Market Timing Rule with Long Term Interest Rate

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

    Since Treasury bonds are qualified as a direct alternative to stock investments, the interest rate on such bonds should have even more predictive power for stock returns than the short term interest rates. If the interest rate increases, we would expect stock prices to go down, and vice versa. 

    So for long 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 long term interest rate used here is ^TNX (10-year Treasury Bond), and there are other choices, such as ^FVX(5-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: ^TNX (10-year Treasury Bond)

Threshold: 5%, 10%, SMA 30days (default), SMA 120days

Waiting days: 1 day, 5 days (default)

Delay days: 1 day, 5days (default) 

 

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