ZYX MULTI-ASSET GLOBAL
ALLOCATION MODEL |
ZYX LONG SHORT EQUITIES
ALLOCATION MODEL |
UPDATES |
This
long term model allocates assets on a global basis between
equities, fixed income securities, commodities, real estate, and
currencies. The model further drills down to sub-asset
classes, sectors, and sub-sectors
Allocations are based on identifying
the changes early using the ZYX
Change Method.
A change means a new risk reward ratio.
model
The model
starts an allocation to an asset class or a sub asset class
when the risk is small, and the reward is high and
increasing. Allocation is increased as there is more
confirmation of the trend and the thesis. The model reduces
the allocation
as the risk increases even if the rewards are increasing.
The model removes the allocation to the asset class as the risk goes
higher even if the rewards are going higher.
Risk Control
The model gives precedence to risk control over potential
rewards. The model is designed to maximize risk
adjusted returns over a long period of time. The model
is not designed to maximize absolute returns over short
periods of time. |
The main
purpose of this adaptive model is to guide the ratio of longs to
shorts in global long/short equities portfolios. The
long only portfolios can benefit from the success of this
model by using it to vary allocation to cash as well
as shifts from defensive stocks to high beta tocks and
vice versa.
There
are a large number of diverse timing techniques already
available to portfolio managers, and we do not claim to
invent a new technique.
The
focus of our research is to first narrow the large universe
of such techniques and factors that influence the market to
a handful of factors that have the most predictive
abilities; and then build an adaptive timing model using the
selected factors.
Adaptive
Model
This is
an adaptive model based on eight distinct inter-market,
macro-economic, technical ,and fund flow inputs.
The model
makes two
adaptations in near real time to the eight inputs as
new data becomes available.
First, the weight of an input is low if the data has been choppy or
directionless. However, if the data offers strong direction,
regardless of the magnitude, the weight of the input
increases. Second, the weight of an input changes based on
its correlation with the equity price.
Eight
Inputs
At present the following are the key ingredients of
our timing model.
1. Aggressiveness of fund flows
2. Leading global economic indicators
3. Commodity price movements
4. Relationship between currencies
5.Risk appetite as demonstrated by the relationship between
the price movements of the stocks deemed safe vs. popular
speculative stocks
6.Price action of the markets at key technical
support/resistance levels
7. Price action of the markets as various classical
technical patterns become apparent
8. Changes in market internals as the prices push through or
fail at key support/resistance levels
Allocation to Cash
The model's approach to cash allocation is not based on risk
since the model has the flexibility to be long and short.
The model strives for no cash when the
probability of significant new and better opportunities
becoming available in the near future is less than 60%. If
the probability of significant new and better opportunities goes over 60%, the
model starts cash allocation. The amount of the cash
increases parabolically as the probability of new better
opportunities goes higher.
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This column
is updated only when there is an actual change in
allocation. These are longer term models and if you
do not see a recent date, it simply means that the last
shown allocation is in effect. For more recent commentary on
allocations, please visit
Market Blog |
May 26,2010 Update
ZYX Multi-Asset Global Allocation Model
Taiwan Equities 5% Long
Brazil Equities 5% Long
India Equities 5% Long
Europe Export Equities 30% Long
US Utilities Equities
10% Long
US Mega Cap Equities 10% Long
US High Yield Bonds 10% Long
US Senior Bank Loans 10% Long
US 20+ Year Treasuries 15% Short
If S&P 500 futures reach 1104 prior to the US May employment
report, fully hedge all positions. Remove hedges if the
employment report is favorable.
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May 26, 2010 Update
ZYX
Long Short Equities Allocation Model
Long 50%
Short 50%
Cash
0%
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May 14,2010 Update
ZYX
Multi-Asset Global Allocation Model
ZYX
Long Short Equities Allocation Model
On both models, hedge all short positions that were
triggered when S&P 500 crossed 1170. The easiest way may be to hedge 100% of all short positions
with futures. Exit silver and long volatility positions at
the end of the day. The exception is copper -- will maintain
the short. Lift the hedges on Monday if no adverse events
occur in Europe. Reinstate the hedges based on event risk
and technicals as needed.
These models are typically not updated as often as they have
been over the last two weeks, but here the fundamental and
technical inputs to the models have been gyrating wildly.
Such wild gyrations in the input data have never been seen
since the inception of real time publishing of these
models in 2007.
The main culprits are the sovereign debt crises in Europe
and the data coming out of China.
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May12, 2010 Update
ZYX
Long Short Equities Allocation Model
Long 0%
Short 100%
Cash
0%
This allocation will be effective when S&P 500 futures go
over 1170. In the meanwhile, present allocation stays at 44%
long and 56% cash. When S&P 500 futures go over 1170, the
long allocation will become zero percent. In case, S&P 500
futures do not cross 1170, the new allocation will be
effective on break of 1085.
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MAY 12,2010 Update
ZYX
Multi-Asset Global Allocation Model
US Retail Equities
25% Short
S&P 500 Short Term
Volatility
15% Long
Crude oil
5% Short
Copper
5% Short
Silver
5% Long
Spain Equities
10% Short
Emerging Markets Equities
10% Short
Cash
25%
This allocation will be effective when S&P 500 futures go
over 1170. In the meanwhile, present allocation of only long
positions and cash stays effective. When S&P 500
futures go over 1170, all long allocations will become zero
percent. In case, S&P 500 futures do not cross 1170, the new
allocation will be effective on break of 1085.
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May 7,2010 Update
ZYX
Multi-Asset Global Allocation Model
ZYX
Long Short Equities Allocation Model
On both models, buy to cover all short positions, hedge them
, tight trailing stops or use a combination of the above.
The easiest way may be to hedge 100% of all short positions
with futures.
All components of both models have in a matter of a
week swung to extreme negative readings. In the past, such
negative readings have resulted in at least short term
explosive rallies.
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April 1,2010 Update
ZYX
Multi-Asset Global Allocation Model
Taiwan Equities 5% Long
China Equities 3% Short
India Equities
5% Long
Asia Real Estate
10% Long
US Small Cap Equities
10% Short
US Large Cap Equities
10% Long
US High Yield Bonds
20% Long
US Senior Bank Loans 10%
Long
US HMO Equities 5% Short
US Retail Equities
5% Short
Copper
2% Short
Chinese Yuan
5% Long
Cash
10% |
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Mar 25, 2010 Update
ZYX
Long Short Equities Allocation Model
Long 44%
Short 56%
Cash
0%
In this adaptive model, weight of an input changes based on
its correlation with the price of the index. There are a
total of eight inputs to the model. At present, the highest
weight belongs to Global Leading Economic Indicators. The
pace of positive movement in these indicators has stalled.
Our proprietary methodology measures aggressiveness of fund
flows; this input is at extreme seen near market tops.
Commodity price movements input is
close to what has been seen at market tops. The relationship
between the currencies input to the model is
forecasting a lower market. Risk appetite input to the
model is at a neutral level. Among the three
technical inputs, two are very positive and one is slightly
negative.
The net result is a modest increase to the short allocation.
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Nov 12, 2009 Update
ZYX
Long Short Equities Allocation Model
Long 45%
Short 55%
Cash
0%
The model successfully captured the swing low by increasing
the long allocation. However, two of the the top three
inputs have started sloping down resulting in allocation
change.
In this adaptive model, at present the top weight belongs to
the relationship between the currencies. The next weight
belongs to aggressiveness of fund flows followed by changes
in market internals as the prices push through key
support/resistance levels. This set of weights has led to
increase in the Short allocation |
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Oct 26,2009 Update
ZYX
Multi-Asset Global Allocation Model
Taiwan Equities
5% Long
China Equities
5% Short
India Equities
5% Long
Asia Real Estate
10% Long
US Small Cap Equities
10% Short
US Large Cap Equities
10% Long
US High Yield Bonds
20% Long
US Senior Bank Loans 20%
Long
Euro Dollar
5% Short
Cash
10% |
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Oct 26, 2009 Update
ZYX
Long Short Equities Allocation Model
Long 35%
Short 65%
Cash
0%
In this adaptive model, at present the top weight belongs to
the relationship between the currencies. The next
weight belongs to aggressiveness of fund flows followed by
changes in market internals as the prices push through key
support/resistance levels. This set of weights has led
to increase in the Short allocation.
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Aug 7, 2009 Update
Long Short Equities Allocation Model
Long 20%
Short 30%
Cash 50%
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Aug 3, 2009 Update
Long Short Equities Allocation Model
Long 25%
Short 25%
Cash 50%
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Feb 24, 2009 Update
Multi-Asset Global Allocation Model
Indonesia Equities
10% Long
Taiwan Equities
5% Long
India Equities
10% Long
US Small Cap Equities
10% Long
US Financial Sector Equities 10% Long
US High Yield Bonds
20% Long
Crude Oil
15% Long
Copper 20% Long
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Feb 24, 2009 Update
Long Short Equities Allocation Model
Long 100%
Short
0%
Cash
0%
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Jul 14, 2008 Update
Multi-Asset Global Allocation Model
Deploy 100% of the cash in
the model to short sell crude oil. No change in other
allocations.
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Oct 16, 2007 Update
ZYX
Multi-Asset Global Allocation Model
Emerging Market Equities
50% Short
20 year US Treasury Bonds 30% Long
US Regional Banks
10% Short
Cash
10%
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Oct 16, 2007 Update
ZYX
Long Short Equities Allocation Model
Long
0%
Short 100%
Cash
0%
The design of this model is such that 100% allocation to
either long or short side is an extremely rare event.
Here in the middle of a bull market, the model is predicting
extremely negative environment for global equities starting
sometimes over the next year.
We will not second guess the analytics that have resulted in
a conclusion that is so contrary to the prevailing wisdom,
but will impress the importance of risk control on short
positions in a bull market. |
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