This market-timing strategy uses a short term interest rate as an indicator to predict future stock market return. In this strategy, stocks are supposed to sell when the interest rate rises above the set threshold value, and vice versa. It also has “delay day” and “waiting day” settings.

Empirical studies find that falling short-term interest rates are associated with economic expansion and thus predict high stock market returns (e.g., Fama (1981)). More recent studies, such as Ang and Bekaert (2007), support the superior forecasting power of short-term interest rates compared to other variables.

       Here for short term interest rates, falling below a certain threshold is considered to be a switch signal from holding cash to investing in S&P 500 Index, and vice versa. If the same switch signal persists for “delay days”, we switch the trading position. And in the succeeding “waiting days” we keep the position ignoring the new switch signals.

      The default short term interest rate used here is ^IRX (13-week Treasury Bill), and Federal discount rate is another choice. Threshold can be certain fix values or SMA (Simple moving average) of certain days. And the Portfolio StartDate should not be set to the date earlier than 01/02/1960 due to the availability of data.

 Parameters used in the created portfolio:

Indicator: ^IRX(default): 13-week Treasury Bill rate

Threshold: 5%, 9%, SMA 30days (default) , SMA 120days

Delay days: 1 day, 5 days(default)

Waiting days: 1 day, 5 days (default)

BuySecurity:  ^GSPC (default)

• Market Timing Rule with Maturity Spread: using the spread of long-term and short-term interest rates as an indicator 
• SMA Timing Method proposed by Faber: using the SMA of the target asset as an indicator
• High Yield Bond Timing Strategy: using  trend  triggers (percentages from recent high or recent low) of the asset price for buy and sell decisions
• The 125 05 Timing Model of High Yield Bond Strategy by Gerald Appel: using  predifined trend  triggers (percentages from recent high or recent low) of the asset price for buy and sell decisions
• Market Timing Rule with Long Term Interest Rate: using long-term interest rate as an indicator
• Market Timing Rule with Earning to Price Ratio: using the E/P ratio as an indicator
• Market Timing Rule with Dividend Yield: using the dividend yield as an indicator
• Market Timing Rule with Expected Inflation: using the expected inflation as an indicator
• Market Timing rule with Implied Volatility Index : using the implied volatility index  as an indicator  
• Market Timing Rule with Bond-Equity Yield Ratio : using the bond-equity yield ratio as an indicator 
• Market Timing Rule with Dividend Payout Ratio : using the dividend payout ratio as an indicator 
• Market Timing Rule with Credit Spread :  using the credit spread as an indicator
• Market Timing Rule with Put/Call Ratio:  using the put/call ratio as an indicator
• Learning Market Timing Rule: following the most profitable rule of the above simple market rules in each period 
• Voting Market Timing Rule : Switching the position if a certain percentage of the above simple market timing rules intends to do so.

See Also

Relative Working Papers: 

• Neuhierl, Andreas,Schlusche and Bernd.Data Snooping and Market-Timing Rule Performance. 2009.
• Ang, Andrew and Geert Bekaert. Stock Return Predictability: Is It There?  2007.
• Pu Shen.  Market-Timing Strategies That  Worked. 2002 

Relative books:

• Deborah Weir. Timing the Market: How To Profit in the Stock Market Using the Yield Curve, Technical Analysis, and Cultural Indicators . 2000.
• Les Masonson. All About Market Timing: A Easy Way To Get Started. 2003.
• Colin Alexander. Streetsmart Guide to Timing the Stock Market: When to Buy, Sell, and Sell Short. 2005.