The Correction Protection Model (CPM)

In 2013 we first introduced our Correction Protection Model (CPM) to Asbury Research clients and subscribers.  CPM was created to satisfy client requests for a completely data-driven and repeatable methodology that objectively determined if they should be adding or subtracting risk from portfolios.  Since then, CPM has continued to evolve with newer and better model inputs to keep up with changing market conditions. 

CPM was initially designed to:

    • protect investor assets during market declines,
    • eliminate large drawdowns, and
    • reduce volatility in portfolios by
    • moving assets out of the market during adverse conditions
    • while also taking advantage of the market’s historical propensity to move higher over time.

Most recently, we have developed three different ways to use CPM to more specifically meet the needs of different types of investors with different objectives and risk appetites.  All three use the identical CPM Risk On and Risk Off signals.  Although the Standard version of CPM continues to do exactly what it was designed to do — to invest in the US stock market with significantly less downside risk  — our quantitative testing has found that utilizing different combinations of traditional and leveraged ETFs to trade the CPM signals can significantly change their performance characteristics.

3 Different Ways To Use CPM To Satisfy Different Risk Appetites:

  • Standard CPM: the most conservative version of the model, significantly less risky than the S&P 500.  For older or more risk-averse investors that want to or need to participate in the stock market, but are uncomfortable with the amount of risk.
  • Enhanced CPM: has risk characteristics more similar to the S&P 500.  Also for risk-averse investors, but those who are willing to accept a little more risk than CPM Standard for the potential of producing better-than-average returns.
  • Aggressive CPM: the most aggressive version of the model, moderately more risky than the S&P 500.  For those who are willing to accept additional risk for the potential of significantly outperforming the market.

But All Versions Are Similar In These Ways:

  • They all use the identical CPM Risk On and Risk Off signals
  • The signals are binary: the model is either Risk On (in the market) or Risk Off (out of the market).
  • They all use the S&P 500 as a proxy for the market.
  • There are no short positions and no hedging via derivatives.

The tables, charts, and performance data below were derived by implementing the CPM’s Risk On and Risk Off signals with different combinations of the SPDR S&P 500 ETF Trust (SPY, which tracks the S&P 500) and/or the ProShares UltraPro S&P500 (UPRO, a triple-leveraged ETF that also tracks the S&P 500) to produce different performance characteristics.  The Difference column in the tables displays the difference between that particular version of the model and the S&P 500 for each year or metric displayed.  Green text denotes outperformance or decreased risk by the CPM Model.  Red text denotes underperformance or increased risk by the model.

Standard CPM

Standard CPM was developed for older and/or more risk-averse investors who want to or need to participate in the stock market but are uncomfortable with the amount of risk.  The tables and chart below are based on using the SPDR S&P 500 ETF Trust (SPY) as a trading vehicle.  On average since 2011, Standard CPM has underperformed the S&P 500 (SPX) by 2.3% per year but with less than half the maximum drawdown and a fraction of the risk according to standard deviation and beta.

 

Click the tables or chart to make them larger


Enhanced CPM

Enhanced CPM was developed for those who are willing to accept a little more risk than CPM Standard for the potential of producing better-than-average returns.  The tables and chart below are based on using a combination of the SPDR S&P 500 ETF Trust (SPY) and the ProShares UltraPro S&P500 (UPRO) as trading vehicles.  On average since 2011, Enhanced CPM has outperformed the S&P 500 (SPX) by 6.2% per year but with a smaller maximum drawdown than the S&P 500, a slightly lower beta, and a better down capture ratio.

 

Click the tables or chart to make them larger


Aggressive CPM

Aggressive CPM was developed for those who are willing to accept additional risk for the potential of significantly outperforming the market.  The tables and chart below are based on using the ProShares UltraPro S&P500 (UPRO) as a trading vehicle.  On average since 2011, Aggressive CPM has outperformed the S&P 500 (SPX) by 24.9% per year but with a 7.7% larger maximum drawdown, 12.3% higher risk, and 0.29 higher beta.

 

Click the tables or chart to make them larger


Information about the various comparative metrics referred to above can be found on Investopedia.com.


Disclosure: All investment models have inherent limitations in that they look back over previous data but can’t see into the future.  Hypothetical past performance does not guarantee future results.  Attempting to avoid a market decline by moving to cash comes with the inherent risk of potentially missing out on upside performance.  However, we believe our model’s hypothetical performance data 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 our subscribers and clients but do not imply an actual investment portfolio.


Disclaimer: The information above is provided for information purposes only and is not intended to be a solicitation to buy or sell securities. Past performance as indicated from historical back-testing 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, and different types of investment vehicles, including ETFs, involve varying degrees of risk.  Therefore, you should carefully consider whether such trading is suitable for you in light of your financial condition.