Sunday, March 15, 2020

2020 bounce = 1987, or 1929?

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 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: Sell equities*
  • Trend Model signal: Bearish*
  • Trading model: Bullish*
* 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.

The long awaited bounce?
Is this the long await bounce for the stock market? The SPX traced out a strong bullish reaction to Thursday's ugly action while exhibiting positive RSI divergence. If this is the long awaited bounce, the most logical resistance level is the 50% retracement, which is also the site of the 200 day moving average.

This retreat into bear market territory, as defined by a -20% decline, was the fastest in market history, even compared to the Crashes of 1987 and 1929. Bear in mind that if this was the capitulation low, the market bounced at the initial low in 1929, and in 1987. Each had very different results. Both were market crashes, one went on to mark the start of the Great Depression, the other was just a blip in a continuing economic expansion.

The full post can be found here.

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