Combining Low Price-to-Book Selection with HMM Market Timing

Summary

The author describes a monthly stock-selection approach that buys the ten lowest price-to-book stocks in the CSI 300 universe, then combines it with a market-timing signal based on a hidden Markov model. The starting idea is a single-factor value strategy, while the timing overlay seeks to avoid unfavorable market conditions and reduce absolute losses. The author also compares the low price-to-book portfolio with a portfolio selecting the highest price-to-book stocks, which reportedly lagged the market index.

The post reports that the combined approach reduced the cited maximum drawdown from about 38% to about 13% while retaining a rising equity curve. It acknowledges that timing can lag and may miss some gains, with slower performance during a choppy period. These are the author's backtest observations; the excerpt gives limited detail on data handling, transaction costs, benchmark construction, or validation, so the results should not be treated as proof of robustness.

Key ideas

• The stock-selection rule buys the ten lowest price-to-book stocks in the CSI 300 each month.
• The author combines the value screen with HMM-based market regime timing.
• The reported timing overlay reduced the strategy's maximum drawdown while preserving an upward equity curve.
• A portfolio selecting high price-to-book stocks reportedly underperformed the market index.
• The post notes that timing may lag and miss gains, and gives limited detail for assessing backtest robustness.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.