To help investors better manage downside risk, Ned Davis Research in conjunction with Capital Management Group developed the Ned Davis Research CMG US Large Cap Long/Flat Index that measures overall market health using robust industry-level data over multiple horizons. The index acts as the benchmark for the VanEck Vectors NDR CMG Long/Flat Allocation ETF (NYSEArca: LFEQ).
The indexing methodology covers the S&P 500 Index or Solactive 13-week U.S. T-bill Index, or both, depending on prevailing market conditions. The index would observe the market breadth, and direction of the S&P 500 is assessed. Equity allocation would then be determined by composite score and directional trend. Lastly, the index will rebalance to new allocation percentages intra-month if trade signals change.
Schuster explained that the model produces a market breadth composite of S&P 500 industries to analyze each industry’s price level returns; applies multiple technical indicators to each industry to measure trends, countertrends, and overall market health; and then allocations are based on both the composite’s score of market bullishness or bearishness and its directional trend.
During declining directional trends, the portfolio may include a 100%, 80%, 40% or 0% allocation to equities with the other portion allocated to T-bills, depending on the composite score. During improving directional trends, the portfolio is 100% long equities, regardless of its composite score.
“Index’s embedded risk management minimized losses during years with significant drawdowns,” Blumenthal said. “Tactical allocations offered significant downside protection and participation, keeping pace overall with the market.”
Financial advisors who are interested in learning more about an alternative equity market strategy can watch the webcast here demand.