The model is based on the following three components. An exacta signal occurs if two of the components are triggered within a week of each other and a trifecta signal occurs if all three are triggered:
- VIX term structure is inverted: When the ratio of 1-month VIX (VIX) and 3-month VIX is above one, it indicates a high level of market fear.
- TRIN above 2: When TRIN is over 2, it is an indication of indiscriminate forced selling by either risk managers or margin clerks - and often marks a capitulation bottom.
- Intermediate term overbought/oversold: When the intermediate term OBOS is below 0.5, the stock market is oversold and stretched to the downside.
The chart below shows the past signals of this model in the last three years, with exacta signals in blue and trifecta signals in red.
The US equity market is setting up for a short-term face ripper of a rally very soon.
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