Systematic Investing

The charts will be updated by every Saturday. When no change to text, [NC] will be used. Click for favorite investment websites or to go to the Investors' Forum

Investing for the Longer Term with a System  (4/6/2013)

2/23/2019:   The Power Zone typically starts in October, but due to the big drop in the market it did not begin until later.  The Power Zone started when the Health Buy Alert occurred on 1/10/2019. The was reinforced by the Bull Cycle Signal on 2/15/2019. So this BullHeal System went to a buy on 1/10/2019. I am sorry to be delinquent in identifying this change.

6/30/2018:   The Power Zone was longer than is typical, but it has now ended, which is a SELL for this BulHeal System.

5/8/2018:   The Power Zone will end when there is a Health Sell Alert. That will indicate a SELL for this system.

9/30/2017:  The market has been in a solid bull move. On 9/27/2017, a dramatic 2.0% move in the Russell 2000 small-cap index defined the start of the Power Zone, and thus a BUY for this system.

5/20/2017:  The Power Zone is over so the BullHeal System switched to a SELL on 5/19/2017. This is discussed on the Cycles page.

5/6/2017:  The definition of the Power Zone was modified somewhat to end closer to the end of May. Click here to see the reasoning. Therefore, the zone has not ended yet. Also, this year could be different due to political uncertainty.

This website is oriented toward the intermediate-term and longer-term investors.  Investing during the Bull Cycle, as described in the 12/1/2012 observation, gives fairly good results.  Then there is the Power Zone Health Alert on the home page.  So the question is:  What if these three good periods are combined?  Will that provide a nice gain with a low draw-down? 

Systematic Investing

Combinations of these approaches have been back-tested to determine a system to be know as BullHeal. The Power Zone is defined as November 1st through May 1st for purposes of the backtest.  The rules that have given the best results are as follows. 

BUY when the Bull Cycle starts OR at (the Power Zone AND the Health Buy Alert)
SELL when the Bull Cycle ends OR at the end of the Power Zone

11/12/2016:  The BullHeal System switched to a BUY as of 11/11/2016 when a Health Buy Alert occurred during the new Power Zone. 

4/30/2016:  The BullHeal System switched to a SELL as of 4/28/2016 when the Power Zone ended.

3/19/2016:  The BullHeal System switched to a BUY as of 3/18/2016 when a Bull Cycle was indicated. See the Observations tab.

  The BullHeal System switched to a SELL as of 1/8/2016 when a Bear Cycle was indicated. The bear cycle started on 12/30/2015, but the weekly indication of this occurred on Friday 1/8/2016.

10/24/2015:  The BullHeal System is on a BUY as of 10/22/2015 when the Power Zone started. The Health Alert was already a buy due to the rapid rise from the 9/29 low. The typical October low came early this year.

5/2/2015: The Health Alert went to a SELL on 4/30/2015. The Power Zone, which extends from sometime in October to the end of April, is over. Therefore, the BullHeal System is a SELL as of 4/30/2015.

 The Health Alert went to a BUY on 10/24/2014. That is the time of identification of the Power Zone, which started at the market low on 10/15/2014. Therefore, the BullHeal System is a BUY as of 10/24/2014.

4/26/2013: The Health Alert went to a SELL on 3/26/2014. The market had a short up-swing after that to a 4/2 high. Since then, it has dropped. The end of the Power Zone occurred on 4/2. Therefore, the BullHeal system is now on a SELL. This call was made on the Saturday 4/12 site update. Sy Harding has written a recent article on seasonality and whether to take the advice of "Go Away In May" early this year.

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The combination of the three alerts does, in fact, provide a good method of determining when to be in the stock market.  This works better with some funds than others, however, as determined by back-testing over more than eight years.  Here is a chart that shows how each type of alert has performed using the IWS, the Russell Mid-Cap Value iShares.  This ETF gives the best results with this system.

The 'system' is identified as BullHeal, and it makes only 1.8 switches per year.  Holding for a long duration has proved to be better than moving in and out of the market.  The data is for switching to IWS in the good times and to a money-market fund (FDRXX) during the bad times.  The other rows provide data for the three components of the system.  Note the compound annual return (CAR) in the Ann column for each entry.  That is pretty good considering that the buy and hold CAR of the S&P 500 (SPY) was only 6.04% during that time, and IWS had a CAR of 8.88%. 

One big factor in following a system is the fear that can be felt when the market drops and the system is still holding.  A measure of this is the MDD, the maximum draw-down.  This is the drop in the security from a peak to the lowest point while the system is holding.  Each component of the system has a large draw-down.  The system itself has an MDD of -9.4%.  The last column of the table shows what percentage of the trades were wins -- 100% of the eight trades were wins for the system, and that gives confidence in the system.  To see the actual trades, click here.  This analysis has been done using Cycle Signals Plus software with FastTrack data.

This chart shows what the return looks like with the BullHeal system.  You can see that you give up some gain in the early years to have the protection of the system.  The way that the components are combined is shown at the top of the chart. 

It turns out that the 'sells' in many of the years were at the end of the Power Zone (NovApr signal).  Would it be better to remove that component from the system?  This chart shows the effect of doing that.  The system would work better in the bull market of the early years, but does not sell soon enough in the bear market that started in June 2007.  There were also big drops just before the 'sells' in 2010 and 2011, due to the lag in the Bull Cycle alert. 

There are other ways of combining these components, but the inclusion of the Power Zone is important in all of them. Note that the 8+ years of the study is not a long enough period for the results to be statistically significant.

What, you may ask, has the system done during the bull market that started March 9, 2009?  The first 'buy signal' occurred on April 6th.  Here is a chart from that date.  Not too shabby!

The system gain was 29.0% with a -9.4% MDD vs the IWS buy & hold of 24.9% with an MDD of -24.1%.

When selling, the data is for moving the proceeds into a money-market fund.  One could put the money in a bond fund.  The data below is for using AGG, Core Total US Bond Market iShares, when the system is out of IWS.  The data with the money-market fund is shown again for comparison.

The chart below is for the BullHeal system using IWS and AGG.  This is the way to go as long as the bond market holds up.  AGG may not be the best bond ETF to use.  It is shown here because it existed for the full duration of this study.  Here is an April 2013 analysis of AGG and the bond market.

The last question to be answered relates to how this BullHeal system would work with other funds.  Here is a chart of the best ETFs and the best Vanguard mutual funds with the system.

Cycle Signals Plus software is used for these charts using FastTrack data. This page is for amusement only, and should not be taken as advice to buy or sell anything. It is best not to use one system for a large part of investable money.