V.10:10 (432-435): Timing The Stock Market With A Discount/T-Bill Spread by Nelson Freeburg and Charles Skelley

V.10:10 (432-435): Timing The Stock Market With A Discount/T-Bill Spread by Nelson Freeburg and Charles Skelley
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Timing The Stock Market With A Discount/T-Bill Spread by Nelson Freeburg and Charles Skelley

Building on a February 1990 article by Jay Kaeppel, "Formula Research" report editor Nelson Freeburg and engineer/investor Charles Skelley introduce a stock market timing model using the Fed discount rate and the 13-week Treasury bill rate spread.

Tracking two well-known interest rates the Federal Reserve discount rate and the 13-week Treasury bill rate allows us to build a powerful stock market timing model, one that backtesting over the past 40 years shows could have consistency outperformed the Standard & Poor's 500. Properly manipulated, the spread between these two rates can give buy and sell signals with 78% historical accuracy, produce only small losses when wrong and yield gains totaling 513 S&P points since 1953, far more than the rise in that index throughout its history.

In the February 1990 STOCKS & COMMODITIES, Jay Kaeppel introduced a trading method keyed to the Fed discount rate and the 13-week T-bill rate. More than 90% of the buy signals were accurate. In 35 years of testingfrom 1953 to 1988total long-side profit was 312 S&P points, almost 40% more than the corresponding gain in the market. A $10,000 initial investment would have grown to $375,000. The appreciation works out to a compound annual return of 10.6% compared with a buy and hold gain of about 7% (excluding dividends and interest).

Kaeppel's procedure was as follows. Each week, take the Fed discount rate and subtract the yield on the three-month U.S. Treasury bill. (The data can be found in The Wall Street Journal , Investor's Business Daily or Barron's.)




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