Today we will look at another trend following strategy developed by a famous fund manager long ago. It’s called Fabian Timing Model and was developed by Richard Fabian in the 1960s.
The Fabian timing model is a simple quantitative long-term trend following strategy for the stock market. It is based on an intermarket signal between the S&P 500, The Dow Jones Industrial Average, and the utilities sector.
In this article, we look at what a market timing model is, the Fabian timing model strategy, the trading rules, and how the strategy has performed.
What is a Market timing model?
Market timing is the attempt to anticipate the future movement of an asset. Trying to predict the future is already very hard to leave to subjective factors, which you will never be sure what you are supposed to do at any given moment. This is why market timing models are built quantitatively so that trading becomes mechanical rather than discretionary.
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The decisions of when to buy and sell are based on previously specified trading rules. What you think may happen at any given time shouldn’t be considered or included in the model.
The most critical aspect of trading a timing model is following the system and your strategy. You can devise the most outstanding portfolio in the history of investing, but it will do you no good unless you commit your money to it and follow the signals. Most people will sooner or later abandon the system or override it.
Also, it’s very important to give the model enough time to work because anything can happen in the short term. In the long term, if you have chosen a strategy carefully and followed the trading rules, you should be rewarded accordingly.
What is the Fabian Market Timing Model?
The Fabian market timing model is a trend-following strategy for S&P 500 based on its 39-week moving average. The Dow Jones Industrial Average confirms the signals and the utilities sector respective 39-week moving averages. This is key in reducing, but not eliminating, false signals.
The model was created by Richard Fabian, a very successful writer, money manager, author, and speaker. He explains this strategy in his book The mutual fund wealth builder.
Although he argued that no one could come up with consistently good market timing predictions on their own, nor was he smart enough to assess all available information correctly, he strongly recommended adhering to some mechanical system. Also, he did not say that his model was perfect but that by trying to perfect any timing model, we would have no strategy.
Fabian Market Timing Model trading rules
The buy and sell rules for the Fabian market timing model are simple, and they are executed at the end of each week:
- Buy the SPY if all three indices are greater than their respective 39-week moving averages.
- Sell SPY if two or more of the indices are trading under their respective 39-week moving average
(The buy and sell rules for the Fabian timing model are simple and executed at the end of each week. We have backtested the original trading rules, and the results are in the article’s next section. If you want to know the specific trading rules, you must (at least) become a Bronze member).
Fabian Market Timing Model Python Backtest
We backtested the strategy with python since 2000 using the SPY, ^DJT, and XLU (SPY and XLU are ETF)s. The data is not adjusted for dividends or splits. Here is the equity curve:
The equity curve looks pretty good! Here are the trading statistics and performance metrics:
- CAGR is 6.95% (buy and hold 4.90%)
- The standard deviation is 9.87 (17.96)
- Time spent in the market is 56.20%
- Risk-adjusted return is 12.34% (CAGR divided by time spent in the market)
- Total trades were 31
- Maximum weekly drawdown is 16.38% (56.52%)
The CAGR seems high, but we should consider that we started the backtest right after the peak of the dot.com bubble. The historical results of this timing model are much closer to the buy-and-hold returns.
Nevertheless, the volatility is low, and so is the maximum drawdown. This is, by far, the best selling point of the strategy.
Fabian Model conclusion
As we saw, the Fabian model is a simple rule-based trading strategy for the S&P (that works). It has performed well, but its lower volatility and drawdown are the strong selling point. Returns should get closer to buy and hold in the long term.
However, if there is one lesson we should take from the Fabian Model, it is that what is essential is not the model but our discipline to stick with it through good and bad times.