Keller, Wouter J. and Keuning, Jan Willem, Breadth Momentum and the Canary Universe: Defensive Asset Allocation (DAA) (July 12, 2018, SSRN) is a follow up to their Vigilant Asset Allocation paper that we discussed previously. A summary of their paper with some drawbacks of their approach can be found here.
The paper used the Emerging Market ETF – EEM – to be one of the canary assets. While EM equities are indeed risky, a risk-off in them doesn’t really mean a risk-off in DM equities. So, we ran a parallel backtest with SPHB (High-Beta ETF) instead of EEM.
As with VAA, the out-of-sample performance of the strategy is abysmal. Using SPHB makes it marginally better but nothing great to write home about.
To reiterate, practically, investors are better off managing drawdowns through asset allocation (hence giving up the upside during booms) or through using simple trend-following to avoid steep drawdowns (hence incurring higher transaction costs due to whipsaws) than trying to construct a Rube Goldberg machine.
Code and charts are on github.