In 2013 we introduced our Correction Protection Model (CPM) to Asbury Research clients and subscribers. CPM was created to satisfy requests for a completely data-driven and repeatable methodology that objectively determined if investors should be adding or subtracting risk from portfolios. Since then, CPM has continued to evolve with newer and better inputs to keep up with changing market conditions.
The significance and strength of CPM is its ability to reduce the systematic risk of investing in the stock market. This can be seen in the model’s low beta, significantly lower drawdowns, and lower standard deviation (risk) when trading the S&P 500. But, in financial markets, less risk typically means less reward, so, while significantly reducing risk, CPM also tamps down performance. The model was built for investors that are willing to sacrifice some performance for significantly less risk.
The tables and chart below display quantitative performance data and hypothetical returns from 2011 through 2022 when applying the CPM signals to the SPDR S&P 500 ETF Trust (SPY, which tracks the S&P 500).
CPM was developed for older or more risk-averse investors who want or need to participate in the stock market but are uncomfortable with the risk. The tables and chart below are based on using the SPDR S&P 500 ETF Trust (SPY) as the trading vehicle. On average since 2011, trading CPM signals with SPY have underperformed the S&P 500 (SPX) by 1.7% per year, but with less than half the maximum drawdown and significantly less risk according to standard deviation and beta.
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To help investors better understand how CPM reduces risk, the following tables and chart display quantitative performance data and hypothetical returns, also from 2011 through 2022 when applying the CPM signals to the ProShares Ultra S&P500 (SSO), a double leveraged ETF that also tracks the S&P 500. They show that, by incrementally adding risk back into the CPM ModeI, its character and performance can shift from defensive to offensive. This strategy may be of interest to those who are willing to accept a little more risk than standard CPM (using SPY) for the potential of producing better-than-average returns.
Editor’s Note: We are not advocating or promoting the use of leveraged financial products to trade financial assets, but rather using them to more thoroughly explain how the CPM Model works. The examples show that the significant amount of risk that CPM removes from trading the S&P 500 can be incrementally added back into the model by utilizing different types of ETFs. The risk of loss trading in financial assets can be substantial and different types of securities, including ETFs and leveraged products, involve varying degrees of risk. Therefore, investors should carefully consider whether such trading is suitable for them in light of their own financial condition.
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Further adjustments to performance and risk characteristics can be made by using the CPM Model with additional ETFs.
Information about the various quantitative 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.