Research Excerpts

Asbury’s Correction Protection Model (CPM): Risk Off Status As Of Last Week

Posted on: Monday, August 5th, 2019

Asbury Research’s Correction Protection Model (CPM) moved to a “Risk Off”, defensive status as of the open on August 2nd, from a Risk On status since June 11th.

The chart below displays CPM’s signals thus far in 2019.

CPM is a defensive model with the primary objective of protecting investor assets during adverse market conditions, but otherwise remaining invested to take advantage of the market’s historical propensity to move higher over time.

CPM’s Purpose & Key Features

  • Protects investors against significant market declines
  • without sacrificing long term performance, under a variety of market conditions,
  • all while greatly reducing market risk as measured by actual time invested and by volatility of returns.

More About CPM

  • CPM is binary.  It is either Risk On (invested in the market) or Risk Off (out of the market).  There are no short positions, leveraged longs, or hedging via derivatives.
  • CPM is not a returns-driven model. It was designed to protect investor assets during adverse market conditions while taking advantage of the market’s historical propensity to move higher over time.
  • CPM utilizes 3 quantitative inputs.
  • CPM uses the S&P 500 as a proxy for the market.

Back-Tested Performance Highlights

Since 2011:

  • CPM has averaged 5.6 round turn signals per year.
  • CPM has only been in the market 64% of the time, significantly reducing risk.
  • Table 1 below shows that CPM has outperformed the S&P 500 4 of the past 8 years.

    Table 2 below shows CPM’s maximum drawdown (over a rolling 90-day period) has been 9.5% versus 17.9% for the S&P 500, which is 47% less.

  • Table 2 also shows CPM’s implied volatility has been 4.45% versus 5.91% for the S&P 500, which means CPM has been 25% less risky.

  • The chart below plots the daily performance in index points for both CPM and SPX from January 2011 through May 2019, showing that CPM has outperformed SPX by 273 index points or 9.9% during this period.

Chart 1

Click on tables and charts above to enlarge

The Bottom Line

Since 2011, CPM has:

  • outperformed the S&P 500 (SPX),
  • reduced the time invested in the market by 36%,
  • reduced the maximum drawdown in SPX by 47%, and
  • reduced the volatility of market returns (implied volatility) by 25%.

Simply stated, CPM provides Asbury Research subscribers with a methodology to participate in US stock market advances while significantly reducing market exposure and market risk during stock market declines.

Disclaimer

All investment models have inherent limitations in that they look back over previous data but can’t see into the future.  Past performance does not guarantee future results.  These limitations aside, however, our model argues against the buy and hold “strategy”, and the assertion by its proponents that “you can’t time the market” or “you can’t beat the market”.  Attempting to get out of the way of an emerging market decline comes with the inherent risk of potentially missing out on some performance — especially considering the current “buy the dip” mentality engendered by a decade of accommodative central bank policy.  However, our model’s performance since 2011 is a testament to intelligent quantitative risk management, showing that a conservative, systematic, and repeatable process of active management can, over time, significantly outperform passive buy and hold.

This is provided for information purposes only and is not intended to be a solicitation to buy or sell securities.  The performance indicated from back-testing or historical track record may not be typical of future performance. No inferences may be made and no guarantees of profitability are being stated by Asbury Research LLC.  The risk of loss trading in financial assets can be substantial. Therefore, you should therefore carefully consider whether such trading is suitable for you in light of your financial condition.


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