Global Sentiment and Flight to Quality: Timing VT and GLD Trades
The investment landscape is more interconnected than ever in our highly globalised world. In periods of high volatility, correlations between global markets strengthen while sentiment oscillates between Risk-On and Risk-Off. The Macrowonk Global Sentiment Indicator is the best gauge of this phenomenon. As sentiment increases, money flows into ‘riskier’ asset classes while declining sentiment sees a ‘flight to quality’ towards assets like bonds and gold.
In this case study we’re looking at a portfolio of just two ETFs; Vanguard’s Total World Stock ETF (VT) and the SPDR Gold Shares ETF (GLD). Rules are straightforward: Enter VT when the Global Sentiment Indicator is greater than 0, close the VT position and enter GLD when Global Sentiment is less than 0. Again, there’s a lot of number crunching that goes into the creation of the Global Sentiment Indicator. Our focus as always is condensing this complexity and noise into a simple signal to support informed decision making.
There are no money management rules at play. Positions are sized according to the maximum available equity (anti-martingale) with commissions at 2.5 basis points per trade. All performance metrics are based on closed trades, which can potentially underestimate mark-to-market drawdown.
Our benchmark comparison here is the same starting balance split equally between the same two ETFs. All positions are rebalanced monthly to realise P/L and the same position sizing and commission rules apply.
Key risk-adjusted metrics below:
|Benchmark||Macrowonk Global Sentiment|
|Worst Case Drawdown:||17.24%||5.77%|
Using the Global Sentiment Indicator produces significantly better results (see table above for full stats). The key takeaway here is that risk adjusted returns are expressed by a profit factor > 7 compared to the benchmark profit factor of 1.24. Knowing how to invest with the underlying economic current can reduce your exposure to adverse market moves. Our indicators give you advance warning of changing conditions, allowing you to tilt your portfolio accordingly.
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