningful analysis to help the middle class manage risk and investments better. I have some ideas on how to do this. But it will be a few years, before I am ready.

In general, the results imply in recent years:

Follow the trend in Consumer Staples, Financials, Energy, Consumer Discretionary, Utilities and Materials
Trend does not matter in Health Care or technology
and Reverse the trend in industrials.

To find the "2015 expected overperformance/(underperformance)" for each sector I did the following: (Binomial Distribution - 50%) X (2014 Actual -Predicted)

I get the following expected over/(under) performance percentages

Overweight
Utilities 3.4%
Consumer staples 2.1%
Industrials 0.8%

Neutral
Health Care 0%
Technology 0%
Financials (0,4%)

Underweight
Consumer discretionary (1.0%)
Materials (-1.4%)
Energy (-4.5%)
 

Below is a comma delimited file of the results.

Log Normal Returns ,SPY,XLY,xlp,xle,XLF,xlv,xli,xlb,xlk,xlu
2014,13.63%,09.45%,15.84%,-08.32%,15.17%,23.44%,10.86%,07.91%,17.52%,27.08%
2013,27.99%,35.57%,23.33%,23.31%,30.38%,34.65%,34.03%,23.10%,23.29%,12.28%
2012,14.84%,21.19%,10.21%,05.08%,25.01%,16.02%,13.92%,13.71%,14.24%,01.02%
2011,01.87%,05.81%,13.18%,02.80%,-18.84%,11.68%,-01.10%,-11.55%,02.61%,17.93%
2010,14.02%,24.28%,12.91%,19.71%,11.28%,03.23%,24.53%,18.68%,10.78%,05.20%
2009,23.39%,34.05%,13.33%,19.68%,16.18%,17.82%,19.94%,39.34%,41.40%,11.07%
2008,-45.88%,-40.02%,-16.27%,-49.35%,-79.62%,-26.53%,-49.01%,-58.11%,-53.62%,-34.13%
2007,05.02%,-14.71%,11.96%,31.41%,-21.29%,06.92%,12.65%,19.97%,14.37%,16.90%
2006,14.71%,16.91%,13.54%,16.59%,17.27%,06.81%,12.70%,16.87%,11.49%,18.96%
2005,04.72%,-06.80%,02.75%,33.79%,06.03%,06.23%,02.68%,03.97%,-00.33%,15.19%
2004,10.16%,12.13%,07.41%,29.22%,10.30%,01.27%,16.37%,12.68%,05.51%,21.20%
2003,24.83%,31.63%,10.58%,22.97%,26.62%,13.91%,27.63%,31.78%,32.68%,23.48%
2002,-24.31%,-20.69%,-22.41%,-15.88%,-15.93%,-00.78%,-28.19%,-05.50%,-48.09%,-33.95%
2001,-12.51%,12.00%,-10.48%,-20.02%,-09.91%,-00.82%,-11.13%,02.10%,-26.60%,-13.95%
2000,-10.25%,-18.47%,22.74%,21.85%,22.95%,-12.52%,06.48%,-17.65%,-54.24%,20.27%
1999,18.56%,17.83%,-15.35%,16.48%,02.60%,17.81%,19.77%,20.59%,50.15%,-04.51%
Totals,80.79%,120.18%,93.25%,149.31%,38.20%,119.16%,112.14%,117.90%,41.17%,104.04%

Speed Estimate Relative to S&P,,XLY,xlp,xle,XLF,xlv,xli,xlb,xlk,xlu
2014,,105.03%,81.64%,108.02%,120.29%,94.23%,107.76%,111.15%,87.74%,72.16%
2013,,99.40%,57.93%,124.14%,124.05%,74.29%,111.37%,122.00%,105.19%,37.77%
2012,,100.14%,58.08%,127.03%,136.47%,80.47%,115.94%,127.69%,93.60%,60.85%
2011,,108.48%,59.11%,120.54%,130.95%,71.96%,118.06%,125.48%,97.95%,69.57%
2010,,108.89%,49.91%,118.68%,213.41%,54.44%,113.93%,113.40%,88.64%,54.51%
2009,,92.48%,48.55%,125.19%,146.97%,60.19%,85.38%,97.64%,92.44%,74.39%
2008,,97.66%,53.64%,124.48%,134.61%,66.09%,90.64%,123.71%,88.71%,78.45%
2007,,98.88%,61.60%,125.68%,99.83%,71.08%,99.25%,135.82%,118.18%,62.52%
2006,,107.96%,70.65%,138.57%,97.45%,72.36%,98.78%,120.55%,94.08%,97.03%
2005,,99.28%,61.44%,74.81%,95.89%,83.96%,102.62%,118.46%,125.12%,56.33%
2004,,111.80%,65.93%,49.89%,111.18%,80.40%,95.08%,95.76%,134.75%,67.12%
2003,,93.89%,49.63%,82.38%,107.92%,77.07%,97.07%,85.41%,138.84%,80.10%
2002,,97.73%,31.58%,36.28%,92.63%,85.41%,102.63%,76.42%,177.56%,26.05%
2001,,79.12%,27.08%,18.66%,100.15%,64.96%,77.42%,36.04%,142.74%,30.38%
2000,,92.56%,79.97%,41.80%,117.78%,83.89%,58.42%,41.69%,125.35%,53.30%
1999,,92.56%,79.97%,41.80%,117.78%,83.89%,58.42%,41.69%,125.35%,53.30%
average,,99.55%,57.12%,94.41%,121.97%,74.72%,98.29%,102.08%,114.06%,61.37%

Actual - Predicted,,XLY,xlp,xle,XLF,xlv,xli,xlb,xlk,xlu
2014,,-04.87%,04.71%,-23.04%,-01.22%,10.59%,-03.83%,-07.24%,05.56%,17.25%
2013,,07.75%,07.12%,-11.45%,-04.35%,13.85%,02.86%,-11.05%,-06.16%,01.71%
2012,,06.34%,01.59%,-13.77%,04.77%,04.08%,-03.28%,-05.23%,00.35%,-08.01%
2011,,03.78%,12.07%,00.54%,-21.29%,10.34%,-03.31%,-13.90%,00.77%,16.62%
2010,,09.01%,05.91%,03.06%,-18.65%,-04.41%,08.55%,02.78%,-01.65%,-02.44%
2009,,12.42%,01.97%,-09.60%,-18.20%,03.75%,-00.03%,16.50%,19.78%,-06.33%
2008,,04.78%,08.34%,07.76%,-17.87%,03.79%,-07.43%,-01.35%,-12.92%,01.86%
2007,,-19.67%,08.87%,25.11%,-26.30%,03.36%,07.67%,13.16%,08.44%,13.76%
2006,,01.03%,03.15%,-03.79%,02.94%,-03.83%,-01.82%,-00.86%,-02.35%,04.69%
2005,,-11.48%,-00.15%,30.27%,01.51%,02.27%,-02.16%,-01.61%,-06.23%,12.53%
2004,,00.77%,00.71%,24.15%,-01.00%,-06.90%,06.70%,02.95%,-08.18%,14.38%
2003,,08.32%,-01.74%,02.51%,-00.18%,-05.22%,03.53%,10.58%,-01.79%,03.59%
2002,,03.07%,-14.73%,-07.06%,06.58%,19.99%,-03.24%,13.07%,-04.92%,-27.61%
2001,,21.91%,-07.09%,-17.68%,02.62%,07.31%,-01.44%,06.61%,-08.73%,-10.15%
2000,,-08.99%,30.93%,26.13%,35.02%,-03.92%,12.47%,-13.38%,-41.40%,25.73%
1999,,00.65%,-30.19%,08.72%,-19.25%,02.24%,08.93%,12.85%,26.89%,-14.41%
Totals,,34.82%,31.46%,41.86%,-74.87%,57.29%,24.18%,23.87%,-32.53%,43.19%

positives,,XLY,xlp,xle,XLF,xlv,xli,xlb,xlk,xlu,Total yr.,binomial yr
2014,,,0,1,0,0,1,0,0,1,1,4,50.0%
2013,,,1,1,0,0,1,1,0,0,1,5,74.6%
2012,,,1,1,0,1,1,0,0,1,0,5,74.6%
2011,,,1,1,1,0,1,0,0,1,1,6,91.0%
2010,,,1,1,1,0,0,1,1,0,0,5,74.6%
2009,,,1,1,0,0,1,0,1,1,0,5,74.6%
2008,,,1,1,1,0,1,0,0,0,1,5,74.6%
2007,,,0,1,1,0,1,1,1,1,1,7,98.1%
2006,,,1,1,0,1,0,0,0,0,1,4,50.0%
2005,,,0,0,1,1,1,0,0,0,1,4,50.0%
2004,,,1,1,1,0,0,1,1,0,1,6,91.0%
2003,,,1,0,1,0,0,1,1,0,1,5,74.6%
2002,,,1,0,0,1,1,0,1,0,0,4,50.0%
2001,,,1,0,0,1,1,0,1,0,0,4,50.0%
2000,,,0,1,1,1,0,1,0,0,1,5,74.6%
1999,,,1,0,1,0,1,1,1,1,0,6,91.0%
total sector,,,12,11,9,6,11,7,8,6,10,80,92.2%
Binomial sector,,98.9%,96.2%,77.3%,22.7%,96.2%,40.2%,59.8%,22.7%,89.5%,92.2%,

same sign as last year,,XLY,xlp,xle,XLF,xlv,xli,xlb,xlk,xluTotal yr.binomial yr
2014,,,0,1,1,1,1,0,1,0,1,6,91.0%
2013,,,1,1,1,0,1,0,1,0,0,5,74.6%
2012,,,1,1,0,0,1,1,1,1,0,6,91.0%
2011,,,1,1,1,1,0,0,0,0,0,4,50.0%
2010,,,1,1,0,1,0,0,1,0,1,5,74.6%
2009,,,1,1,0,1,1,1,0,0,0,5,74.6%
2008,,,0,1,1,1,1,0,0,0,1,5,74.6%
2007,,,0,1,0,0,0,0,0,0,1,2,09.0%
2006,,,0,0,0,1,0,1,1,1,1,5,74.6%
2005,,,0,0,1,0,0,0,0,1,1,3,25.4%
2004,,,1,0,1,1,1,1,1,1,1,8,99.8%
2003,,,1,1,0,0,0,0,1,1,0,4,50.0%
2002,,,1,1,1,1,1,1,1,1,1,9,100.0%
2001,,,0,0,0,1,0,0,0,1,0,2,09.0%
2000,,,0,0,1,0,0,1,0,0,0,2,09.0%
total sector,,,8,10,8,9,7,6,8,7,8,71,75.4%
binomial sector,,,69.6%,94.1%,69.6%,84.9%,50.0%,30.4%,69.6%,50.0%,69.6%,,00.0%


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