Slow-Timing the Market, an Alternative Portfolio-Allocation Approach

Cohen, D. Allen
February 2011
Journal of Financial Planning;Feb2011, Vol. 24 Issue 2, p45
Academic Journal
This article presents an innovative approach to projecting intermediate-term statistical market trends, permitting advantageous adaptations of client portfolio allocations. We call this "slow-timing the market." A simple, automatable algorithmic procedure is put forth for identifying bullish and bearish market trends with durations generally greater than primary-trend durations and less than those of secular trends. The algorithm uses the trailing 12-month average of the constant, 1901-dollar Standard & Poor's 500 Composite Stock Price Index to identify intermediate maxima and minima of the market. A trend change takes from two to six months to recognize; however, the shortest such trend over the past 106 years was 9 months, and the longest was 112 months, invariably permitting such trends to be recognized and advantageously leveraged before they change. Statistical distributions of the major security-index total returns were derived separately for these intermediate-trend bullish and bearish periods spanning the past century and programmed into a Monte Carlo model to test the efficacy of slow-timing the market. Candidate client bullish and bearish portfolio allocation strategies were evaluated using the model. The model statistically projects trend durations as well as trend-recognition lag times. The model subsequently statistically projects the behaviors of the portfolio-allocation strategies (month-to-month) in accordance with the then-current market trend as each run is projected forward in time. Definite improvements resulted using this approach versus maintaining allocations independent of market trends.


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