yk strategy

The YK Strategy isn't a traditional market timing strategy in the sense that it isn't programmed with traditional rules; rather, the strategy is designed to "learn" from the markets. Each day the strategy scraps all of its assumptions and reanalyzes the market based on the newest data available. In timer parlance this is called "self-tuning" and in theory, the strategy should adapt to not just changing market conditions, but changes in the fundamental way the markets work.

The strategy takes short-term positions in the S&P 500 and Russell 2000 (small-caps) at the market's close. The strategy is active, changing positions daily, and is currently our most aggressive strategy.

The strategy was originally designed to trade leveraged mutual funds from Rydex or ProFunds, but could be applied to other assets as well such as ETFs, futures, or other mutual funds (transaction costs permitting).

Important notes about YK: first, as we've discussed in detail on the MarketSci Blog, despite doing very well in real-time in many different market types, YK fell down badly when the market made an extreme divergence from history in October of 2008. The model had no mechanism to protect against a market moving so far beyond historical norms. We developed a simple filter (discussed in A New Approach to Coping with Abnormal Markets), not to guide entries or exits, but to gauge when the market has moved beyond normal ranges, because a strategy based on norms might not be suited for that very abnormal moment. The program was very successful in the extremely bearish months that followed. Click to compare the independently-audited results of both the original YK(A) and revised YK(B).

Second, note that our audited Timer Trac results assume that we always allocated 55% and 45% respectively to the S&P 500 and Russell 2000 legs of the strategy. In actuality, we shift our allocation based on the volatility of each index; however, this 55/45 split is a very close approximation.

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