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Objective: The model was designed to answer the following questions:
Methodology Step One: Determine portfolio’s allocation to more conservative assets and growth-oriented assets. The CCM Market Model uses input from five proprietary sub-models providing a form of “allocation redundancy”. The final allocation is determined via a weighted average from the five distinct sources. This weighted average approach provides a more robust methodology, enabling the model to handle a much wider variety of market conditions. The weighted average approach also reduces the probability of “curve fitting”.
Market Exposure: The market model allocates between more conservative assets, such as bonds, and more growth-oriented assets, such as foreign and domestic stocks. The most common ETFs selected by the model include, but are not limited to:
* = Under specific and well-defined conditions, the model can select to hedge or “go short” using SH (short S&P 500) or similar hedging/short ETFs.
Methodology Step Two: Compare alternatives in each allocation category (conservative & growth-oriented) head-to-head using a proprietary trend-following methodology. For example, in the growth-oriented category, small caps are compared to all other options. The least attractive alternatives are eliminated allowing the model to focus on the strongest areas of the global markets.
Model Portfolios: The most conservative of the three options, the CCM Moderate Growth Model, limits exposure to higher beta assets. The CCM Growth and Aggressive Growth Models allow for greater exposure to higher beta assets, such as gold, small caps, and emerging markets.
2007-2009 Example: Was it possible to see something was changing after stocks peaked in October 2007? Yes, there were many ways to monitor the shift from risk-on to risk-off. The chart below shows the ratio of bonds-to-stocks on top with the S&P 500 below. In mid-June 2008, with the S&P 500 trading at 1360, the weekly trend clearly shifted in favor of bonds over stocks. This is one example of the inputs used in the CCM Market Model.
2008 Warning Before Stocks Dropped 51%: The text below is from a February 2008 article, which was published when the S&P 500 was trading at 1367. The S&P 500 eventually bottomed at 666 in March 2009. The point is the methods used in the CCM Market Model add value and can help protect your hard-earned principle.
“Based on recent technical breakdowns in many risk-based investments, the probability of investors incurring additional losses over an extended period of time has increased. Both the technical and fundamental outlook now favor bearish outcomes over bullish outcomes.”
Example Of Observable Shift: This 2009 article outlined obervable improvment in the market's risk-reward profile. The June 2009 table below allows you to visualize the basic concepts used in the market model.
Warning In 2000: This August 2013 article, Stocks, Bonds, or Short? – The Million Dollar Question, expands on the concepts used in the market model and covers an example from the 2000-2002 bear market in stocks.
Model Inputs: The CCM Equity Step-In and CCM Equity Step-Out Models were created using historical data from the CCM Bull Market Sustainability Index (BMSI) and CCM 80-20 Correction Index (80-20). The CCM Market Risk Model (MRM) is also an integral piece of the CCM Market Model.
No Need To Forecast: This video segment compares forecasting the outcome of a football game to stock market forecasting. The second portion of the clip shows specific examples of the CCM Market Model in action during bull and bear markets, where it is not necessary to forecast anything.
The Market Does Not Care What I Think: This October 2013 article describes how asset prices are set and how personal opinions factor into that process. See the Facebook example in the article.
Easy To Understand Concepts: This October 2013 article covers the important concepts of thinking in probabilities, developing an IF-THEN system, monitoring the big picture, and flexibility.
Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC. More on the web at www.ciovaccocapital.com