r/letfs
Adding TIP as a Canary Filter?
Author proposes adding a 200-day TIP SMA as a secondary filter to their SPY SMA strategy, showing significantly improved backtested CAGR.
- Adding TIP SMA as a canary filter significantly improves strategy CAGR (e.g., from 18.91% to 25.34% since 2003).
- TIP acts as a leading indicator compared to the lagging SPY SMA, helping to dodge market bullets.
- The strategy can produce false signals in certain years (e.g., 2013), leading to underperformance compared to a pure SPY SMA approach.
I'm considering making my first substantial change to my 200 SPY SMA strategy since I started it two years ago. So far, I've been using a pretty generic 200 SPY SMA with \~240% equity exposure. I'm very happy with it.
However, on reading this thread, Low Initiative LETF Adventure V2 - 21% CAGR and 27% Max DD : r/LETFs, and this paper, Dual and Canary Momentum with Rising Yields/Inflation: Hybrid Asset Allocation (HAA) by Wouter J. Keller, Jan Willem Keuning :: SSRN, it seems that adding 200 TIP SMA as a secondary filter can make a huge difference.
At the end of the day, a 200 SPY SMA is a lagging indicator. 200 TIP SMA is a canary. This should in principle give me the best of both worlds.
At first, I was skeptical, but the results since 2003 are impressive. Adding TIP as a canary indicator greatly increases the CAGR of my own strategy, from 18.91% to 25.34%:
https://testfol.io/tactical?s=lNdtWOBhwyi
vs
https://testfol.io/tactical?s=i2WpU38hvwg
I thought that maybe this was because it dodges bullets in 2008 and 2022. Nope, my CAGR increases from 23.58% to 29.22% from 2010 to 2021 too.
The only year it really lags is 2013, when it gave a false signal, and made "only" 35.65% instead of 82.80%. That still beats SPY for the year, and that reduced return is included in all of the other numbers.
I fiddled with the SMA numbers, and still got great results between 150 and 250 on both filters. This isn't just dodging some bad days.
What are people's thoughts on adding TIP as a secondary filter? Am I missing anything? In principle it is actually more conservative, but still gives better outcomes.
For reference, my strategy is:
On: 75% UPRO, 10% RSSX, 6% ZROZ, 3% each MATE/CTAP/RSIT
Off: 15% each RSSX, GLDM, ZROZ, VTIP, SGOV, 5% each MATE/CTAP/RSIT/DBMF/HFMF
1% band on SPY SMA, 0% band on TIP SMA
January rebalance
Honestly you've basically rediscovered why Keller put TIP as the single canary in HAA, so you're in good company... TIP price moves on real yields and inflation expectations, so it tends to turn before SPY does, which is exactly the leading vs lagging gap you're describing.
The thing I'd watch is grogi's overfitting point, it's a fair one. TIP only goes back to ~2003 and that whole window had falling real yields as a tailwind, so a single canary tested on that sample is going to flatter itself a bit. The real stress test is a rising real yield regime, and 2022 is about the only clean one we have. Sounds like it held up there, which is encouraging, but one regime isn't a lot to lean on.
What would make me trust it more: it still helps when you move the SMA length around (you said 150-250 all worked, that's a good sign it's not curve fit to one number), and the TIPSIM extension back through the 70s inflation doesn't blow up. My read is the logic is genuinely sound, I'd just not anchor on the 25% CAGR. That number is probably the first thing to shrink out of sample...
Seems solid to me but I might be biased. I agree with your analysis on 2013. The occasional false signal is the cost you pay - but as you point out, it still outperforms.
Only time will tell if it’s overfit but the underlying theory of the TIP canary is seemingly robust enough. It’s a case of whether you’d rather have it and not need it than need it and not have it.
Best of luck with your strategy 🤞
I really like it. Its probably personal preference but as a leading indicator I prefer the OECD Composite Leading Indicator - might be useful for you to read about if you're still shopping around for canary indicators though:
https://allocatesmartly.com/using-the-oecd-composite-leading-indicator-momentum-to-time-the-market/
But I ultimately I only want to use that for one strategy, and I'm probably leaning towards the TIP indicator as the best alternative for a second canary strategy. I really like that bonds in general are actually a very good indicator of future stock returns so even if you switch out TIPSIM for IEFSIM etc it still works just not quite as well. It feels like another strong indicator that the strategy isn't overfit. (I think it was also on the Allocate Smartly blog that I read about that if you were interested.)
Wow! I had no idea about that TIPSIM?FB=IEFSIM code. I ran a pared down version of my strategy to 1962 using that code, and I would have turned 10k into over 3 billion: https://testfol.io/tactical?s=e2bJce4arfH Too bad I wasn't born.
Thank you for the link, too. I think I prefer bonds, but I see the value of that idea. I like the way that you phrased it "bonds in general are actually a very good indicator of future stock returns".
Haha yes that's the feeling whenever looking at long backtests or past house prices!
I use BNDSIM instead, the for is much better.
Lots of published strategies use multiple signals, why is it not possible to use them together? Typically you say either: if one signals risk I go completely to risk off; or use a breadth measure where you take different levels of risk depending on how many are signalling risk.
Ha exactly, that's the part that makes me comfortable too. If it's overfit the CAGR mean reverts toward the plain SPY SMA number rather than blowing up, so the downside is "merely good" instead of great. Plenty of cushion to give back and still beat buy and hold.
$TIP canary is much more optimistic than sma filter. It will move to risk on much quicker and to risk off much later...
It produces better results because $TIP exist only since ~2000, and that has been generally positive run.
I don't think you will do worse than with SMA, but I would not count on getting impressive either. The TIP canary smells a lot like ocerfitting to me
I back tested this myself and went with an asymmetric TIP signal to increase the total amount of time in risk on vs risk off. I figured that \if\ it was overfit the opportunity cost would be a greater loss than a slightly too early or late 200 SMA trigger.
It comes down to preference but technically symmetric signals \could\ be more robust. It just depends on what you’re optimising for and whether you are comfortable with the outcome.
What would you think about integrating your idea with this guy's RVol method?
https://old.reddit.com/r/TQQQ/comments/1rpzweg/stop_blindly_holding_3x_the_rvol_shifter_for_the/
Would it improve your results even further if you added a basic RVol filter (even if yours was much more simple and didn't have multiple tiers like his does)?
Would love to hear your thoughts or see your results if you try to integrate the two!
https://preview.redd.it/0r3of9wqbf9h1.png?width=1730&format=png&auto=webp&s=3238d324f989573350def9043316115133997444
Adding this seemed to improve results
What? Plenty of strategies are premised on mixing multiple canaries at once.
It's the TIP ETF. I use Barchart. I make sure to have "Adjust Price History for Dividends" checked under "Data" under "Settings".
that makes more sense thank you.