Introduction

In 2013, we first introduced the Correction Protection Model (CPM) to Asbury Research clients and subscribers.  CPM was initially created to satisfy requests for a completely data-driven and repeatable methodology that objectively determined if investors should be adding or subtracting risk from portfolios.  Since then, CPM has continued to evolve with newer and better inputs to keep up with constantly changing market conditions. 

Ray Dalio, hedge fund manager and chief investment officer of the world’s largest hedge fund, Bridgewater Associates, believes that trading strategies and investment models should be adjusted every five to seven years to adjust for these changes and so do we.  Over the past few years, we have been noticing that CPM was not performing as well as it used to, which we believe was due to a number of things including recent changes in interest rate policy and increasingly sophisticated computerized trading.  As a result, we have spent the past several months developing and designing an updated version of CPM, which we have named CPM+.

The following text, charts, and tables display and explain CPM+, showing how it has performed versus the S&P 500 (SPX) and also against the current version of CPM, (which we now refer to as CPM Legacy) in multiple time periods and according to many different quantitative metrics.

Key CPM+ Features

  • Designed to protect investor assets during market declines, eliminate large drawdowns, and reduce volatility in portfolios by moving assets out of the market during adverse conditions.

  • CPM+ was designed to be a wealth preservation tool.  To “play the game with less risk”.

  • CPM+ is completely data-driven.  No opinions.  No forecasting.  Just data.

  • CPM+ is binary: either Risk On (in the market) or Risk Off (out of the market)

  • CPM+ averages 4 round turns per year (versus 6 for CPM Legacy).

  • There are no short positions or derivatives (options, futures, etc.) trading

  • CPM+ annualized total return is slightly better than the S&P 500

  • with significantly lower risk than the S&P 500 (according to standard deviation, beta, maximum drawdown)

  • CPM+ has better risk-adjusted returns than the S&P 500 (according to Sharpe Ratio, Sortino Ratio)

  • CPM+ can become an alpha-generating model by using the same signals with leverage.

The significance and strength of CPM+ is its ability to reduce the systematic risk of investing in the stock market.  The tables and chart below display quantitative performance data and hypothetical returns since 2017 when applying the CPM+ signals to the SPDR S&P 500 ETF Trust (SPY, which tracks the S&P 500).

Defensive Strategy: CPM+ using SPY

The table below displays the year-by-year performance of CPM+ (green) versus the S&P 500 (SPX, blue) through 3rd Quarter 2023.  It has outperformed the S&P 500 by 4.9% during this 7-year period or by an average of 0.7% per year, while outperforming the index in 3 of 7 individual years. 

The next table below compares CPM+ (green) to the S&P 500 (blue) and to CPM Legacy (orange) in 9 quantitative categories, showing in the rightmost column that CPM+ outperforms the S&P 500 in 8 of them including total return, maximum drawdown, standard deviation, and beta.

Click the tables or chart to make them larger

The line chart below plots the daily performance of CPM+ using SPY (green) versus both the S&P 500 (blue) and CPM Legacy (orange) from 2017 through Q3 2023.

The column chart below displays the year-by-year performance of CPM using SPY (green) versus both the S&P 500 (blue) and CPM Legacy (orange) from 2018 through Q3 2023.

 

Click the tables or chart to make them larger

Offensive Strategy: CPM+ using SSO

To help investors better understand how CPM reduces risk, the following tables and charts display quantitative performance data and hypothetical returns, also from 2017 through 3rd Quarter 2023, when applying the CPM signals to the ProShares Ultra S&P500 (SSO), a double leveraged ETF that also tracks the S&P 500. 

They show that, by incrementally adding risk back into the CPM ModeI, its character and performance can shift from defensive to offensive. This strategy may be of interest to those who are willing to accept a little more risk than standard CPM (using SPY) for the potential of producing better-than-average returns.  

The table below displays the year-by-year performance of CPM+ using SSO versus the S&P 500 through 3rd Quarter 2023.  CPM+ has outperformed the S&P 500 by 60.6% during this 7-year period or by an average of 8.7% per year, while outperforming the index in 5 of the 7 individual years. 

The next table below compares CPM using SSO to the S&P 500 (blue) and to CPM Legacy (orange) in 9 quantitative categories, showing that CPM outperforms SPX in 5 of them including total return, Sharpe Ratio, and up capture.

Click the tables or chart to make them larger

The line chart below plots the daily performance of CPM+ using SSO (green) versus both the S&P 500 (blue) and CPM Legacy (orange) from 2017 through Q3 2023.

 

The column chart below displays the year-by-year performance of CPM using SSO (green) versus the S&P 500 (blue) from 2018 through Q3 2023.

Please contact us with questions or for assistance implementing this new model into your portfolios.

Editor’s Note: We are not advocating or promoting the use of leveraged financial products to trade financial assets, but rather using them to more thoroughly explain how the CPM Model works.  The examples show that the significant amount of risk that CPM removes from trading the S&P 500 can be incrementally added back into the model by utilizing different types of ETFs.  The risk of loss trading in financial assets can be substantial and different types of securities, including ETFs and leveraged products, involve varying degrees of risk.  Therefore, investors should carefully consider whether such trading is suitable for them in light of their own financial condition.

Information about the various quantitative metrics referred to above can be found on Investopedia.com.