Signals from your market regime indicators?

Hi everyone.

I am interested to hear if anyone of you was able to catch this correction with one of your market regime indicators. None of mine have flagged a change. Luckily I am running low net exposure portfolios (ca. 40-70%) during normal markets.

Thanks
whotookmynickname

PS: I personally don’t like the name market “timing” a lot, because often people equate this to “predicting” markets. With my indicators I am “adapting” to changing market regimes by measuring technical, fundamental, economic and sentiment indicators.

Economic indicators are still strong, so no. My market timer is reading 0.88/1 right now. Around 0.4 I begin pulling out.


Same here. Economic indicators still looking good.


Mine are 100% positive.
Unemployment trend
Fed model
SP500 EPS trend
Debt spreads
SP500 value trend

My indicator is still market-long.

Walter


My economic indicators are long too. The economy is fine. This is not an economic correction.

It’s earnings season. 275 companies (55%) of the S&P 500 having reported earnings so far, 80% have beaten EPS targets and 78% have beaten revenue targets.

None of my indicators worked on this one, although they may work yet if there is a second leg down after a fizzled rally.

Psychologically, the absence of volatility has made this correction much more painful than normal. As a result, there has been some overreaction.

And this from Ray Dalio:

[i]What we are seeing is typical late-cycle behavior, though more exaggerated because the durations of investment assets (i.e., their sensitivities to interest rate changes) are greater.

Here’s what happened.

Over the past week or so, we had reports of strong growth and rising wages (good things!), which sent bonds and stocks down (bad for most investors) due to justifiable fears that the Fed will tighten faster than is priced in the credit markets. The surge in growth and wages came because of both the fiscal stimulation and the rekindling of animal spirits, thrusting the economy into late-cycle capacity constraints, which is leading to the expectations of faster Fed tightening. In other words, fiscal stimulation is hitting the gas, which is driving the economy forward into the capacity constraints, which is triggering interest rate increases that are hitting the brakes, first in the markets and later in the economy. This confluence of circumstances will make it difficult for the Fed to get monetary policy exactly right. This is classic late-cycle behavior (when it’s difficult to get monetary policy exactly right, which leads to recessions), though it is more exaggerated because the durations of assets are uniquely long, which means that when interest rates are low, prices of assets are more sensitive to changes in interest rates than when interest rates are high.

To be clear, we are not claiming to be smart about this. In fact, the opposite is true, as this is happening sooner than we expected. Still, these big declines are just minor corrections in the scope of things, there is a lot of cash on the side to buy on the break, and what comes next will be most important.[/i]

I had previously promised some tutorials on charting, and this post seems to be a ‘teachable moment’ for Entry and Exit signals, so here is a tidbit of Charting Basics related to the recent violent selloff and how you could have avoided it:

While the primary focus of P123 is working with fundamentals, investors can add some essential, supplemental charting techniques to identify favorable times to exit and good times to enter. Along with the identification of desirable conditions with regard to individual positions, you can dramatically improve performance while decreasing drawdowns with every equity you buy. I avoid discretionary decisions as much as humanly possible, so I supplement my P123 picks by using charts with a strict, rules-based approach.

First of all, conditions were extremely overextended the week ending January 26 - in fact, the most overextended in the history of the stock market! How can I know and measure this? By reviewing a chart. This chart does not go back to 1925 (the start of the S&P 500) because you would not be able to see the recent peak, but trust me that the recent high of the market coincided with the all-time high in Relative Strength:

RSI(100) shows the 100-day relative strength of the market. As shown in the next chart, 100-day moving average - or preferably the 20-week moving average - is the key to the market, not the 20-day, 50-day or 200-day moving averages. I strongly recommend Weekly charts over noisy Daily charts.

The market used to be a far more slow-moving machine than it is in today’s computer-driven times. Investors used monthly and occasionally weekly charts when I started in the 1970s. The 20, 50, and 200-period averages were originally applied to weekly charts, then borrowed for daily charts as trading became more frequent. Of course, indicators and prices are ‘scalable’ in that an indicator that works on a monthly chart will also work on a five-minute chart. However, the shorter the time segments you observe, the more likely it is you will see a lot of meaningless noise that can lead you astray. With most P123 portfolios rebalanced on a weekly basis, the weekly chart is probably all you ever need to see.

The following chart offers some rules that would have signaled you to exit the market (as I did with my aggressive-equity portfolios) at the beginning of last week (January 29), thereby avoiding all the recent turbulence. A good re-entry point is coming soon, as identified in Rule number 4:

The bottom line from my review of these charts is that in a frenzy over the recent tax cuts, the market went into a near-parabolic pattern during January. After reaching extremely overextended levels the week ending January 26, the recent selloff neutralized that situation, and it will soon be time to make new purchases (per rule #4). With economic conditions still favorable according to many measures (and confirmed by Georg, Walter and Matt’s indicators) and S&P prices above the critical 20-week moving average, the bull market is intact, and a good entry point for new positions will likely be later this week or Monday (after RSI reverses and rises above 30).

While I still check the charts visually each week, perhaps more out of habit than anything else, many of the indicators mentioned above for prime entry and exits can be programmed into P123 algorithms.

/ Chris

Based on that, wouldn’t you have sold out in Dec16, Jun17, twice in Oct17, and earlier in January as well?

Very interesting insight but would be interested to see how/if you implement it on P123 and how it has backtested.

Thank you everyone for sharing your insights.
Christopher, thank you for your post. It would really be interesting to see how this backtests.

No, I didn’t say that weekly closes above the 2-SD range on 20-week Bollinger Bands should trigger a Sell signal. Notice that each time the market closed slightly above the band there was a slight pullback that ensued. Larger breaks above the bands (as occurred three weeks ago) result in large reversals downward. An investor could place a stop on positions that are affected by a development like this in the weekly Bollinger Band indicator. That’s what I did with my stocks when I saw that price had gone way over-extended the week of January 22 and my positions were closed with a profit before things got ugly.

Imagine Bollinger Bands functioning like a hollow, soft-rubber tube. Prices are bouncing around inside it (from bottom to top and back) and we’re seeing a cross-section of that. The farther the tube/band stretches in one direction, the farther will be the rebound in the opposite direction. Therefore, an investor should realize that the optimum entry point is at the bottom of the bands, which in my chart was last shown in November 2016. Notice that was also when the “3-week RSI” and “Percent of stocks above the 50-day moving average (!GT50SPX)” were both in oversold territory (below 30).

Note that condition is occurring now, as I write this (February 9, 2018), so a good entry point will occur as soon as those weekly indicators rise back above the 30-threshold. Because the weekly price of the index is now below the 20-week moving average, it’s possible that prices will continue going downward. Although with RSI already oversold, that’s less likely. Without these kinds of signals to tell an investor when conditions are overbought and oversold and where good entry and exit points occur, the average investor is just playing he ‘buy and hope’ game. That’s not a great investment strategy.

Chris

P.S. - Because prices did not reach the bottom of the Bollinger bands and stretch the tube downward, don’t expect a big sky shot upward. Prices only moved to the middle of the ‘tube,’ around the 20-week moving average. As expensive as stocks are, we may see a fairly sideways market for most of this year (before deep selloff in the late-third or early-fourth quarters, 2018)

Hi everyone,

I guess these indicators you are using are all customized using other economic and market timing indicators, would you tell me how you do this?

Thanks,

I got mine from searching through old posts.

Hi,

I actually wanted to say how do you create the chart in p123?

Thanks

Chris’ charts were created in StockCharts.com, a very powerful charting tool, although sometimes a little confusing.

I make mine by abusing the Custom Series tool.

Walter

The (SPY-Cash) Hi-Lo index will go to cash on Monday.
https://imarketsignals.com/2015/avoiding-stock-market-crashes-with-the-hi-lo-index-of-the-sp500/
https://www.portfolio123.com/mvnforum/viewthread_thread,9071#47989

I thought you used 100-d EMA with this timer?