Market Timing Strategies – putting it all together

We offer a number of timing strategies for the SP-500 as described below:

1.Long-term investment models
These are primarily focused on funds-grade long-term investing models such as the Recession Forecasting Ensemble (RFE) and the Composite Market Health Index (CMHI). These are high confidence, infrequent traders. They attempt to capture as much upside of the market (SP-500) as possible whilst avoiding the bear markets. The CMHI is focused on purely technical factors whilst the RFE is focused purely on econometric factors. The CMHI is a little more active than the RFE since its focus is bear markets avoidance  whilst the RFE is purely focused on recession avoidance. Consequently the CMHI offers better returns than the RFE but this comes with more activity switching in and out the market. Despite the higher activity, CMHI can still be regarded as a long-term investment strategy since while its trades are punctuated here and there with the odd 3-6 month duration, there are many  multi-year trades in her repertoire.

2.Medium-term trading models
Currently this is performed by the ETF Market Timing Probability Models. These are BULL MARKET long-only strategies, meaning we don’t want to be using them when the RFE is flagging recession. Their main aim is to indicate probabilities of market tops, market bottoms, downtrends and up-trends. These are multi-factor models that use 5-6 different factors to determine these probabilities.  These are much more active than the investment models since they can make 20 trades in a typical bull market that is captured by a single trade in one of the investment models.

3.Seasonal Model
The STM Seasonality Model is a mix between a short-term and medium-term SP-500 trading model . Seasonal models use purely statistical seasonal factors and do not look at all at technical or fundamentals or econometrics. They are the purest form of an actuarial model. They offer a lot of benefits over and above traditional models – the main point being their predictability and simplicity. You know months in advance if you are going to be in or out the market. This gives you time to plan ahead. If you know you are exiting the market in 3 months time and are going into cash for 4 months, you can start planning now for the move, securing the instrument in advance that is going to offer you the best return on your cash while you are out the market. If you are using a fixed term-deposit for you cash you can specify the term period up-front since you know exactly how long you are going to be in cash for. From a simplicity perspective, the models trade right through bear markets and recessions so you don’t have to fret about watching the economy and its fortunes.

The psychological mind-set for following seasonal strategies is very different from those that deploy technical or econometrics to make their determinations. You need trading skills to be able to accept the imperfections  that come with seasonal models (which are essentially blunt instruments), and the many 1-2 month trades that pepper the strategy, but you also need the fortitude of a buy-and hold investor to sit tight in the market for up to 6 months at a stretch no matter what you hear and see about you. But as you can see from our research note these models have very robust  multi-decade performance returns provided you stick with them long enough for the positive expectancy inherent in them to come to the fore.

4.BUY on the DIP Signals
We also have the Great Trough, Zweig ReduxSelling Pressure and Modified DeMark, models that are displayed on live charts on our web site. These quantitative models have one singular purpose and that is to identify favorable times to be placing funds into the market. They attempt to identify “trough reversals” otherwise known as “market bottoms”. These are not trading strategies but funds placement strategies. In the main, they have BUY signals but no SELL signals. The purpose is to use this in conjunction with the trading models we mention in sections 1, 2 and 3 above to allow you to place additional funds into whatever models you are already following. This is especially useful for those that regularly deploy money into the market  such as private investors putting aside money each month to deploy into the market or funds that have to regularly place money into the market. In this instance, the EXIT signal for the funds will be governed by whichever model you are following.

5.Multi-factor SP500 Signaling Model (SIGS)
Over the past decade we have developed 12 quantitative models for market timing the SP500. SIGS is a multi-factor diffusion that brings these all together into a single composite line. The SIGS dashboard is updated daily with the status of the individual models together with the composite as shown below. With this model, subscribers do not have to monitor the 12 separate models, they can just monitor the composite for an expression of bullishness or bearishness:

6. Important Techniques
It is critical to not use the various timing models in triangulation decision making. This is an easy trap to fall into and will just confuse you. Just because the Seasonal model says we are entering a bearish 3 months does not mean you must go and execute a wholesale liquidation of all your investments. Similarly, just because the Sp-500 A strategy goes into cash doesn’t mean you must liquidate your investments and your current Seasonal models’ long trade.

You must pick your preferred strategies and stick to them in isolation. They must run in parallel with each other even though at times they may be saying different things. If all the models agreed all the time then we would only have one model right? This allows you to have a diversified portfolio approach to your trading/investing endeavors. This is a necessity since no one quantitative model is right all the time.

As an example, we trade all the models, so we have our equity account carved out in one-fifths each for STM, RFE, CMHI and SP-500 A and B. This way we have diversified time-horizons and models. As each model goes long we are placing more funds into the market. As each model goes into cash we are effectively reducing our overall stock market exposure. We never have all our cash in the market, so there is always spare cash to get deployed additionally into the models we are following whenever we see great trough “buy on the dip” signals from Zweig or the Great Trough or the Selling Pressure charts.

We are quite active traders and so when we see the “buy-on the dip” signals we also speculate on aggressive short-term trades as well. For example going long the SP-500 whenever we see a buy-on-the-dip signal and then closing the positions again whenever Selling Pressure  or its “Large Down Days” component rises from 0 to 1. Another one of our favorites is to go long the SP-500 whenever we see a buy-on-the-dip signal and then closing it whenever the Great Trough Detector breadth signal falls below the correction warning threshold. One of my more successful traders just exits whenever she has made 3.2% profit! The point is that these great trough signals stack up the odds so much in your favor you could conjure up any old half-decent exit strategy and are likely to eke out a profit.

7. Exceptions to the rule
On the point of model triangulation there is one exception. The STM seasonal model has very specific, but infrequent  “Death Zones” and “Power Zones”. These periods are so statistically significant that they cannot be ignored and this is the only time we use the STM signal to temper our risk appetite for  BUY signals on any model we see. If we see we are coming up to a “Power Zone” then we will double-up our bet size on the SP-500 A and B. If we see the STM is forecasting a “Death Zone” period then we halve our bet-size on the SP-500 A and B models. If you are going to perform triage or triangulation among models then use the strength of the STM signal (ie a strong statistical significance) to “risk adjust” you trades – but never make a literal interpretation. These are rare periods and when they occur, you can be assured we will be making mention of it in our regular weekly REFLECTIONS market updates.

The above text describes broadly what the various models excel at and are designed for. If you are a regular trader, like some of my staff, you will be constantly seeking out ways to make the models work better for you. Whenever I sit with one of my traders and talk about their strategies I am always intrigued by methods they have discovered to make this or that model work better for them. The longer you use the models and signals, the more familiar with them and their individual nature you will become and you will start spotting undocumented characteristics that warn of early tops and bottoms. My experience with good models has taught me that as much as you can design and document a model, you only see 65% of its useful features within the first year, whilst the remaining 35% reveal themselves to you through regular application thereafter.

About RecessionALERT

Dwaine has a Bachelor of Science (BSc Hons) university degree majoring in computer science, math & statistics and is a full-time trader and investor. His passion for numbers and keen research & analytic ability has helped grow RecessionALERT into a company used by hundreds of hedge funds, brokerage firms and financial advisers around the world.


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