The stock market brought some nice gains this year, but how will it perform in the future? Nobody has a crystal ball, but what about a simple rules-based strategy which only consumes one minute of your time at the end of each month? Let´s dive into the Gebert indicator!
The Gebert Indicator – A Systematic Investment Strategy for the DAX
The physicist Thomas Gebert investigated several investment rules for the DAX at the beginning of the 90s – not only technical analysis tools, but also seasonal impacts and macro data like interest rates or currencies. After lots of research he came up with his own scoring system which was able to outperform the DAX on a large scale and thus became quite famous in the German speaking area. The strategy consists of 4 components with each contributing 1 or 0 points to the overall scoring:
- inflation rate of the Eurozone (HCPI): if lower than 12 months ago, then +1 point, otherwise 0 points
- interest rate policy of ECB: if last change was a reduction, then +1 point, otherwise 0 points
- euro/dollar rate: if lower than 12 months ago, then +1 point, otherwise 0 points
- seasonal phase: from November to April +1 point, rest of the year 0 points
The indicator can take values from 0 to 4. Here are the simple rules for the DAX:
- A buy signal is generated, when the Gebert indicator has a value of 3 or 4 points
- Standing at 2 points, we keep the long position and do nothing
- If the Gebert indicator falls to 1 or 0 points, we exit the stock market (and invest in short-term bonds etc.)
Proof of Concept Backtest
Now let us do a simple backtest. In order to keep it simple, I took the DAX performance index data on a monthly basis. Of course, this can`t be traded, but as an approximation for such a slow-frequency strategy including dividends, this should be good enough. I used an initial capital of 100k and reinvested profits/losses to make it comparable to the benchmark. Here are the results since 1992:
In the middle subchart, you can see all components of the Gebert indicator as well as the combined scoring (black). The subchart at the bottom shows the percentage performance of the strategy (red) vs. the buy&hold performance of the DAX (blue). The strategy`s performance is double as high as the buy&hold approach.
As with many investment strategies, investors need a strong discipline to follow the rules in order to beat the market. The following chart shows why that can be very hard from time to time: Between 2005 and 2007 the strategy has lagged the overall market significantly and I assume many investors would have thrown in the towel – and would have missed the next long entry near the bottom 2008/2009.
If you want to backtest this strategy on other markets or add and modify rules, please take a look at the Equilla source code below. If you have any suggestions or questions, please contact me 🙂
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