Unlike our CPM+ Wealth Preservation Model, which operates within a Strategic time frame and only averages approximately four trades per year, the Asbury 6 is a Tactical Risk Management model that is more sensitive to daily changes in underlying market conditions and averages approximately 9 trades per year.
The Asbury 6 helps investors to quantitatively answer the question that we most frequently hear from our own subscribers:
“Should I be increasing or decreasing my exposure to equities right now, and by how much?”
What Is The Asbury 6?
The Asbury 6 is a data-driven risk management model that uses six diverse market metrics to objectively determine the daily health of the US stock market. The “A6” assigns a positive or negative rating to each of its six constituent metrics based on their current condition and trend. The model then aggregates the ratings to produce a composite score that ranges from zero (all negative) to six (all positive). The higher the score, the healthier the market is and the lower the risk of a major correction. The lower the score, the weaker the market is,and the higher the risk of a significant decline.
Here is a list of the Asbury 6’s constituent metrics with a brief explanation of each.
- Market Breadth: This measures the number of stocks that are participating in the market’s movement. A healthy market should have broad participation, meaning that most stocks are moving in the same direction as the market index. A narrow market, on the other hand, indicates that only a few stocks are driving the market’s performance which could signal weakness or vulnerability.
- Volume: This measures the amount of trading activity in the market. Volume indicates urgency to buy or sell. High volume means that many investors are buying or selling, which suggests strong demand or supply. Low volume means that few investors are trading, which implies weak interest or indecision.
- Relative Performance: This measures how different segments of the market are performing relative to each other. Relative performance can reveal which areas of the market are leading or lagging, and which ones are likely to outperform or underperform in the future. For example, if small cap stocks are outperforming large cap stocks, it may indicate that investors are more willing to take risks and favor growth-oriented companies.
- Asset Flows: This measures the flow of money into and out of different types of investments. Asset flows indicate investor conviction and can show where investors are allocating their capital and what their expectations are for various asset classes. For example, if money is flowing into bonds and out of stocks, it may signal that investors are seeking safety and lower volatility.
- Volatility: The CBOE Volatility Index (VIX) measures the expected future volatility of the S&P 500 stock market over the next 30 days. It is calculated by the CBOE Options Exchange using the prices of S&P 500 index options with near-term expiration dates. The VIX is also known as the fear index because it tends to rise when investors are uncertain or fearful about the market conditions. The VIX is widely used by investors, traders, and portfolio managers as a way to measure market risk and sentiment.
- Price Rate Of Change: The rate of change (ROC) is the speed at which a variable changes over a specific period of time. ROC is often used when speaking about momentum and can generally be expressed as a ratio between a change in one variable relative to a corresponding change in another. Graphically, the rate of change is represented by the slope of a line.
The primary purpose of the Asbury 6 is to provide an objective, data-driven methodology to determine how much capital investors should be deploying into the stock market. To quantitatively accomplish this, we back-tested it as an incremental style model by assigning each metric in the Asbury 6 an equal weighting of 16.7%. For example, if one indicator was positive for a particular day, we would invest 16.7% percent of our hypothetical portfolio into the SPDR S&P 500 ETF (SPY). Two positive indicators would put us at 33.3% percent invested in SPY and so on so that the daily rebalancing of our hypothetical portfolio reflected what the “A6” determined the market’s internal health to be on that particular day.
We back-tested the Asbury 6 over the past 5 years which includes a Federal Reserve engineered zero rate and a rising rate environment, a 100-year pandemic shock, and a stock market with both bullish and bearish major trends. The chart below shows that the Asbury 6 has been robust enough to keep pace with the market throughout this difficult period while avoiding the major downturns.
Click chart above and table below to enlarge
More importantly, the table below shows that the Asbury 6 has essentially been a relative performer versus the S&P 500 over the past 5-year period but with a maximum drawdown that was roughly half of the S&P 500 and with about half the risk according to both beta and standard deviation.
In conclusion, this breakdown of the Asbury 6 shows that, based on backtested quantitative strategies, it is possible to participate in the stock market and produce similar results with significantly lower risk.
Information about the various quantitative metrics referred to above can be found on Investopedia.com.