I have found models are a key component of managing money in the markets. Not only do they keep it very mechanical and easily manageable, they help to keep a human’s natural biases out of the financial decision-making process. For client portfolios, I have created a couple of models that attempt to strike a balance between risk/losses and trading activity. The shorter term your timeframe the more trading activity will occur in the account (more signals). Whereas longer term timeframes help reduce the trading activity, but opens an account up to much greater drawdowns (signals are fewer and slower). And then there is the fact that no model is always correct which brings in a whole new set of problems but those are worthy of their own separate blog post and won’t be addressed herein.
My two longer term client models (one based upon weekly price movement, the other on monthly) are both within a cat’s whisker of providing a US stock market sell signal. Europe, Asia, the emerging and frontier markets all triggered sells much earlier in the year so the fact the US has held up this long is a testament to its strength. It appears as if we are finally looking at the potential for substantially bigger move to the downside.
My weekly proprietary model, Sightline, triggered last week but is waiting for a final confirmation before it becomes an official sell signal (a key rule within the model). With respect to the monthly model, I thought it worth posting the chart for review.
All 4 components of the monthly model, RSI momentum crossover and negative divergence, price moving average crossover, PMO and MACD moving average crossover have all occurred, the confirmation needed to reduce exposure to US stocks. While the trigger for each component is currently in place for a sell signal, one of model’s rules require that they all have triggered at the end of the month (intra month does not count). Since we have a few more days left in November (and a chance for the expected year-end rally to reverse and put this model on hold) we need to provide both models a bit more time to activate an “official” US stock sell signal.