Mosaic Linearity – Week 5

This is a graphic comparison of SPY versus Mosaic versus LT6 (a Mosaic model skewed to the upside). LT6 has a built-in equity curve signal line (MOM21) that determines when to increase or decrease net position size.  Keep in mind that these are NOT rotation models.  The components of LT6 and Mosaic are the same for the 5 year period shown.  Engineering this balance is the tricky part of the modelling as the linearity of the signal line determines the ultimate risk exposure. The fact that we are able to maintain the same Mosaic of components over an extended period of time should encourage confidence in the model's reliability and our focus then becomes one of developing strategies to generate the greatest return from the linear equity line.Following up on last week's SDS/SSO comments the matrix below displays the performance metrics of LT6, the base Mosaic model, SPY and the SPY ultras, which clearly do not yield a flat equity curve. The goal of Mosaic is to construct and maintain a flat equity line to trade from, but an upward sloping equity curve (such as LT6) provides a different set of opportunities…to be explored in future posts. The STDEV (standard deviation) and RSQ (R-Squared) metrics are the most critical parameters for purposes on engineering the Mosaic models, as an RSQ of  zero yields an essentially flat line.