This market-timing strategy uses the dividend yield of the target security as an indicator to predict future stock market return. In this strategy, stocks are supposed to be sold when the indicator fall below the predefinded threshold value, and vice versa. It also has “delay day” and “waiting day” settings.
Many investors assume that stock prices do not wander too far from their normal levels relative to such fundamental values as earnings, dividends, and book value, but revert back to their normal levels after periods of deviation. That is, financial ratios are assumed to fluctuate within historical ranges and to be positively related to expected returns. Fama and French (1989), and Campbell and Shiller (2001), among others, argue that the dividend yield and the E/P ratio have predictive power. However, Fisher and Statman (2006a) and Fisher and Statman (2006b) also investigate the success of market timing based on financial ratios and find that the performance of buy-and-hold investors is usually higher than that of various timing rules based on E/P ratios and dividend yields.
In this Strategy, for the dividend yield, rising above 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 signals are examined every trading day.
Threshold can set to be certain fix values or SMA (Simple moving average) of certain days. The BuySecurity should only be set as ^GSPC or VFINX. And the Portfolio StartDate should not be set to the date earlier than 01/02/1990 due to lack of data.
Parameters used in the created portfolio:
Indicator: Dividend yield of security
TresholdValue: 0.015, 0.025, SMA 30days (default), SMA 120days
WaitingDay:1 day, 5 days (default)
DelayDay: 1 day, 5 days (default)
BuySecurity: ^GSPC (default) , VFINX
- Market Timing Rule with Short Term Interest Rate: using the short-term interest rates as an indicator
- 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 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.