Since I basically changed the model portfolio to be market-neutral last week based on the most recent retail and employment stats, I thought it worthwhile to update my prior post on market timing based on retail sales. Last week, I did what no trader should do, which is to take action based on quantitative data before back-testing the decision. In other words, my prior back-testing was based on a rule whereby the trailing-2-month average retail sales were compared to the trailing-12-month average retail sales. So, just to get squared away, this week I've back-tested what it would looks like if one were to have traded based on the criteria I implicitly cited last week, which was:
1. If the year-over-year retail sales growth has weakened for two consecutive months, then sell.
2. If the year-over-year retail sales growth has strengthened for two consecutive months, then buy.
3. Otherwise, hold your position (either in or out of the market as the case may be) the same as the previous month.
The results are shown in the chart above, and the story is essentially the same as it was. Lower variability of returns (standard deviation), much lower Beta, and positive Alpha, which you'll recall is simply the amount of 'excess' return after adjusting for what you 'should' have received after adjusting for the lower Beta of the market-timing strategy. As you can see, this is a long-term strategy that will under-perform in bull markets and outperform in bear markets, but over the entire cycle does fairly well after accounting for the lower volatility risk.
Note: retail sales data is only available in electronic format back to 1994.
Quote for the Week: "Anger is an acid that can do more harm to the vessel in which it is stored than to anything on which it is poured." - Mark Twain
