Secrets of stable returns in a chaotic bear market

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 the 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 Asset Allocation Model is an asset allocation model that 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. The performance and full details of a model portfolio based on the out-of-sample signals of the Trend Model can bsoe found here.

My inner trader uses a trading model, which is a blend of price momentum (is the Trend Model becoming more bullish, or bearish?) and overbought/oversold extremes (don't buy if the trend is overbought, and vice versa). Subscribers receive real-time alerts of model changes, and a hypothetical trading record of the email alerts is updated weekly here. The hypothetical trading record of the trading model of the real-time alerts that began in March 2016 is shown below.

The latest signals of each model are as follows:

• Ultimate market timing model: Buy equities*
• Trend Model signal: Bearish*
• Trading model: Neutral*

* 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 mid-week observations at @humblestudent. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of those email alerts is shown here.

Subscribers can access the latest signal in real-time here.

A bear market

The signs are becoming clear. This is an equity bear market. Global central banks are engaged in a coordinated round of tightening. Fed Governor Lael Brainard put on the table the prospect of quantitative tightening, or a reduction of the Fed balance sheet, in a speech last week. This was confirmed by the release of the March FOMC minutes which revealed the Fed is targeting $95 billion in balance sheet reduction per month. Cue the fears about the effects of falling liquidity on stock prices.

In addition, the hopes that the bulls had for a momentum-driven rally fizzled in late March. The S&P 500, S&P 400, and S&P 600 all stalled at resistance and have all since pulled back.

Here are some ways that traders and investors can find stable and risk-controlled returns in a chaotic bear market.

The full post can be found here.