Conclusion & Investment Implications
We have recently made some minor adjustments to our Asbury 6 risk management model. These changes have resulted in a much better, more responsive model that has managed to stay right with the S&P 500 over the past five years during uptrends and downtrends alike, but with only about half the risk.
How We Improved the Asbury 6 & Why It’s Important
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 model 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.
Right now, 5 of the 6 constituent metrics are negative (red). Four or more of these metrics have been negative since October 18th while the benchmark S&P 500 has declined by 5%.
Click the graphic to enlarge
Considering recent changes in market conditions, particularly regarding interest rates and Federal Reserve policy, we have made some minor changes and updates to the Asbury 6™ to ensure that we are providing our subscribers with the very best tools to address the latest market conditions. The most significant change that we made in the “A6” was to replace the Corporate Bond Spread component, which utilized the BofA Merrill Lynch US High Yield Bond Spread, with a volatility metric, the CBOE Volatility Index (VIX).
Asbury 6 Constituent Metrics
The updated list of constituent metrics to the Asbury 6 appears below, 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.
We backtested this updated version of the Asbury 6 as an incremental style model. The goal was to provide some “hard” numbers to measure its veracity as a data-driven daily indication of the stock market’s real internal health. We kept the testing simple and clear 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.
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. One of the most common questions we are asked by subscribers is this: “I have (x) percent of my portfolio invested in the stock market right now. Should I be increasing or decreasing that percentage today, and by how much?” The Asbury 6 empirically answers that question.
Participating In Advances While Avoiding Downtrends
We back-tested this updated version of the Asbury 6 over the past 5 years, which has included Federal Reserve-engineered zero rate and rising rate environments, a 100-year pandemic shock, and both major uptrends and major downtrends in the S&P 500. The line chart below shows that the Asbury 6 has been able to keep pace with the market throughout this difficult period while avoiding the major downturns.
Click chart above and table below to enlarge
Moreover, the table below shows that the incrementally-tested Asbury 6 has essentially been a relative performer versus the S&P 500 over the past 5 years 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 updated version 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.
Disclosure/Disclaimer: The information in this website is provided solely for informational purposes and is not intended to be an offer to sell securities or a solicitation of an offer to buy securities. The strategies employed in managing this and other model portfolios may involve algorithmic techniques such as trend analysis, relative strength, moving averages, various momentum, and related strategies. There is no assurance that these strategies and techniques will yield positive outcomes or prevent losses. Past performance as indicated from historical back-testing is hypothetical in nature and does not involve actual client portfolios, does not consider cash flows, market events and is not predictive of future performance. The model is managed by contemporaneously recording hypothetical trades. Such trades are not live trades and are not influenced by emotional or subjective reactions to extraneous market, economic, political and related factors. The performance for such model(s) is derived from utilizing a variety of technical trading strategies and techniques. Technical trading models are mathematically driven based upon historical data and trends of domestic and foreign market trading activity, including various industry and sector trading statistics within such markets. Technical trading models utilize mathematical algorithms to attempt to identify when markets are likely to increase or decrease and identify appropriate entry and exit points. The primary risk of technical trading models is that historical trends and past performance cannot predict future trends and there is no assurance that the mathematical algorithms employed are designed properly, new data is accurately incorporated, or the software can accurately predict future market, industry and sector performance. Asbury Research LLC doers not and cannot provide any assurance that an investment in the model portfolios will yield profitable outcomes. 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. An investor’s personal goals, risk tolerance, income needs, portfolio size, asset allocation and securities preferences, income tax and estate planning strategy should be reviewed and taken into consideration before committing to a specific investment program. Please consult with your financial advisor to discuss the appropriateness of any strategy prior to investing. All investments involve risk. Principal is subject to loss and actual returns may be negative. Returns are not guaranteed in any way and may vary widely from year to year.