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Hi,
I found this idea at the mechanical investing board at The Motley Fool. I
can't backtest it since I have only quotes database and no earnings yield data,
so I thought I would pass this along, in case someone else could use this
information for backtesting purposes.
1. Arezi Ratio <A
href="">http://www.aetheling.com/MI/AreziRatio.html
2. Growth Projections <A
href="">http://www.aetheling.com/MI/
Greg
... A simple application of that idea would be to do this. Compare
the yield of cash to the SPX earnings yield. The SPX earnings yield is
simply the ratio of estimated earnings for all stocks in SPX divided by
the price of the index at that time. Use that in the denominator of a
ratio, the numerator of which is the yield on cash, the proxy for which is
the 3-mo tbill yield. When that ratio is over 1.25, reduce exposure to
stocks. When it's under 0.75, increase exposure. How much you do of either
depends on your personal risk perferences and how much you wish to avoid
or embrace risk. Personally, I look for stocks to short when the ratio is
too high and, conversely, buy stocks on margin when it gets too low. But I
take more risk than most.
The above relative value ratio has actually had a gradually rising
secular trend over the past 50+ years. So a more sophisticated application
would be to do a regression of that trend over the past 50 or so years and
measure deviations from the trend in std dev.
I mentioned this idea to a friend of mine recently, and he sent me
a beautiful chart of this ratio covering the past several decades. For
lack of graphics capability here I cannot post it, but I recommned that
anyone interested in this idea calculate it and look at it for yourself. I
have been using this idea for quite some time and have been quite pleased
with it. Perhaps you will find it helpful too. It's certainly better than
an arbitrary fixed allocation.
arezi
Greg
Here are some references
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