[amibroker] "Arezi ratio" to decide stocks or cash .

["Greg" <gregbean@xxxxxxxxxxx>]

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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