Trade idea – SSO and UBT
Base system rules:
At the end of each month, put 50% of system capital into SSO and 50% into UBT. Rebalance monthly.
Base system results:
CAGR: 15.7%, Max Drawdown: -48.5%, Average Drawdown: -8.2%
Note: see bottom for notes about price estimates prior to inception.
Improved system rules:
If the 7 month rate of return on the base system is positive (on a monthly basis), follow the base system. If the 7 month rate of return is negative then put 50% of system capital into TLT and 50% into cash. Rebalance monthly
Improved system results:
CAGR: 16.8%, Max Drawdown: -21.0%, Average Drawdown: -4.8%
Notes: SSO and UBT are leveraged ETFs. SSO is a 2X tracker of the S&P 500 while UBT is a 2X tracker of long term government bonds. The 2X leverage only applies to a single day. Test period above is 8/1990 to 9/2012. I created estimates of SSO and UBT prior to their inception. My estimates are not perfect by any means. For UBT prior to inception, I use dividend adjusted values of TLT and VUSTX to estimate prices. Differences between my series and UBT are very small during the overlap period. For SSO prior to inception, I use non-dividend adjusted values of VFINX to estimate prices. The non-dividend adjusted values of VFINX created a much better match in the overlap period. My series is not as close of a match for SSO as the one for UBT, but still pretty close. For the improved system, using 6 or 8 months as a filter would have produced similar results.