Special Report: 2021 Correction Protection Model (CPM) Update

The Correction Protection Model (CPM): 2021 Update

Introduction

CPM was designed to be a defensive model that:

• • protects investor assets during market declines,
  • eliminates large drawdowns,
  • reduces volatility and risk by moving assets out of the market during adverse conditions, and
  • also takes advantage of the market’s historical upward bias.

More About CPM:

• The signals are binary: the model is either Risk On (in the market) or Risk Off (out of the market).
• There are no short positions and no hedging strategies.
• Historically, CPM averages about 5 round-turn signals per year.

The significance and strength of CPM is its ability to reduce the systematic risk of investing in the stock market.  This can be seen in the model’s low beta, significantly lower drawdowns, and lower standard deviation (risk) when trading the S&P 500.  But, in financial markets, less risk typically means less reward so, while significantly reducing risk, CPM also tamps down performance.  However, the model was built for investors that are willing to sacrifice some performance for significantly less risk.

The tables and chart below display quantitative performance data and hypothetical returns from 2011 through 2021, when applying the CPM signals to the SPDR S&P 500 ETF Trust (SPY, which tracks the S&P 500).

CPM using SPY

CPM was developed for older or more risk-averse investors who want or need to participate in the stock market but are uncomfortable with the risk.  The tables and chart below are based on using the SPDR S&P 500 ETF Trust (SPY) as the trading vehicle.  On average since 2011, trading CPM signals with SPY have underperformed the S&P 500 (SPX) by 3.4% per year, but with less than half the maximum drawdown and a fraction of the risk according to standard deviation and beta.

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CPM using SSO

To help investors better understand how CPM reduces risk, the following tables and chart display quantitative performance data and hypothetical returns, also from 2011 through 2021, 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. 

Editor’s Note: We are not advocating the use of leveraged financial products to trade financial assets, but rather using examples to disclose and better  explain how the CPM Model works.  The risk of loss trading in financial assets can be substantial and different types of investment vehicles, including ETFs and leveraged products, involve varying degrees of risk.  Therefore, you should carefully consider whether such trading is suitable for you in light of your financial condition.

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

Disclosure/Disclaimer: The information above is provided for information purposes only and is not intended to be a solicitation to buy or sell securities. Past performance as indicated from historical back-testing may not be typical of future performance. No inferences may be made and no guarantees of profitability are being stated by Asbury Research LLC.  The risk of loss trading in financial assets can be substantial, and different types of investment vehicles, including ETFs, involve varying degrees of risk.  Therefore, you should carefully consider whether such trading is suitable for you in light of your financial condition.  All investment models have inherent limitations in that they look back over previous data but can’t see into the future.  Hypothetical past performance does not guarantee future results.