This market-timing strategy uses the bond-equity yield ratio as an indicator to predict future stock market return. In this strategy, stocks are supposed to be sold when the indicator rises above the predefinded threshold value, and vice versa. It also has “delay day” and “waiting day” settings.

    The so-called bond-equity yield ratio (beyr), which is defined as the ratio of the bond yield to the yield in the stock market, has become a popular indicator for future stock market movements. It is assumed that beyr possesses a long-term level which reflects the long-run arbitrage relation between the government bond market and the stock market. If the beyr becomes high relative to its long-term level, equity yields are considered to be low compared to yields on bonds. Stock prices are therefore expected to fall in order to reestablish the long-run equilibrium. In contrast, a low beyr indicates that equities are cheap compared to bonds and that equity yields are expected to decrease in order to restore the long-term relationship. Besides, beyr is also called gilt-equity yield ratio.

    In this Strategy, for the bond-equity yield ratio, 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 signals are examined every trading day.

    Threshold can set to be certain fix values or SMA (Simple moving average) of certain days. The BuySecurity can 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: Bond-equity yield ratio

TresholdValue: 0.7, 0.9, SMA 30days (default), SMA 120days

WaitingDay：1 day, 5 days (default)

DelayDay: 1 day, 5 days (default)

BuySecurity: ^GSPC (default), VFINX

Bond yield: ^TNX (default, 10-year T-Bond rate), ^FVX (5-year T-Bond rate), ^TYX(30-year T-Bond rate).   

Similar Strategies in ValiFi:

• 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 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 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. Federal Reserve Bank of Kansas City, 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.