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Greetings --
A message appeared on the Yahoo Indigo Investment Group, asking for
information about a filter, called the Interest Rate Filter, that the Indigo
program contains. I am posting this response to that group and to several
other groups that might be interested. Apologies to readers who receive
more than one copy.
I designed and wrote the original version of Indigo in 1996. I cannot speak
for the recent details of Indigo's Interest Rate Filter, but this message
describes a filter that may be similar to the one in Indigo in the original
(1996) implementation.
Credit goes to work done by Mr. Heine and reported by Nelson Freeburg in his
Formula Research journal. I do not have my original notes, but I am certain
that Nelson Freeburg (800-720-1080) can supply interested readers with back
issues of his journal.
As described by Heine and Freeburg, the filter is based on weekly data of
five indices: Dow Jones 20 Bond Index, Long Term Bond Yields, 13 Week T
Bill Yield, Dow Jones Utility Index, and CRB Index. Score +1 when the DJ20
is above its 24 week Simple Moving Average. Score +1 when Long Term Bond
Yield is below its 6 week SMA. Score +1 when 13 Week Yield is below its 6
week SMA. Score +1 when the DJ Utility Index is above its 10 week SMA.
Score +1 when the CRB Index is below its 20 week SMA. Score 0 when those
conditions are not met. Add up the five scores. Allow Long positions when
the total score is +3 or higher, allow Short positions when the total score
is +2 or lower. The Heine Filter was designed to time the Dow Jones 20 Bond
Index.
Prior to joining MicroStar / Indigo, I adapted Heine's work to use daily
data and later included it as one of the features of Indigo. The equivalent
Simple Moving Averages for daily data for the same data series are: Dow
Jones 20 Bond Index 17 days, Long Term Bond Yields 92 days, 13 Week T Bill
Yield 12 days, Dow Jones Utility Index 32 days, and CRB Index 246 days.
Almost any combination of the five series using average periods between 5
and 250 days works well when used to time the Dow Jones 20 Bond Index. It
also worked well for many common stocks, particularly those with a strong
relationship to interest rates. It worked well for the S&P 500 index and
the NASDAQ Composite index until about April 1999. It has not worked well
on the major market indices recently.
The Dow Jones 20 Bond Index has always been quirky. Data for a more stable
index (the Dow Jones Corporate Bond Index) begins about January 2002. To
bring the Heine filter up to date on daily data, replace the DJ 20 Bond
Index with the Dow Jones Corporate Bond Index. For back testing, you may
need to splice together the earlier data from the DJ 20 Bond Index. Then
use Exponential Moving Averages with lengths 20, 150, 100, 100, and 200
respectively in place of 17, 92, 12, 32, and 246. The resulting filter is
still not very good for the general stock indices, but it is a good filter
for long term interest rates and relate securities. The model is very
stable relative to the values of its parameters.
I am sure some of you will be testing this filter and improving upon it.
Please copy me with your findings, or post them for all to read.
Thanks,
Howard Bandy
howardbandy@xxxxxxxxx
September 7, 2003
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