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

    Rather than focusing on interest rates themselves, many economists have tried to predict future real economic activity by using the maturity spread, defined as the spread between yields on long-term and short-term bonds. The term structure of interest rates contains useful information about expected real interest rates and expected in ation (e.g., Mishkin(1990b)) and is a useful tool to predict economic growth and thus stock-market returns. 

    According to the expatation theory, the maturity spread depends on the expected short-term interest rate. Consequently, a high spread indicates a expected low short-term interest rate, then a economic growth and an increase returns in the stock market. So rising above the threshold value is a switch signal from holding cash to investing in the stock market, since the market is expected to yield higher returns than cash during these periods, and vice versa.

    The short term interest rate can be ^IRX (13-week Treasury Bill) or Federal discount rate. The long term interest rate can be ^FVX(5-year Threasury Bond), ^TNX(10-year Treasury Bond) and ^TYX(30-year Treasury Bond).  Threshold can be certain fix values or SMA (Simple moving average) of certain days. And for ^TNX, the Portfolio StartDate should not be set to the date earlier than 01/02/1962 due to lack of data.

Parameters used in the created portfolio:

Indicator: Maturity spread-the spread between yeilds on long term and short term bonds

Threshold: -0.5%, 0.5%, SMA 30days (default) , SMA 120days

Delay days: 1 day, 5 days (default)

Waiting days: 1 day, 5 days (default)

BuySecurity: ^GSPC (default)

Short Term Bond yeild: ^IRX (default) - 13-week Treasury Bill rate

Long Term Bond yeild: ^FVX(5-year Threasury Bond rate), ^TNX (10-year Treasury Bond rate), ^TYX(30-year Treasury Bond rate)

Similar Strategies in ValiFi:

• Market Timing Rule with Short Term Interest Rate: using the 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.