AIM UK

[lionhead0]

Hi Clive; Spot of Bother....

Looks like you gentlemen have a larger problem on your hands than your American cousins. ;)



Your markets move to a slightly different drummer than the U.S. but the proportionality remains. Enjoy!


Best, Tim

[ls7550]

24% indicated cash reserve (FT100 4182)

[ls7550]

Hi Tom.

I did allow a few days lag, a week would have been a better choice.

So next weeks prediction is -37.5% (hedging between -35% and -40% vWave :)

Best regards. Clive.

[OldAIMGuy]

Hi Clive, Sometimes it's a bit hard to anticipate what Value Line will be reporting. Their reports tend to lag "real time" by a week or two.

Nice job on your guess, however!!

Best regards, Tom

[ls7550]

My prediction of vWave of -20 (up from -60 the previous week), turned out to be wrong (but not that far off) as the actual was -30%

http://investorshub.advfn.com/boards/read_msg.aspx?message_id=33450060

:(

[ls7550]

30% indicated cash reserve (FT100 4531)

I'm also trying out a vWave predictor for next weeks value which is showing -20% :)

[lionhead0]

Hi Tom, Re: Relative Valuation..............

Thanks for the chart and explanation of the 2 factors. Yes, I agree with you as to the observation of the "flat" ranges for extended lengths of time. That would be normal for the 2 inputs on your chart. Adding additional inputs would most likely present a different picture in the final result.

P/E ratios can be forecasted somewhat based on other economic factors. I'm sure the wiz kids on Wall street have worked this all out in their computer modeling for the market makers in order to derive stock prices.

As I posted earlier, my forecast for the market is more conservative than the TV pundits and Masters of the Universe. ;) Considering the P/E at the market low, a nice countertrend rally that's developing has potential for some nice gains, but I don't expect a new bull run from here; rather the grinding sideways market for a longer period of time. If that doesn't occur, then I'll be pleasantly surprised!

We won't know the likely outcome for awhile until other factors become more apparent that will ultimately influence the P/E ratios, hence the sideways markets. In the fullness of time, we'll have the answers.

Best regards and Happy Halloween!

Tim

[OldAIMGuy]

Hi Tim, Re: Relative Valuation..............

Here's an older graphic of Relative Valuation...



While this chart only goes back to 2005, you can see that the P/E remained rather flat through much of the first part. It was the continuing upward pressure the Treasury Rate added to the sum that pushed it over into the bearish zone.

P/Es have been contracting for quite a while now. Interest rates have been falling for much of the last 12 months, too. The combination has reversed the RV from quite high risk to quite low. Of course this all assumes the P/E holds up going into a rough patch in the economy.

With interest rates now nearing the 1% mark, if we assume the middle of the Neutral zone to be about 21, then P/Es can rise to 20 before we've even started to recognize any stress. Now, P/E can rise two ways:
1) Earnings can drop off dramatically while stock prices stay the same.
2) Stock prices could rise dramatically while earnings remain the same.

Which of these two are more likely to play out? That's anybody's toss of a coin. However, it's likely that a bit of both will be in there when the final analysis is done. If earnings remain flat and P/E rose to 20, that would mean about a 66% rise in stock prices on average! That would put the S&P 500 back around 1400+. Well, that's why I think it will be a combination.

Hope this helps clarify how the RV works and the relationship of the short Treasury rate and P/E. In the past we've had interest rates of 12% and a P/E of 9 and it still adds up to about 20 so is a "neutral" market. We've also had P/E of 20 and nterest rates of 1% - also adding up to a neutral market. So, history shows that when interest rates are high, P/E's usually head lower and visa versa. Negative correlation. It's also true that the market will ignore rising interest rates for a long time before they realize the situation.

In 2002-03 at the market bottom, the sum was well below the "bullish" threshold. It is again right now.

Best regards, Tom

[lionhead0]

Hi Clive, RE Sanjoy

Thanks; from my first quick glance it looks like he's using all the right indicators in his analysis.

Regards,

Tim

[ls7550]

Hi Tim

You might find Sanjoy's webpages located at http://www.predictableinvesting.com to be of interest.

Regards. Clive.

[lionhead0]

Yield Curve, the FED (BOE) & P/E's

Changes in short-term interest rates by the Fed (or the BOE), on their own, have minimal impact on stock market P/Es...unless the Fed is unsuccessful in controlling inflation or preventing deflation. Increases in short-term rates are intended to contain inflation, the driver of P/Es and long-term interest rates, at levels of price stability. Decreases in short-term rates, often to stimulate the economy, must be done in a way that does not cause inflation or foster inflation expectations.

The implication of an average yield curve spread of approximately 100 basis points (1%) is that the interest rate that relates to inflation expectations, the long-term rate, is likely to stay relatively low. When the spread exceeds 1%, the implication is a risk of potentially higher inflation and
lower P/Es. Spreads below 1% imply tighter monetary policy and efforts to control inflation risks (yet this also creates the risk of deflationary conditions and lower P/Es).

The spread refered to above applies to all points along the yield curve similar to a percentage band above and below the moving average.

[lionhead0]

Hi Clive, RE: I-Box

Thanks for your reply and explanation with links! Now I know what's inside the I Box and how your ladder works. IMHO, you're on the right track with your modeling protocol. I don't think the V-wave is the best guide to use for the AIM cash reserve as it leaves out some components of stock returns.

Those components are: P/E ratios, dividend yield, earnings growth, bond market credit spreads (stocks vs bonds), inflation/deflation, and volatility. As you develop the I-Box you may want to consider the additional inputs.

I'm very much a "chart" person, as I like the visual presentation of data vs tables or spreadsheets. I've been a technical analyst for 4 years with much study into market cycles and proportionality. I think the I Box P/E or composite graphs likely follow the natural order of things re proportionality, thus secular cycles can be isolated from the trends.

Well, I can see I have my work cut out for me in developing the database for the P/E ratios. Since as you note, I wave has been taken private, the historical data will need to be done afresh whether using V/L or another indexing scheme.

Best regards and good luck with the I-Box. I'll be closely monitoring it as you display it. The ladder is an outstanding idea to make the cash reserve relative to the divd yield metric. Congratulations, you've pushed the envelope out in incorporating that into the I-Box!

Tim

[ls7550]

My overall personal style is broadly to allocate one third of total funds to each of Stock-like, Bond-like and Managed Futures.

Periodically I rebalance back to around one third each levels as and when sizeable deviations have occurred.

I further divide the stock and bond components into stock (or bonds) and cash elements along the lines of AIM. I used to use classic AIM but have evolved my personal style to along the lines of Ladder (which is somewhat similar to Don Carlson's EZM).

For example I consider the likes of CHY (which Tom holds) to fall into the Bond category. I actually hold some CHY myself for currency diversification purposes and the recent declines in the UK Pound have helped reduce recent losses in that holding.

I seek low correlations across the Stock/Bond/MF blend, for example



shows recent correlations between stocks, bonds and managed futures styles.

I prefer to manage my own Managed Futures style as the likes of RYMFX have quite heavy charges which I prefer not to pay.

My bespoke MF style is based on a stop-loss style, so typically it has low downside correlation to stocks, but has a positive upside correlation.

For stocks I generally hold a widely diversified range of individual holdings with no one holding being too large a proportion of the total. That way if any one stock fails then it represents only a small proportion of the total.

I rebalance those holdings back to near equal capital weightings as and when any one stocks value is around 1000 UKP above the median. So for example if I initially invested 5000 UKP in each of 20 stocks and later one stock holding was valued at 6000 UKP then I'll sell of 1000 UKP worth of that stock to reduce the holding back down to a capital value of 5000 UKP. The proceeds from the sale are either accumulated until a total of 5000 is available to add another new stock to the set, or possibly added to another stock whose value had perhaps declined to 4000 UKP.

[ls7550]

Hi Tim

The blue line is the UK's FT All Share Index value (somewhat similar to the US S&P500).

I update the data once per week, and just take the FTAS index value at that time (usually after Wednesdays UK market close).

The yellow line is the 20 week simple moving average of the individual weekly Index levels.

Both of those are scaled to the right hand Y-axis in the RV chart.

The red bar is the FTAS PE value, scaled to the left Y-axis. So the tops of those bars give a feel for the trend of the PE ratio. On top of that however the bar is extended upwards (stacked bar) in green to reflect the current Bank of England Base Rate.

I used to use Tom's iWave as a guide, but when that went private and was replaced with the vWave I didn't like the vWaves scaling (potential - and more recent actual going negative (leveraged)).

Whilst the RV provides a feel for current valuations, the second "Ladder" table provides a more numerical guideline of appropriate cash reserves (and hence stock exposure) to carry at any one time.

Crudely the Ladder might be considered as being scaled around dividend yields. UK markets historically averaged around 4% dividend yields, so the top of the Ladder is around 2% dividend yield whilst the bottom is around 8% dividend yield.



I use data collected from http://markets.ft.com/ft/markets/researchArchive.asp?report=FTUK&cat=EQ that shows current index, dividends, PE, dividend cover etc. to identify the most recent RV and Ladder levels/values.

Generally the UK and US markets follow similar price motion patterns, however as the UK generally pays more in dividends than does the US, the US index capital only values tend to show greater performance over the longer term. Where however dividends are included and reinvested then the two markets tend to show similar total performance. I suspect therefore that the RV/Ladder combination might equally be used as a guideline for US holdings.

Regards. Clive.

[lionhead0]

Relative Valuation; I-Box

Hi Clive,

I wonder if you would be so kind as to explain to me the moving averages inside the I-Box. It appears as if the blue line is a x period ma of the P/E histogram or composite of the P/E + BOE? The data you're presenting is in a weekly format? Also, does the I-box represent all the data you've been collecting, i.e., since January 2006? Your graphics presentation is outstanding. Very clear for me to see. What I'm trying to get is a feel for is the "trend" of the P/E ratios. A line presentation adds to that.

If you've explained all this earlier, please direct me to the post. I've scanned them all on this board, but perhaps I've missed something.

Additionally, thank you for all the AIM spreadsheets you've posted. Most helpful to a beginner like me. I live in the U.S., but am monitoring your board for the I-Box. Please note my posts in the U.S. board re V wave if you have some time.

Best Regards,

Tim

[ls7550]

25% indicated cash reserve

[ls7550]

21% indicated cash reserve

[ls7550]

22% indicated cash reserves

FT All-Share (2075) dividend yield currently 5.48%
FT100 (4079) dividend yield 5.62%

Historically peaks of 8% dividend yield and above have occurred, which implies such WILL occur again at some point in time (maximum historic yield was in the 1970's when an exceptional extreme of 12%+ was recorded).

Remaining cash reserves provides cover for a further 26% downside in FT100, which would lift dividend yield to 7.63% levels, beyond which we'd have to ride through any further declines fully loaded.

Recent times have seen cash as the relative outperforming asset class as stock prices have declined and wiped out years of excess stock returns within a short period of time.

This is the true nature of a AIM like style - for periods we relatively under-perform, but then narrow or reverse that gap as stock prices decline. When the two converge (or better) dumping cash reserves into stocks at bargain price levels results in subsequent relative out-performance through having cost averaged into more stocks for the same capital amount. The additional dividend yield also adds to that benefit.

[ls7550]

Indicated cash reserves 27%

The dividend yield for the FT All-Share has risen to 5.14%.

0.5% was shaved of BoE rate today in a multi-national simultaneous rate cutting effort to address the financial crisis.

Whilst some are predicting that we may be near a bottom historically dividend yields have risen as high as 12%, less rarely 8% and not that infrequently to 6%. So in principle we could still have a lot of downside to come and yet still be within historical boundaries. A 6% yield would reflect a further 16.6% downside, an 8% would occur after a 36% decline from current levels, and a 12% yield would require a 57% decline.

The iBox table caters for a further 31% decline before we'd be fully loaded (zero cash).

[ls7550]

Indicated Cash reserves 39% (RV in Low Risk).

I've changed the iBox table to be percentage based rather than showing capital amounts. I've also modified the table to be based on Level Cost, Proportional Step Ladder rather than Linear Step Ladder.

The bottom price now reflects a 5682 FT100 mean at 4% dividend yield as being the present date fair value which was identified using a regression series that dated back to 1918. Based on that regression the Ladder TOP and BOTTOM should be incremented at 5.6% p.a.

An exceptional rise to a 8% market yield would reflect a halving of fair value and that was set as the Ladder bottom. I then determined the Ladder top by using 5682 (the mean) as the current price and tweaked the top until the Ladder indicated 50% cash reserve.

Rarely has the dividend yield spiked to 8%, it has however during the 1970's spiked as high as 12%, so the Ladder would be fully loaded into stocks at around such a 8% yield level and miss a further 50% decline should the yield continue on up to 12% levels. Such extremes however are typically very short lived and subsequent 100% gains arise within a short timescale, bringing the price back into the realms of the Ladders range.

The iBox Ladder is therefore very conservative and for a more aggressive stance you could divide the indicated cash reserve by 1.5.

[OldAIMGuy]

Hi Clive, Looking at your local Relative Valuation, the P/E portion is looking quite favorable. Of course that assumes that earnings are going to hold up in a slower world economy. I'm seeing the same sort of valuations on this side of the Atlantic, and am still unsure of the near term future.

Best regards, Tom

[ls7550]

Indicated Cash Reserve 42.25%. Aggressive 28.17%

[ls7550]

Indicated cash reserves 41% (aggressive 27%) based on a current FT100 index value of 4950.

I've simplified calculating the cWave to being based directly on the Ladder available in the iBox.

So now you can calculate the current cWave at any time for yourself rather than having to wait for my weekly based figure ;>)

[ls7550]

cWave 10th September 2008 = 42.6%

[ls7550]

Hi Wim.

I wouldn't actually longer term trade doubles using AIM or AIM like method.

About the only thing doubles may have been useful for IMO is if you bought the double long with half the amount that you would have normally bought stock with and potentially saved on trading costs. But in practice their fees and costs mitigate any potential benefits on that front.

The only other potential use for doubles is for shorter term trading and where you don't have access to credit based trading.

If say you want to protect a collective set of long positions via an Index short to around the same capital amount as the collective long positions held, then the double could enable you to do so (up to twice the available amount of cash reserves you had at that time).

Regards. Clive.

[wim]

Hello Clive,

Again thanks for your work. Very interesting about to short a double short.
How do you manage such an account? With Ladder its looks like normal but not with Aim or LD- Aim because its works in the opposite direction.
I have made a test with SKF (short the doubleshort financials) with ladder with bad result and also with a huge risk when financials make a big run down. (Who knows)
When you take a normal long position, zero is your limit. With short on a short or even on a doubleshort only the sky is the limit. So very,very risky.
Results over last 12 months with 20% bij a turn and 10% when ik goes in same direction (with QLD = double long qqqq) outperformed ladder and std AIM

wim

[ls7550]

Well the decouplings done and all orders effectively filled, late on a Sunday evening too!

Turned out to be a pure paper exercise.

I had a collective sizeable set of buy trades queued in view of recent declines across the range of Ladders, once decoupling is applied however the indicated sell amounts are each individually too small to actually trade when trading costs are factored in.

There are a couple of exceptions, but I'm opting to just let those ride for the time being.

[ls7550]

In view of the Freddie Mac and Fannie Mae issues announced earlier today I'm opting to decouple current cash overlaps between Ladders.

In the shorter term markets may rise in reflection of reduced unknowns. Over the mid term however I perceive potential risks of highly correlated (widespread) declines. Most likely driven by significantly higher levels of interest rates.

Decoupling will ensure that cash burn is maintained down to FT100 1000 price levels as per the Ladder shown in the iBox above.

A just in case approach. The potential additional benefits of cash overlaps just isn't worthwhile under the present climate IMO.

To put FT100 = 1000 levels into context, the Wall Street Crash saw prices halve, halve again and then halve yet again from its previous pre-crash highs. With the FT100 having peaked at 7000 such a 3 x halving would see a 3500, 1800, 900 type sequence, perhaps over the course of a year or two. From that Wall St Crash low however markets recovered somewhat and doubled back up again within a few years, so exhausting cash at 1000 odd levels could turn out to be at or near absolute bottom levels.

A benefit of such a wide ranged (top/bottom) Ladder is that it covers us for such eventualities in a transparent manner.

Just my opinion, that may very well turn out to be wrong. I just presently feel more comfortable erring on the side of caution and applying conservatism.

[ls7550]

Hi Wim

to compare Ladder with AIM and/or LD-AIM, did you have make some backtests?

Over the years I've stripped down and tested what seems like every possible component and combination of AIM.

Don Carlson's EZM was the precursor to Ladder, coupled with some D'Alembert betting sequence style and synthetic virtual Call/Put Options that I was evaluating at the time. Don did do some extensive EZM backtesting and found Level Cost (the style Ladder is based upon) to be the better choice.

Ladder is similar in many respects to LD-AIM in that you can go 100% cash (unlike conventional AIM). LD-AIM typically scales trade sizes by using virtual stocks to increase the minimum trade size (as a percentage of stock value). Ladder scales the trade size by increasing cash - on the basis that two Ladders individually track stocks that don't beat to the same drumbeat.

With both LD and conventional AIM I was continually evaluating at what price level cash would likely be exhausted and I had concerns about the dynamics of maintaining accounts (adding and reducing account sizes). I also wanted to be able to tune trades to my own preferred levels (for instance for market wide index funds I like to trade after a 5% price move in the same direction as the previous trade or 10% price moves in the opposing trade direction).

Generally Ladder fits in better with my overall money management and trading style. Typically however I have lower lows at which cash burn is supported than does conventional AIM and accordingly the (non scaled) trade sizes and hence volatility capture gains tend to be smaller. Equally though Ladder can be scaled to larger trade sizes by narrowing the top/bottom price range (for instance you could perhaps tune the top/bottom range to Bollinger Bands).

With Ladder you have three primary variables that you can adjust, the top, bottom and total amount of funds allocated. I feel that Ladder provides a better instant overview when adjusting any/each of these that does conventional AIM.

In view of such variables it would make backtesting somewhat meaningless. I could for instance backtest using fixed variables but then that would just present one possible result for one particular type or price motion waveform.

So in short no I haven't performed detailed backtests to compare Ladder with LD/AIM, neither do I intend to. I'm 'testing' in the forward direction using real funds ;>)

Regards. Clive.

[extelecom]

Wim, There is a poster from the Netherlands on the other AIM board:
http://investorshub.advfn.com/boards/profile.asp?user=10457
http://investorshub.advfn.com/boards/board.aspx?board_id=949

[wim]

Tom, Clive and others, thanks for so much research. It gives me a lot of study as I'm rather new here.

For me its all more difficult because my English is not as good as it should be.

Clive, to compare Ladder with AIM and/or LD-AIM, did you have make some backtests?


wim

[ls7550]

Selections, Scaling and Expectations

Bit of a novel this posting, but may prove useful to some

Which stocks/sectors to Ladder?

Ideally we want to individually Ladder each of a range of stocks and/or sectors that don't all zig and zag at the same time. This way we can share cash reserves across multiple Ladders and enhance volatility capture gains.

If you add to a core defensive stock based holdings some things that don't start to go down until much later (commodities and Brazil) in the cycle and can find some things that turn up much sooner (cyclicals) you have a chance for that one zigging another zagging effect over the whole cycle.

Cyclicals include such sectors as automobiles, heavy machinery, steel, manufacturing, travel etc. and typically move with the economic cycle.

Defensives, such as utilities, food etc. are much less affected by economic downturns.

Yet another possible option is to include the likes of long/short (hedge) based funds.

o O o

Scaling to overall 100% equity exposure levels.

Assume that we set a Ladder Top of 2 times the 52 week mid price value and a bottom that's 0.25 times that 52 week mid price value.

Assuming a mid price of 100, then this amounts to a top of 200 and a bottom of 25.

If we rebase to zero then we have 0 bottom, 75 mid and 175 top - which equates to 75 out of 175 cash and 100 out of 175 stock proportions, or around 43% cash, 57% stock.

The stop-loss based strategy that I use for cash (to reduce cash drag), typically averages 60% stock exposure time and 40% cash exposure time.

In total given 57% Ladder stock exposure and 0.6 * 43 = 25.8% stock exposure from the stop-loss based style. A combined 82.8% overall average stock exposure expectancy (17.2% cash).

We can however scale up the stop-loss based style such that overall we average 100% stock exposure across the total account. We can do this by using a Double Long (twice leveraged) index fund instead of a conventional unleveraged index fund for a relatively small amount of holdings.

Typically scaling the cash reserve by 1 / 0.6 = 1.667 will result in such an average 100% overall total equity exposure level.
So how much double-long does this require to be held? Well we need to solve 2x + y = 1.667 which given that x+y=1 is a simple simultaneous equation

2x + y = 1.667
- x + y = 1
= x = 0.667 and hence y = 0.333

So with 66.6% double-long, 33.3% conventional we have in effect 166.6% overall equity exposure on the 43% of cash reserves managed under the stop-loss arrangement, and as the stop-loss style averages 60% stock exposure we have an overall 100% stock exposure.

Relative to the total account this means holding 66.6 * 0.43 = 28.6% of the total funds in double-long type funds.

The net effect from this is that we typically will average around 100% overall stock exposure across the total account, and supplement the returns from such exposure levels with the volatility capture gains achieved by Ladder trading in and out of stock over time.

An alternative to holding a double-long is to scale up the cash reserves by 28.6% of the total fund value, so instead of a Ladder being comprised of perhaps 100% * 57% stock and 100% * 43% cash, we instead invest 57% in stock in the normal manner, but then set cash to 43% + 28.6% (71.6%) of the total fund value.

In a somewhat similar manner to how LD-AIM uses virtual-stock, under Ladder we can use virtual-cash.

Reflecting that virtual cash through to the stop-loss style will result in overall average 100% stock exposure levels coupled with additional stock price volatility capture benefits.

Providing our individual Ladders each run against different stock styles as outlined previously, then typically the differently timed zigzag's will enable those Ladders who have relatively high levels of (real) cash reserves to supplement those that are cash-hungry.

o O o

What sort of volatility capture benefits might we expect?

Consider that an Index such as the UK's FT100 might range through 20% to 40% of its value each year.

Our rule of trading at price intervals of 5% in the same direction, 10% in the reverse direction means that for each such paired (buy/sell or sell/buy) we make a 10% profit on the trade amount invested across that range.

As an example prices might decline 5% three times in a row and then reverse and rise up 10% followed by another two 5% gains. Collectively that is a 15% decline followed by a 20% rise, putting the price back to 5% above the original start price level and having ranged through 20%, which is towards the minimum that the FT100 typically ranges through across any one year.

From the Ladder in the iBox we see that typically Ladder will trade just over 1% of the total fund value at each such buy or sell trade level, which amount to around 0.3% of the total fund value in profit after three such round-robin trades (lower end of average 20 to 40% index motion). At the upper end of yearly Index price range we might expect around twice that amount, 0.6%. In practice the trade size is over 1% of total fund value, closer to 1.25% which uplifts that yet further still. Overall typically I generally use a guideline figure of 0.5% of the total fund value in volatility capture gains each year based on the UK FT100 Index.

The US markets tend to be more volatile than that of the UK's, around twice as volatile and as such US index Ladders typically average closer to 1% volatility capture gains.

When applied at the sector level however, typically volatility increases such that volatility capture gains are yet higher still. And if we scale up trade sizes by increasing cash (real + virtual cash) then we can relatively easily double these volatility capture gains.

It isn't particularly difficult to uplift volatility capture levels to 2% of the total fund value or more.

In concept therefore, it is viable that the Ladder and stop-loss money management based combination can yield higher returns than that of buy and hold, yet do so with greater money management controls that reduce volatility. Similar or better investment returns but with lower volatility in turn mean that compound effects add yet further benefits over time (as in how a consistent 10% p.a. is better than alternating years of 0% one year, 20% the next).

Through money management controls alone, it is possible to achieve better returns than buy-and-hold and yet do so with less volatility. All too often novice investors donate to much time and effort to stock analysis, and give too little time to money management controls. Yet it is money management that is likely to provide the greater overall longer term reward.

[ls7550]

A Ladder spreadsheet can be downloaded from http://www.jfholdings.pwp.blueyonder.co.uk/ladder.zip

[ls7550]

Thanks Tom.

I recall that your iWave did add some alpha like benefit, so I would imagine that the LD-AIM Bull/Bear like scaling at iWave below/above risk levels could bolster total returns.

To bear in mind ;>) mind however is Bulls and Bears can last a lot longer than you might anticipate.

LD-AIM scales up trade size by adding more virtual shares to actual holdings so that minimum trade size, as a percentage of (real+virtual) stock value, is increased. Applying this scaling when in low risk could be a good thing as more stock would be purchased quicker during the rebound back up again in stock prices, averaging in more at a lower price overall.

Equally however it could turn out to have been a bad action as more stock would be bought quicker should the bear prolong (cash-burn rate)

You'd need tight downside methods to prevent excessive cash burn. Perhaps along the lines of waiting at least 30 days between consecutive purchases and/or 15% discounts in stock price from the previous purchase price level before making any further purchases (as I believe Steve uses).

Once average risk regions were entered reverting back to conventional levels (no virtual stocks) would slow down the trade sizes and pace.

Equally when in high risk the virtual+actual like scaling of LD-AIM would have a tendency to sell out of stock quicker and at higher prices before entering back down into the average risk territory and again reverting to conventional (no virtual stocks) AIM.

There are many ways that fundamentally might achieve a similar affect, using twice long, twice shorts funds at low/high risk levels, or scaling up trade sizes using LD-AIM during high/low risk levels etc. A further extreme might be achieved by combining both, switching to twice scaled long/short index funds and using LD-AIM. A virtual 4X fund! Ouch! Scary!

Ladder tends to be more transparent on the cash burn rate front. Under Ladder the top and bottom price levels at which we are 100% all-in or all-out are pre-defined. That top and bottom range combined with the amount of funds we have available or allocated to the investment depicts the trade size.

If the Ladder top and/or bottom price levels are narrowed then the trade size increases, if the bottom/top price range is widened then the trade size reduces.

To implement this scaling type activity using Ladder we could narrow the top/bottom range during low risk periods - bringing the Ladder TOP down during low risk periods. When in high risk we could narrow the range by bringing the Ladder BOTTOM up. During neutral risk we could again revert the Top and Bottom price levels back to their previous wider levels. Ladder accommodates the injection/removal of funds into/out the account relatively easily and provides an instant update as to any adjustment trades required. Equally adjusting the bottom and/or top also provides an instantaneous adjustment trade size indication.

Best regards. Clive.

[OldAIMGuy]

Good morning Clive, Re: AIMing for the Shorts............

Thank you for the interesting review of both the concept of SHORT selling and the use of 2X index funds.

There have been times when I thought of using the old i-Wave's "high risk" reading to initiate an AIM account in a 2X bear index fund following something like the S&P500. One would do so in a fashion like LD-AIM. In other words, one would, if successful, close out the position once the shares were exhausted.

There would also be an initial cash reserve in case the market wasn't ready to acknowledge the high risk nature of the market as of yet. So, if the market continued to rise while the IW was indicating high risk, we would continue to buy more of the 2x bear fund (market rising, bear fund dropping). In essence adding to the short position.

Eventually the pressures of the market place would start to weigh on the index values and we would see a drop. This would drive the bear fund upward. Using AIM's Sell side, we'd be parting out the 2x bear fund as its NAV started to climb. Eventually with the LD structure AIM would exhaust the actual shares in the holding. At that point, the market should be well consolidated, most of the fat trimmed, etc. I imagined then just closing out the position completely and using the residuals to start something on the LONG side of the market.

I have done something similar with a 2x LONG index fund in the past, but not as well planned. At that time the LD or leveraged AIM concept had not been developed so I continued the long position even in the face of a massive market run up. Silly me! After that, I decided that the fund should only be used when the IW was in its 'bullish' territory and would switch out of it at the first notice of a 'bearish' signal. The funds would then be redeployed to the relative safety of a long govt bond fund.

This method of turning on one fund type and turning off another has worked reasonably well since getting it started. The non-correlation worked to my advantage most of the time. I should probably look at it again and see if a rule set could be divined that would make it more useable for the long term.

My intent was to use the double funds only during the extreme portions of the market's risk range through a reversion to mean. In other words, use an LD-AIM'd BEAR fund from high risk back to middle average risk and use an LD-AIM'd BULL fund from low risk back to middle average risk. Use something with relative safety of principle and reasonable yield in the times we weren't using either of the extreme fund sides.

Whether the performance of the extreme ends was going to be enough to bolster the total return of the account to above average, I never finished testing.

Thanks again,
Tom

[ls7550]

Double Funds

Periodically on the AIM boards a question is asked along the lines of

"If AIM likes volatility, why not use double Funds?"

Double funds simply scale the amount of movement in an Index - typically twice.

Most Double funds however are reviewed on a daily basis. A problem with this is that, taking an extreme example, if the conventional Index is down 10% one day, and then up 10% the next, then the conventional case encounters 0.9 * 1.1 changes over the two days, or a 0.99 overall change factor across both days.

The double fund however encounters a 20% loss the first day and a 20% gain the next and stands at 0.80 * 1.2 = 0.96 over the two days.

From this simple example we see that the double fund lost 4% across the two days, whilst the conventional index was only 1% down over the two days.

A more preferable use for Double funds would be to SELL them, as that way you would benefit from this type of compounding effect. The problem is however its not that easy to place such trades as 'Short the Double Short'.

Consider however that a short is somewhat similar to going into cash. That is if the price does decline, then cash relatively outperforms (makes a relative profit), which is therefore somewhat akin to having bought a short.

A trading sequence that somewhat emulates a Traded Options PUT is to start with a small short position and add to that short as prices decline and reduce the short as prices rise.

If we consider buying cash as similar to going short, then this might be extended to starting with a small amount of cash and adding to cash as prices decline, reducing cash as prices rise.

Taking the complete opposite stance - to SELL the Short of the previous paragraph - amounts to reducing cash (buy stock) as prices decline, add to cash (sell stock) as prices rise - which is exactly what AIM does.

By increasing AIM trade sizes, we increase this effect - which is somewhat similar to Selling the Double Short (Shorting a Double Short).

There are a couple of ways to increase trade sizes, LD-AIM is one such method, Ladder with uplifted Cash reserves is another. In many respects LD-AIM and Ladder are quite similar in this respect.

LD-AIM scales the trade sizes by using virtual shares. As AIM trades are typically sized as a percentage of stock value, then uplifting the amount of stocks with virtual and actual stocks results in larger trade sizes.

With Ladder each Ladder is allocated a total amount of funds, of which part is initially allocated to stocks and the remainder is assigned to cash. Where two Ladders track stocks or funds that typically don't move in the same direction at the same time then we can increase the cash reserves of both Ladders on the assumption that we might borrow some of the other Ladders cash reserves when called upon. Providing both stocks/funds don't dive down and collectively call upon more cash than what is available across the two Ladder accounts then generally this approach will increase the total amount allocated to each individual Ladder - which in turn has the effect of uplifting the trade sizes and hence potential stock price volatility capture gains.

I used the short side in the above examples as that is generally the more difficult one to get-your-head-around. The exact same principles can equally be applied to the long side of doubles with a similar outcome.

So in short ;>) when asked about using Doubles with AIM the answer is that selling Doubles is a lot better than buying doubles due to compounding effects, and as its difficult to Sell Doubles, AIM emulates such selling whenever the trade size is scaled up to above conventional AIM trade size levels - which can be achieved via the likes of Vealies, LD-AIM and/or Ladders that have overlapped cash reserves.

[ls7550]

Reducing Cash Drag

The cash reserves available under Ladder generally act as a drag upon overall total investment returns.

To minimise such drag I personally apply those 'cash' reserves to a stop-loss based strategy that primarily focuses upon loss minimisation. The stop-loss style encounters some stock exposure time, some cash exposure time. That additional stock exposure however has the effect of uplifting the overall total accounts stock exposure level and hence reduces the total accounts cash drag to some extent.

[ls7550]

Extending the Ladder concept to enhance volatility capture benefits.

Using the Index Ladder we can identify a suitable amount of cash and stock exposure to carry at any one time.

If we split that indicated stock and cash levels across a range of sectors/styles that have low correlations, then we can individually Ladder each such sector/style and increase the cash reserves for each individual sector/style Ladder in reflection of the different drumbeats of price motions.

Scaling each sector/style Ladders cash allocation three times will result in the total funds allocated to each sector/style being around twice that of the conventional case. With twice the amount allocated to each sector/style Ladder we might reasonably anticipate encountering twice the volatility capture gains.

We increase the risk of burning all cash if all sectors/styles call upon cash reserves at the same time. Providing however that when one sector/style is down, others remain level (or up) then this risk is largely mitigated.

A further benefit of applying Ladder at the sector/style level is that generally individual sectors/styles tend to be more volatile than the Index.

[ls7550]

LADDER

I've added a copy of the UK FT100 Ladder table that I use to the iBox.

Ladder is a simple concept. Pick a top price level at which you are prepared to be 100% fully in cash. Pick a bottom price at which you are prepared to 100% in stock. Partition that range into equal sized steps and divide your total investment amount by one less than the number of steps (Level Cost).

Starting with 100% cash at the top of the Ladder, deduct one Level Cost amount for each step down and you have your Ladder.

Personally to determine appropriate top and bottom price levels to use when starting a new Ladder I simply take the current stock price and double it to identify a TOP price level and quarter it to identify a BOTTOM price level.

[ls7550]

cWave 43.1%

[ls7550]

cWave for last Wednesday was 43.3%

Nearly a week late with this one due to the holiday season.

[OldAIMGuy]

Hi Clive, Re: c-Wave reactionary moves...........

Just for fun, you could calculate, using the same data, an exponential moving average for an appropriate period and compare that to the "instant" number. I do this with the i-Wave data. The difference then is what I used to present as the IW Oscillator. It showed which direction the current data was diverting from the eMA. I think I used approx. 10 weeks as the eMA but would have to check.

Plotting them together shows history and the slope of the eMA is sometimes instructive also. So, even if you have some lumps and bumps on the instant data, maybe the overall slope of the eMA shows a longer trend of either rising or falling risk that might be of value.

Best regards,
Tom

[ls7550]

Hi Tom.

The cWave is much more of a knee jerk reaction between 25%, 50% and 75% type levels whenever a cross-over of the lower/upper line occurs. It could be made smoother by overlaying further complimentary fundamental measures, but I don't think that over time it would make that much difference overall.

[OldAIMGuy]

Hi Clive, c-Wave...............

It appears the c-Wave is perceiving a rather rapid buildup of risk relative to the U.S. markets. The v-Wave is still rather low for individual stocks and industry specific mutual funds.

It will be interesting over time to see the convergence/divergence of these various indicators.

Best regards, Tom

[ls7550]

cWave for last Wednesday was 42.9%.

Sorry about being nearly a week late before publishing the figures as I've been away on holidays with my two sons.

[ls7550]

Hi Tom.

The sudden jump in cWave occurs because of the upward crossing of the 16.5 PE+BoE lower line.

From the iBox

From our Relative Valuation measure which is constructed by summing the current FT All Share Indexes PE with the current Bank of England Base Interest Rate we identify a multiplier of between 1 and 3. We use 1 when the RV is in high risk (above 18.5), 3 when the market is in low risk (below 16.5) and 2 when the market is between 16.5 and 18.5.

So you get much more of a large step transition, that effectively averages around 25% cash when below the 16.5 line, 50% cash when in the mid zone and 75% cash when above the 18.5 line.

Regards. Clive.

[OldAIMGuy]

Hi Clive, The v-Wave is also rising, but not as quickly as of yet.

Best regards, Tom

[ls7550]

cWave 43.5% - having risen from below the low risk line level and re-entered the neutral region.

[ls7550]

cWave as of last Wednesday was 16.1%.

Late reporting this week as I've been away for a few days.

[ls7550]

cWave 15.6%