In my last post I introduced a stock market trading strategy based on my 6 month market forecasts. It turns out that the forecasts consistently lead the market by a couple of months, so actual trading works best not by following the most current forecast, but by using a lagged forecast that weights forecasts from a few prior months. The buy/sell periods called by that strategy are shown in the plot at the end of this piece. That plot shows the strategy produced just a handful of handful of buy/sell points in the period since mid-2007 when I started posting forecasts for my models.
So what? A few correct buy/sell decisions can have a huge impact on investing returns. In particular, the forecasts of 2008 through early 2009 screamed of likely 6 month market losses of 17% or more, months before the crash took place. They turned out to be right. They were worth paying attention to.
A back-test applying the buy/sell strategy to an S&P 500 index fund is shown below running from mid-2007 to the present. In the stock crash of 2007-2009 the S&P 500 took a big hit, but overall for the period the average has had a 4% annualized rate of growth. The strategy using the 6 month stock market forecasts, however, had an annualized growth rate of 14%, roughly 3 times better.
(Click on image to enlarge.)
The big market call of major likely declines made for most of the difference in performance. Since the bottom of the financial meltdown the strategy has had only a few brief sell periods. So, for mid 2009 to the present the S&P 500 index has had a great rise and has only slightly under-performed the strategy.
The chart below shows the buy/sell calls produced by a strategy based on using a weighted average of 6-month market forecasts.
(Click on image to enlarge.)
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