An alternative Robot ?

[manucastle]

Pascal/Billy.

We have had discussions before about alternative Robots.

We are operating in an environment with US Debt downgrades which could possibly mean bearish US stock markets for some considerable time.

We have an alternative of GDX which could mitigate this somewhat but I would feel a lot safer if we had a further Robot which has proved to be generally Bullish when the US stock market is Bearish.

I understand that the magnitude of returns could be less through more diversification but would better control the portfolio volatility. It may also allow us to be fully invested at all times.

I would appreciate your comments. :O)

Trev

[Billy]

Trev,

The equity markets turning "bearish for an extended period of time" would actually be an excellent environment for making money with the IWM robot. All the robot needs is a real trend to follow - up or down- to outperform significantly. I don't see the problem, quite the contrary since the robot could at last excel outside of a multi-month choppy market.

GDX is the least correlated instrument to IWM. Our previous research didn't find any instrument diversification improving the long term risk-adjusted performance of a 50%/50% IWM/GDX robot allocation. But we remain open to any suggestion with a proven allocation edge. If we knew an instrument that "proved generally bullish" when IWM was bearish, we would of course already have made a robot for it. I wish it was so easy!

Finally, in my view, the biggest mistake one can make is to be "fully invested at all times". Current times are a good demonstration of how ST/LT probabilities are simply unreliable because the backtesting sample of similar trend-transitioning conditions is too small. Your only probabilistic hedge is to stay in cash and so is the robot. Once conditions normalize, the robot's probabilities will be our best guide once again.

Billy

[manucastle]

Trev,

The equity markets turning "bearish for an extended period of time" would actually be an excellent environment for making money with the IWM robot. All the robot needs is a real trend to follow - up or down- to outperform significantly. I don't see the problem, quite the contrary since the robot could at last excel outside of a multi-month choppy market.

GDX is the least correlated instrument to IWM. Our previous research didn't find any instrument diversification improving the long term risk-adjusted performance of a 50%/50% IWM/GDX robot allocation. But we remain open to any suggestion with a proven allocation edge. If we knew an instrument that "proved generally bullish" when IWM was bearish, we would of course already have made a robot for it. I wish it was so easy!

Finally, in my view, the biggest mistake one can make is to be "fully invested at all times". Current times are a good demonstration of how ST/LT probabilities are simply unreliable because the backtesting sample of similar trend-transitioning conditions is too small. Your only probabilistic hedge is to stay in cash and so is the robot. Once conditions normalize, the robot's probabilities will be our best guide once again.

Billy

Thanks for your quick reply Billy,

I am probably going to show my ignorance here but I never learned anything by not asking stupid questions :O)

Lets for example add to the Robots a bond fund and we need an ETF with good liquidity so lets choose SHY (iShares Barclays 1-3 Year Treasury Bond).

This fund has a negative correlation with GDX of -0.10 and with IWM of -0.41 over the last 5 years.

http://www.assetcorrelation.com/user/add_to_custom

Would this not be a good alternative to make some money during the times when both GDX and IWM Robot signals are in cash. Or on the other hand be simply a better investment at times than the other two ?

I hope you can indulge me.

Trev

[Billy]

Thanks for your quick reply Billy,

I am probably going to show my ignorance here but I never learned anything by not asking stupid questions :O)

Lets for example add to the Robots a bond fund and we need an ETF with good liquidity so lets choose SHY (iShares Barclays 1-3 Year Treasury Bond).

This fund has a negative correlation with GDX of -0.10 and with IWM of -0.41 over the last 5 years.

http://www.assetcorrelation.com/user/add_to_custom

Would this not be a good alternative to make some money during the times when both GDX and IWM Robot signals are in cash. Or on the other hand be simply a better investment at times than the other two ?

I hope you can indulge me.

Trev

Trev, is SHY really an alternative to cash with an ATR of 0.09%?
In comparison to IWM, (ATR = 3.04%) and GDX (ATR = 3.40%), your allocation into SHY to compensate the volatility of the other 2 instruments should be close to 100% of your portfolio.
SHY gained 0.08% last week, IWM lost 10.55% and GDX lost 2.58%.
Frankly, if a SHY robot ever told you to be long, what would have been the difference with being in cash?
Finally, there is no money flow that could be computed for a bond ETF like for a stock ETF. We would have to rely on the treasury futures flow or the ETF's flow itself for direction and we know that it would not be practical nor reliable.
Billy

[manucastle]

Trev, is SHY really an alternative to cash with an ATR of 0.09%?
In comparison to IWM, (ATR = 3.04%) and GDX (ATR = 3.40%), your allocation into SHY to compensate the volatility of the other 2 instruments should be close to 100% of your portfolio.
SHY gained 0.08% last week, IWM lost 10.55% and GDX lost 2.58%.
Frankly, if a SHY robot ever told you to be long, what would have been the difference with being in cash?
Finally, there is no money flow that could be computed for a bond ETF like for a stock ETF. We would have to rely on the treasury futures flow or the ETF's flow itself for direction and we know that it would not be practical nor reliable.
Billy

Ok, all points taken and understood.

Thanks for the education yet again. :O)

Trev