Stock Market Cash Trigger: Learn a Simple Technique That Tells You When to Go to Cash by David Alan Carter

Author:David Alan Carter [Carter, David Alan]
Language: eng
Format: epub
ISBN: 9780998021010
Google: Yp9EuwEACAAJ
Amazon: B07CG4YC2J
Publisher: Echo West Publishing
Published: 2018-04-15T00:00:00+00:00

Well, I think it's safe to say that the addition of SHY trounced VMFXX alone. If we were to sum up the Cash Trigger strategy at this point, it would look like this: The Stock Market Cash Trigger is...

What? Wait! Did you see what just happened?

When our stock market Regime-O-Meter told us to go to cash, we initially bought the Vanguard money market mutual fund VMFXX. That was fine and dandy, but then we swapped out SHY for the money market fund beginning in 2002, and saw returns edge up, in some cases considerably (i.e., 711 percentage points when trading Apple).

So, what was that difference again between those two funds? VMFXX is made up primarily of U.S. government agency obligations with average maturities of 60 days or less. SHY is made up primarily of U.S. Treasuries with average maturities of 1-3 years.

So, the opening up of the tangential opportunity/can of worms goes like this: what would happen if, instead of investing in cash or cash proxies during market downturns, we invested in even longer-term bonds or Treasuries? Or better yet, what if we could devise a mechanism for determining which, among a number of bond options, would offer the best results?

What we're imagining is something similar to sector rotation. Most often associated with areas of the economy in which businesses share similar product or service, (i.e. semiconductor manufacturers or consumer services companies), there's no reason the concept of rotation can't be applied to the fixed-income market.

In short, the idea is that whatever sector (or bond fund?) has outperformed recently should continue to outperform for a period of time (the essence of momentum investing, confirmed by decades of data). When that time is up, another sector/bond fund that had been out of favor will rise in the ranks to become the outperformer. The investor rotates from one to the next, catching a bit of that outperformance.

In our case, once our Regime-O-Meter tells us the market has entered a "risk-off" environment, perhaps long-term Treasuries are poised to outperform other bond funds for a period of time. In that case, we would want to be in them. On the other hand, maybe whatever is impacting the equity market is also taking a toll on long-term Treasuries, and a different bond fund (or cash proxy) is the way to go.

In fleshing out this bond rotation idea, let's first identify the bond funds we're going to be rotating among.

First up, TLT, the iShares ETF that tracks a market-weighted index of bonds issued by the U.S. Treasury with remaining maturities of 20 years or more (inception date: July 22, 2002). Why? Because it has a frequent negative correlation to equities (making it an effective hedge), and because long-maturity Treasuries have price swings that most closely approximate the price swings of the overall stock market.

But a “frequent” negative correlation doesn’t mean it always reacts in the opposite direction of the stock market. A number of factors can and do influence long-term U.S. Treasuries, and those influences sometimes drive the bonds in the same direction as stocks for extended periods.

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