Performance of Individual Components During Market Crashes

[iwealth]

MG, I'm trying to understand what you are saying..

If one backtests a timing or rotation system based on end of month closing numbers and performs the transactions the following trading day, you are seeing a vast reduction in historical drawdown?

So if one backtests that same system using varying start dates such as the 2nd of the month, 3rd of the month, etc., assuming results are consistent with trading on the first of the month, wouldn't that eliminate doubt about the robustness of the system?

[MachineGhost]

If one backtests a timing or rotation system based on end of month closing numbers and performs the transactions the following trading day, you are seeing a vast reduction in historical drawdown?

No, you're seeing a vast reduction in maximum drawdown by buying on the close of the last trading day of the month.  The overnight gap between that close and the open of the next day can kill the return and increase the maximum drawdown.  And I don't believe you can actually get the open print price either, so there's even more slippage to consider.

So if one backtests that same system using varying start dates such as the 2nd of the month, 3rd of the month, etc., assuming results are consistent with trading on the first of the month, wouldn't that eliminate doubt about the robustness of the system?

Maybe.  A different start date would just demonstrate the path dependency.  I'd increase the exit date proportionately.

[vnatale]

I did this fun exercise mainly to see how bonds respond during overvalued market crashes.

1973: Stocks -18.19%, Bonds -5.66%, Gold 72.35%, Cash 2.46%
1974: Stocks -29.81%, Bonds -0.05%, Gold 60.00%, Cash 4.61%
(Nifty Fifty Implosion: http://www.ozy.com/flashback/nifty-fift ... 37.article)
(Gold was not legal to own again until January 1, 1975 and only thanks to Ron Paul's diligent legislative efforts, so you'd have crushing PP losses unless you had invested in other real assets like, say, Chinese ceramics.  Not kidding.)

1981: Stocks -9.05%, Bonds -3.79%, Gold -32.60%, Cash 9.82%
(Tight money to break inflation expectations; gold imploded previous year.)

1987: Stocks 4.15%, Bonds -10.67%, Gold 19.98%, Cash 2.88%
(US Dollar Implosion: https://en.wikipedia.org/wiki/Black_Monday_%281987%29)
(The year Harry Browne came out with the current PP allocation.)

1994: Stocks 1.31%, Bonds -12.87%, Gold -2.25%, Cash -0.16%
(Bond Implosion: http://money.cnn.com/magazines/fortune/ ... /17/79850/)

2000: Stocks -8.26%, Bonds 21.66%, Gold -5.53%, Cash 4.58%
2001: Stocks -9.57%, Bonds 1.35%, Gold 1.91%, Cash 5.05%
2002: Stocks -22.70%, Bonds 13.28%, Gold 24.65%, Cash 2.12%
(Tech Implosion.  Without 09/11 fear, it seems likely gold would not have responded so favorably.  That is also the year I first bought gold, so it had to have been a fear trade.)

2008: Stocks -36.19%, Bonds 38.97%, Gold 2.60%, Cash 3.89%
(Subprime Implosion.)

2014-:
(TBD Implosion.)

So it seems to me that the market could vaciilate between either bonds or gold in providing crash protection.  I don't think we can universally say that bonds always hedge equity, as I previously thought.  In some cases, it is the cash yield alone that barely just saves the overall PP at the end of the day.  Can the same be said of now with interest rates at nearly zero if both stocks and bonds crash at once?  My worst fear is a worser repeat of 1981 or 1994 where nothing responds; I see nothing to suggest we're not going to have such a "Tight Money" repeat and it'll probably be far worse since I don't believe we've had both stock and bonds overvalued at the same time before along with zero paying cash.  That puts a tremendous amount of pressure on gold to outperform against a massive deflationary headwind.  And pigs fly.

I'd rate this a "classic" study that somehow needs to be more easily found.

It does not seem that since this was written we've had any market crashes of any type?

And, couldn't the case be made that both stocks and bonds are overvalued even more albeit with cash no longer paying near zero?

Vinny