The Correction Protection Model (CPM)

In 2013 we introduced our Correction Protection Model (CPM) to Asbury Research subscribers.  That initial version of the model did an outstanding job of essentially avoiding the entire 2008 Financial Crisis, and subsequently performed well in real time by simply staying invested during market advances and moving to cash during market declines.

However, the character of the market has changed over the past several years — as it typically does over time — due to a number of factors including quantitative easing, a more accommodation central bank policy, and the fact that more than 70% of daily stock market volume is now attributable to algorithmic trading.  In our view, these factors have resulted in more sustained market advances, smaller, quicker market declines, and more choppy and erratic day-to-day price movement.  Because of this, in 2019 we introduced an updated and improved version of CPM.

This version of CPM, which has been back-tested to 2011, has the exact same purpose.  It is a defensive model that has produced exceptional risk-adjusted returns. CPM’s primary objective is to protect investor assets during adverse market conditions but to otherwise remain invested, taking 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 overall market risk.

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 our own proprietary quantitative inputs.
  • CPM uses the S&P 500 as a proxy for the market.

Performance Highlights since 2011:

  • CPM has averaged 5.4 round turn signals per year.
  • CPM has only been “in the market” 65% of the time, significantly reducing market exposure.
  • CPM’s beta (a measure of volatility and systemic risk) is 0.31.  The S&P 500 has a beta of 1.0.  The lower the number, the lower the level of risk.
  • CPM’s Sharpe Ratio since 2011 is 2.48.  The S&P 500’s 10-year Sharpe Ratio is 0.84.  The Sharpe Ratio is used to help investors understand the return of an investment compared to its risk.  The higher the Sharpe Ratio, the better the risk-adjusted return.
  • Table 1 shows that CPM has outperformed the S&P 500 4 of the past 9 years. On average during this period, CPM has outperformed the S&P 500 by 1.26% per year.

    Table 1

  • Table 2 shows that CPM’s average return over a rolling 90 day period has been 3.93% versus 3.22% for the S&P 500.
  • Table 2 shows CPM’s maximum drawdown over a rolling 90-day period has been 9.51% versus 27.64% for the S&P 500.
  • Table 2 also shows CPM’s standard deviation over a rolling 90-day period has been 4.33% versus 6.41% for the S&P 500, which means CPM’s returns have been significantly less volatile than the US broad market index.
  • Chart 1 plots the daily performance in index points for both CPM and SPX from January 2011 through June 2020, showing that CPM has outperformed SPX by 627 index points or 20.2% during this period.

    Table 2

    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 35%
  • reduced the maximum drawdown in SPX by 66%
  • with 32% lower volatility of returns than SPX

Simply stated, CPM provides Asbury Research subscribers a means to achieve exceptional risk-adjusted returns by participating in US stock market advances while significantly reducing market exposure and market risk during stock market declines — all without sacrificing long term performance.

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 that “you can’t time 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 investing.

Asbury Research’s models and investment research are used to inform Asbury Investment Management but do not imply an actual investment portfolio.

Disclaimer: 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 carefully consider whether such trading is suitable for you in light of your financial condition.