The CSI Ratio is most valuable as a predictor of market confidence and short-term performance. As the real-time and lagging CSI Ratios rise and fall, their relationship to each other – as well as their positive and negative distance from 0 - works to define which of four 'quadrants' the index is currently in.
The chart below illustrates this relationship as well as the index's real-time and historic 'quadrant' dating back to January 1, 2015. (Leverage 'zoom' interface to look at any period.) The chart also presents an overlay of the S&P 500 value dating back over the same period – useful in assessing the CSI Ratio's accuracy as a market predictor.
Quadrant Definitions: 1) Expansion –
Green, 2) Consolidation –
Yellow, 3) Contraction –
Red, 4) Reflation -
Blue
KEY TAKEAWAY:
Avoiding Quadrant 3 Creates % Better Returns
Since January 1, 2015 the S&P 500 would have returned
% for investors who kept their money in the market at all times.
If those same investors had simply pulled their money out of the market and kept it on the sidelines during all times when CSI indicated the market was in Q3, their returns, over the same period, would have been
%.
KEY TAKEAWAY:
Maximizing Risk Adjusted Returns
Analyzing the historical Sharpe Ratio of each distinct CSI quadrant shows that an actively managed portfolio can, indeed, outperform a passively managed S&P500 index fund on a risk adjusted basis.
Specifically:
- Only investing in Quadrant 1 and 4 significantly beats the market (S&P 500) on a risk adjusted basis.
- Moving to cash during Quadrant 3 eliminates periods in the market of negative Sharpe Ratios and significant market turbulence.
KEY TAKEAWAY
Downside Risk: A Deeper Dive
One distinct advantage of following the CSI Ratio is the ability to predict and hedge downside risk.
A historical analysis indicates the the significant vartiation in percentage likelyhood of a 4% (or greater) dip in the S&P 500 within the next seven day period.
Specifically:
- When in quadrant 1 (Expansion), the S&P 500 is ~50% LESS LIKELY to experience a 4% or greater sell off than across all quadrants.
- When in quadrant 2 (Consolidation), the S&P 500 is ~12% LESS LIKELY to experience a 4% or greater sell off than across all quadrants.
- When in quadrant 3 (Contraction), the S&P 500 is ~100% MORE LIKELY to experience a 4% or greater sell off than across all quadrants.
- When in quadrant 4 (Reflation), the S&P 500 is ~50% MORE LIKELY to experience a 4% or greater sell off than across all quadrants.
