Tag Archives: bootstrapping

Looking for signals: are we living a trend change in Dow Jones?

There have been many comments about the bullish trend in Dow Jones after the election of Donald Trump as US president. The US index reached the maximum 20,000 mark after the Inauguration Day very quickly. The given explanation is that Trump plans and market reaction remembered the first Reagan term in the 1980’s. The current debate is if the bullish trend will keep on or not. There are already pundits that have spoken about a dramatic crash, but in T-Advisor, we prefer to consider figures instead of opinions.

First of all, we have to consider two main points:

  • It is not possible to predict the future.
  • Past performances do not guarantee future ones.

Although they are broadly known, it is useful to remember both, as people take some prospects as immediate reality, but they aren’t.

Let’s look at some technical analysis references in the Dow Jones chart in T-Advisor:

Dow Jones chart in T-Advisor

Technical analysis specialists usually consider that:

  • When two MACD cross from up to down, there is a possibility of negative change of trend. This happened at the beginning of March.
  • When the line crosses a Bollinger Band, investor should look at a repetition of this crossing. If it repeats, there is a possibility of trend change. The first crossing happened some days ago in the lower band.

On the other hand, if we make a bootstrapping analysis of the Dow Jones for the next year, this is the result:

Dow Jones bootstrapping in T-Advisor

The distribution of the possible performance is the following:

Cumulative returns distribution of the Dow Jones for 2017

There is 66% of probability that the Dow Jones close the year with a positive performance. The main result is between -0.4% and 6.4%. Negative results consider 33% of probability from -0.4% and -34%.

Other figures found out in the T-Report of Dow Jones are that the volatility is 9.50%, which is low compared with other indexes and the VaR 1-week is 1.54%, that shows also a low result.

How can we consider these figures? Well, there are some technical signals that might provide the idea that there is a change of trend. The current volatility and VaR shows that the movements are not dramatic in this moment. Finally, the bootstrapping analysis is more biased to a positive result than to a negative one in the next year.

In any case, figures only show probabilities, not certainties. In a short-term vision, following the day-to-day signals is relevant. In our long-term perspective, the relevance of this analysis is relative to the moment in which the investor thinks to rebalance his or her portfolio or decide to change the assets he or she invests in.

Capital preservation: more than a strategy

People out from investments usually think that this business is easy and high returns are the common rule. If you say: “I invest”, then they look at you as a rich person, when you probably try to avoid a lost of purchasing power caused by inflation. That is usually the most conservative strategy, but the idea behind that behaviour is capital preservation.

Capital preservation is defined as a conservative strategy that tries to avoid the loss of value of your investments. Some investors are just quiet if their money does not decrease, but this little ambition has an enemy: inflation. If the financial goal reduces only to that narrow meaning of capital preservation, they will surely lose purchasing power in the long term. That’s why this strategy is recommended for safe short-term investments, as bonds or certificates.

However, capital preservation means something else, because it is behind every investment strategy. Whether it is more aggressive or more conservative, it does not mean that the goal behind the scene will not be the same: to keep at least the same as we invest and keeping the same purchasing power. Possibly, someone argues that the more aggressive portfolios are designed to obtain the highest return accepting volatility, but no investor is so fool to accept losing their money without a B-plan.

This B-plan to preserve the capital is rebalancing. When an investor receives alerts from their system, he has to decide when to change his strategy. Regular investors are not traders, but they prefer to invest in the long-term. That’s why these investors have to avoid panic in certain periods when markets are bearish or react negatively due to any external reason (e.g. Brexit or similar). Investors have to look at the long term and analyse with their tools the real effect over their strategy and if they have to rebalance their portfolios. What for? First of all, to preserve their capital; secondly, to serve their strategy (more conservative or more aggressive).

In other words, as the main goal for companies is surviving in the markets, the main goal for an investor is preserving his capital. Returns will come, higher or lower, but these will be the second step. Alerts, optimising modules and bootstrapping systems (as T-Advisor has) are the tools to be successful for it.

Mexico, Trump won the election

Mexico is an example of a developing country that evolved into an industrial nation amongst the 15 largest in the world in a short period. This is the same country that suffered the bond crisis in the 1980s and that signed the NAFTA with a great positive effect for its economic development. This development has also effects in their financial markets, that boomed with a modernisation after the liberalisation of the sector and the investment of foreign entities.

The line was very positive in the global trend, as it registered a bullish bias the main part of the year. However, there was a break… after the second Tuesday in November. Donald Trump won the election and the promises of tightening the relationship with the southern neighbour shocked the Latam markets and, specially, the Mexican one. The line is clear in the T-Advisor trend evolution chart:

Global Trend Evolution chart of Mexico in T-Advisor

The IPC, the Mexican benchmark, scaled a 30% in the last five years, but this positive trend changed dramatically at the beginning of the month.  If we look at the chart, the drop is clear and the change in all technical analysis references is relevant.

IPC YTD evolution in T-Advisor

Compared with other Latam stock exchanges, Mexico didn’t recover from the Trump shock:

Comparison Latam markets in T-Advisor

The question is: what is going to happen after this shock? Trump has relaxed somehow his strong comments about the relationship with Mexico, but nobody knows his real intentions when he takes office in January. Will he order the building of the wall in the Mexican border? Will he abandon the NAFTA? Will he control the Mexican immigration? All these decisions would have strong negative effects in the economy of Mexico and they would also shock the financial markets. Our bootstrapping tool reveals that there are 25% possibilities of a negative return of the IPC in the next two years. However, there are 40% probability of positive returns between 2% and 45%.

Mexico IPC bootstrapping in T-Advisor

This analysis is based on the historical evolution and considers that past performances do not guarantee future returns. In any case, these results can also be altered by sudden political decisions. Many analysts consider that 2017 will be a volatile year linked to political instability. We will soon discover how it will affect to Mexico.

Japan, in the middle of nowhere

Japan is the third largest world economy. It is one of the largest foreign investor and saver (over the GDP), its trading balance has a huge positive result and their GDP per capita is amongst the richest countries. However, it seems that no policy can bring the country out from the stagnation. The GDP growth is weak since the 90s, when the financial bubble exploded in the Empire of the Rising Sun.

This is the real economy, but what about the finances? The figures are not very nice. The T-Advisor trend evolution chart for Japan shows that the line is very  bearish the whole year 2016. In our trend index, Japan is the second-to-last country.

T-Advisor global trend evolution chart in T-Advisor

The Nikkei 225, the Japanese benchmark, has also a negative YTD performance, with an erratic trend.

Nikkei chart in T-Advisor

Compared with other neighbours in Asia, Japan is one of the weakest markets only over Shanghai.

T-Advisor comparison tool between Japan and other Asian markets

But what can we expect from the future in Japan? Our bootstrapping analysis provides a result in which we can perceive a great probability of high volatility. The range between the best and worst result is very wide and the expected performance is low, around a 26% in 10 years.

Nikkei bootstrapping analysis with T-Advisor

The cumulative returns distribution points out that there are a 50% of probabilities that the Nikkei obtains negative results in the next five years.

Nikkei cumulative distribution returns with T-Advisor

To sum up, T-Advisor data shows that the market evolution in Japan has been very bearish this year. Only a 30% of the Nikkei stocks are performing positively. The future seems to be also not stimulating, as the probabilistic bootstrapping analysis detects higher chances of negative returns for the next five years.

Bootstrapping: an example of how it works for specific assets

In a post that we published two weeks ago, we reported that T-Advisor uploaded a new bootstrapping tool to forward testing assets and portfolios. We explained some ideas about how it works, but we are going to show today the results with specific examples.

For instance, let’s simulate a bootstrapping for S&P 500 for the next 20 years. We can select the highest number of trays: 10,000. The more number of trays we choose, they best probability analysis we get. In this case, these are the results:

S&P bootstrapping simulation

Data provide that the maximum possible loss is 25.14% in 4.5 years, but after this point, the poorest result goes up and becomes positive 16.6 years later. Expected probable returns in 20 years are 296%, what means a 15% annually. What does it mean? Investing produces profits in the long term.

The cumulative returns distribution shows also that the highest probability is that S&P performs between -72.9% and 206.82% in around the 40% of the cases.

S&P cumulative return distribution

Let’s get an example from a fixed income fund. It is a bond high yield fund. We simulate with the same conditions: 20 years and 10,000 trays. This is the result:

Fixed income fund bootstrapping simulation

The maximum possible loss is 17.26% in 5.2 years and it reaches probably the breakeven near the 20th year. Expected probable returns in 20 years are 113%, that means a 5.6% annually. In this case, fixed income performs lower than stocks, but possible losses are also less.

The cumulative returns distribution shows also that the highest probability is that the fund performs between 61% and 124% in around 27% of the cases. There is also a probability of 22.5% of obtaining between -1.4% and 61%. If we compare this figures with the S&P bootstrapping, the range is shorter, that means, it is less volatile.

Fixed income fund cumulative returns distribution

What can we conclude?

  1. Investing performs positive in the long term and probably with higher returns than other products.
  2. People should forget to become rich in a year when they invest. Results are clear only in the long term. We have to consider shares and funds investing as an asset amongst other ones.
  3. Bootstrapping provides ONLY probabilities, NOT certainties. When we forward test, we obtain signals, clues and ideas about the possible trends. That is why to read carefully and analyse quietly the results.
  4. At the end, investing is a kind of job that needs a very important value: patience.

T-Advisor implements the bootstrapping tool for your portfolios

T-Advisor does not stop improving the platform and providing professional advanced tools for individual investors in an accessible and easy way. This is the new case: our bootstrapping tool.

What is bootstrapping? It is a statistic complex calculation, which is possible to make due to the current computing capacity. This calculation provides an estimation of different results with the probability that it happens, taking into account the past evolution. We apply it to calculate projected returns, also known as forward testing.

Think about your portfolio. As investors, we are sometimes doubtful and impatient. We would like to know how my portfolio would evolve. We are not a kind of psychics or fortune tellers. On the contrary, we are very scientific. Our bootstrapping tool does not provide the certain results, but the possibilities that your portfolio performs in different ranges.

If you log in T-Advisor and choose one of your portfolios, you have just to click on the “bootstrapping” button. You can select the number of trays and years you would like to test with a 95% of statistical confidence. With a simple click, you obtain:

  • The performance simulation for the time frame you have chosen. It displays the maximal possible loss, the time to breakeven and the evolution of the possible good, expected and poor results.

Bootstrapping performance simulation in T-Advisor

  • The cumulative returns distribution that explains the possibilities (in %) to obtain a specific range of returns.

Bootstrapping cumulative returns distribution in T-Advisor

  • And the cumulative returns in a selected year with the probability that it happens.

Bootstrapping Cumulative returns in T-AdvisorThe bootstrapping tool is very useful to detect possible negative evolutions of your investments. The screens helps you make changes and rebalancings in your portfolios to improve your results. As we insist, it is a statistic analysis and provides projections that will change depending the modifications that you include in your portfolio.

T-Advisor has also implemented the bootstrapping tool to make forward testing in shares, funds and ETFs. We will write soon about it.