Saturday, June 25, 2016

Brexit: LTCM or Lehman?

Preface: Explaining our market timing models
We maintain several market timing models, each with differing time horizons. The "Ultimate Market Timing Model" is a long-term market timing model based on research outlined in our post Building the ultimate market timing model. This model tends to generate only a handful of signals each decade.

The Trend Model is an asset allocation model which applies trend following principles based on the inputs of global stock and commodity price. This model has a shorter time horizon and tends to turn over about 4-6 times a year. In essence, it seeks to answer the question, "Is the trend in the global economy expansion (bullish) or contraction (bearish)?"

My inner trader uses the trading component of the Trend Model to look for changes in direction of the main Trend Model signal. A bullish Trend Model signal that gets less bullish is a trading "sell" signal. Conversely, a bearish Trend Model signal that gets less bullish is a trading "buy" signal. The history of actual out-of-sample (not backtested) signals of the trading model are shown by the arrows in the chart below. Past trading of the trading model has shown turnover rates of about 200% per month.

The latest signals of each model are as follows:
  • Ultimate market timing model: Buy equities*
  • Trend Model signal: Neutral*
  • Trading model: Bearish*
The performance chart and model readings have been delayed by a week out of respect to our paying subscribers.

Update schedule: I generally update model readings on my site on weekends and tweet any changes during the week at @humblestudent. Subscribers will also receive email notices of any changes in my trading portfolio.

What now?
In the wake of the Brexit referendum surprise, I sensed that a lot of investment professionals were in shock and didn't know how to react to the market turmoil. I have found that having the proper analytical framework focuses the mind. I found one tweet by the FT`s Gillian Tett particularly useful for investors.

That's the critical question: Does Brexit represent a Lehman moment or LTCM moment for investors? In the former case, investors should de-risk portfolios and sell equities down to a minimum weighting in order to avoid severe losses. In the latter, investors have been handed a golden opportunity to buy stocks, Blink and the correction will be gone.

For traders, it's entirely a different story, which I will also address in this post.

The full post can be found at our new site here.

Website notice
If you found the above post to be of interest, come over to the new site and check out our track record. We have something for traders and investors alike:

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