Growth Trend Timing
Today’s post looks at the Growth Trend Timing model from Philosophical Economics.
Philosophical Economics
Philosophical Economics (PE) was a very popular finance blog in the pre-COVID era, written under the pseudonym Jesse Livermore – named after the legendary 20th-century stock speculator known as the “Boy Plunger”.
- You can read more about the original Jesse in the book Reminiscences of a Stock Operator, which is based on Livermore.
The modern-day Jesse seems to have disappeared after COVID, but the blog is still there and has some great posts.
I’m particularly interested in Growth Trend Timing (GTT) because it’s a TAA system which uses economic data as well as regular price information (moving averages). I’d like my own TAA system to be a blend of the two approaches.
Allocate Smartly
The Philosophical Economics blogs are famously long, explaining many concepts in great detail and sometimes from first principles. Jesse is very interested in the mechanics of strategies rather than just the results.
GTT emerges from four posts that must run to a couple of hundred pages in total. Luckily for me, Allocate Smartly (AS) has looked at the system in a couple of much more manageable posts.
The first post dates back to April 2017.
Rules and Results
GTT is a simple system that switches between the S&P 500 and cash at the end of each month.
Like most trend-following strategies, the strength of GTT hasn’t been in generating outsized returns; it has been in maintaining returns while managing losses.
The basic idea behind GTT is that the profits from trend following emerge from dodging crashes.
- More importantly, trend is great at signalling when to switch to defensive assets during recessions.
Outside of recessions, trend does a poor job with lots of false signals (whipsaws) that cost you money.
So GTT wants to identify looming recessions so that it can know when to take notice of the trend signal.
The version of GTT tested in the first AS article uses two economic indicators as signals, though Jesse’s post references six, and he later added a seventh:
- Real Retail Sales Growth (yoy)
- Industrial Production Growth (yoy)
- Real S&P 500 EPS Growth, total return (yoy)
- Employment Growth (yoy)
- Real Personal Income Growth (yoy)
- Housing Start Growth (yoy)
- Unemployment trend
AS uses Retail Sales and Industrial Production only.
- If either signal is negative, they defer to the 200MA.
Why not just base the entire strategy on the economic indicators? Because they often signal weakness too early.
GTT is much better than any of its components.
AS also look at improving GTT by replacing cash with bonds:
Redux
In July 2019, AS revisited GTT, testing two variations.
AS calls the 2-test version of GTT from their first post “GTT original”.
- Second time around, they also look at a version based on the unemployment rate (“GTT-UE Rate”).
- And they extended their backtest to 1930.
AS thinks the drawdown chart is a “real pile of spaghetti,” so they also provide a rolling 10-year maximum drawdown.
Once again, they compare the GTT versions to the underlying components.
Conclusions
Which strategy is better? We would say neither; knowing what we know today, they’re equally effective. The strategies agree on allocation about 96% of the time, so we’re really just talking about differences at the margin.
What is probably better is a combination of the two. What’s probably even better than that, is a combination of many strategies, all using very different techniques.
AS is talking their own book there, as that is what their site is designed to support, but I couldn’t agree more.
- I’m particularly keen to include more signals from economic data, rather than just price.
- I also plan to use these signals across a wider range of assets than just the S&P 500.
One point to note is that economic data is often revised, which means some signals may prove mistaken in hindsight.
PE did an excellent analysis of the long-term difference between trading based on initially reported values versus restated values. While it could lead to a different signal in any given month, those differences tend to balance out over time and have little impact on long-term performance.
That’s it for today.
- Until next time.
Mike Rawson
Mike is the owner of 7 Circles, and a private investor living in London. He has been managing his own money for 40 years, with some success.
