Sunday, October 13, 2019

A market beating Trend Model, and what it's saying now

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 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 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 those email alerts are 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 the those email alerts is shown here.

A Trend Model update
Let me start by wishing all of my Canadian friends a Happy Thanksgiving weekend.

A post last week (see A 5+ year report card of our asset allocation Trend Model) brought forth a number of questions, and some new subscribers. To briefly recap that post, I have been publishing the signals of my Trend Model since 2013. A simulated portfolio which varied the equity allocation based on those out-of-sample signals significantly beat a passive 60/40 benchmark, and on a consistent basis. In particular, the simulated portfolio was able to cushion some of the drawdowns during bearish equity episodes. The study was a proof of concept that the Trend Model can add value to an asset allocation process.

This week, we answer the following questions:
  • What is the basis for the Trend Model
  • What is it saying now?
  • How does it react to news like the US-China preliminary agreement?
The full post can be found here.

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