Edition

IFTA JOURNAL
2017 EDITION
(14) trend model compared with buy-and-hold for the S&P 500
Index. The model generated fewer large percent losses and
fewer large percent gains compared with buy and hold, which
is supportive of reducing fat-tail or higher-risk events. The
test results summary statistics in Table 1 reveal the following
benefits of using the model compared with buy and hold: 1) a
higher average or mean return; 2) a lower standard deviation or
overall less risk; 3) a more positive skewness than buy-and-hold
(meaning the asymmetric tail extends toward more positive
annual returns); 4) a higher kurtosis value, suggesting that
there was a peak of distribution in the return stream, which in
this case is supportive of more stable returns with less tail risk;
and 5) lower minimum annual return values than buy-and-hold,
and added downside risk protection.
The test results suggest that the RSI (14) model protects the
investor by avoiding extreme unexpected bear market losses.
The mechanics of the model will execute a move to cash when
the RSI (14) indicator triggers a sell signal, thus eliminating any
extreme fat tail losses associated with the buy and hold strategy.
Figure 4. Yearly percent returns in three secular bear
markets
Table 2. Performance of the RSI (14) model compared to
buy and hold for three secular bear markets
Adjusting for transaction or frictional trading costs is
provided in Table 3. Transaction costs include bid–ask spreads
and commissions. The transaction costs in the 1929–1942
timeframe were the highest, at 0.82% per round trip trade (i.e.,
includes both the buy and sell) of the three secular bear markets
studied, resulting in a 20.6% drag on relative performance. The
1966–1978 secular bear market had average costs per trade at
0.44% and resulted in a 13.7% drag on relative performance. The
2000–2009 secular bear market had the lowest transaction
costs per trade at 0.18% and resulted in a drag on relative
performance of only 5.5%.
Table 3. Performance with transaction costs for three
secular bear markets
Table 1. Performance statistics for three secular bear
markets
Figure 5. Risk and return statistics for three secular
bear markets
Regarding model performance, the results show that the
RSI (14) model outperformed buy and hold for each of the
three secular bear markets, on average by 39.20% (Table 2).
The outperformance versus buy and hold can be attributed to
the elimination of the high-risk fat tail outliers, thus avoiding
major market losses. The model provided greater downside risk
protection compared with buy and hold, based on the following:
• On average over the three time periods, the RSI (14) model’s
maximum drawdown was 14.21% better than buy and hold,
and its standard deviation was 6.11% lower than buy and hold,
which is an indication of lower risk.
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