Sunday, March 21, 2021

A new trading framework

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. 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 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: Bullish*
  • 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 tale of two markets
It was the best of times. It was the worst of times. This doesn't happen very often, but the character of the stock market has made an abrupt turn recently, as evidenced by the performance disparity between the S&P 500 and the NASDAQ 100. 

The weekly chart of the S&P 500 shows that it survived a brief corrective scare, but the index went on to fresh highs. By contrast, the growth-heavy NASDAQ 100 is acting like a sick puppy. NDX violated a rising trend line and last week's rally attempt was rejected at the 50 dma level.

The violent change in market character, or leadership, has created a two-tiered market of extreme winners and losers. Traders need to be aware of this shift and adjust their analytical framework accordingly.

The full post can be found here.

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