Best of the Week
Most Popular
1. US Housing Market House Prices Bull Market Trend Current State - Nadeem_Walayat
2.Gold and Silver End of Week Technical, CoT and Fundamental Status - Gary_Tanashian
3.Stock Market Dow Trend Forecast - April Update - Nadeem_Walayat
4.When Will the Stock Market’s Rally Stop? - Troy_Bombardia
5.Russia and China Intend to Drain the West of Its Gold - MoneyMetals
6.BAIDU (BIDU) - Top 10 Artificial Intelligence Stocks Investing To Profit from AI Mega-trend - Nadeem_Walayat
7.Stop Feeding the Chinese Empire - ‘Belt and Road’ Trojan Horse - Richard_Mills
8.Stock Market US China Trade War Panic! Trend Forecast May 2019 Update - Nadeem_Walayat
9.US China Trade Impasse Threatens US Lithium, Rare Earth Imports - Richard_Mills
10.How to Invest in AI Stocks to Profit from the Machine Intelligence Mega-trend - Nadeem_Walayat
Last 7 days
Facebook's Libra Crypto currency vs Bitcoin: Five Key Differences - 19th June 19
Fed May Trigger Wild Swing In Stock Index and Precious Metals - 19th June 19
How Long Do Land Rover Discovery Sport Brake Pads Last? - 19th June 19
Gold Golden 'Moment of Truth' Is Upon Us: $1,400-Plus or Not? - 18th June 19
Exceptional Times for Gold Warrant Special Attention - 18th June 19
The Stock Market Has Gone Nowhere and Volume is Low. What’s Next - 18th June 19
Silver Long-Term Trend Analysis - 18th June 19
IBM - Watson Deep Learning - AI Stocks Investing - Video - 18th June 19
Investors are Confident, Bullish and Buying Stocks, but… - 18th June 19
Gold and Silver Reversals – Impossible Not to Notice - 18th June 19
S&P 500 Stuck at 2,900, Still No Clear Direction - 17th June 19
Is Boris set to be the next Conservation leader? - 17th June 19
Clock’s Ticking on Your Chance to Profit from the Yield Curve Inversion - 17th June 19
Stock Market Rally Faltering? - 17th June 19
Johnson Vs Gove Tory Leadership Contest Grudge Match Betfair Betting - 17th June 19
Nasdaq Stock Index Prediction System Is Telling Us A Very Different Story - 17th June 19
King Dollar Rides Higher Creating Pressures On Foreign Economies - 17th June 19
Land Rover Discovery Sport Tailgate Not Working Problems Fix (70) - 17th June 19
Stock Market Outlook: is the S&P today just like 2007 or 2016? - 17th June 19
US China War - Thucydides Trap and gold - 16th June 19
Gold Stocks Bull Upleg Mounting - 16th June 19
Gold Price Seasonal Trend Analysis - Video - 16th June 19
Fethiye Market Fruit, Veg, Spices and Turkish Delight Tourist Shopping - 16th June 19
US Dollar Gold Trend Analysis - 15th June 19
Gold Stocks “Launch” is in Line With Fundamentals - 15th June 19
The Rise of Silver and Major Economic Decline - 15th June 19
Fire Insurance Claims: What Are the Things a Fire Claim Adjuster Does? - 15th June 19
How To Find A Trustworthy Casino? - 15th June 19
Boris Johnson Vs Michael Gove Tory Leadership Grudge Match - Video - 14th June 19
Gold and Silver, Precious Metals: T-Minus 3 Seconds To Liftoff! - 14th June 19
Silver Investing Trend Analysis - Video - 14th June 19
The American Dream Is Alive and Well - in China - 14th June 19
Keeping the Online Gaming Industry in Line - 14th June 19
How Acquisitions Affect Global Stocks - 14th June 19
Please Don’t Buy the Dip in Nvidia or Other Chip Stocks - 14th June 19
A Big Thing in Investor Education is Explainer Videos - 14th June 19
IRAN - The Next American War - 13th June 19
Boris Johnson Vs Michael Gove Tory Leadership Grudge Match Contest - 13th June 19
Top Best VPN Services You Can Choose For Your iPhone - 13th June 19
Tory Leadership Contest Betting Markets Forecast - Betfair - 13th June 19
US Stock Market Setting Up A Pennant Formation - 13th June 19
Which Stocks Will Lead The Cannabis Rebound? - 13th June 19
The Privatization of US Indo-Pacific Vision - Project 2049, Armitage, Budget Ploys and Taiwan Nexus - 12th June 19
Gold Price Breaks to the Upside - 12th June 19
Top Publicly Traded Casino Company Stocks for 2019 - 12th June 19
Silver Investing Trend Analysis - 12th June 19
Why Blue-Chip Dividend Stocks Aren’t as Safe as You Think - 12th June 19
Technical Analysis Shows Aug/Sept Stock Market Top Pattern Should Form - 12th June 19
FTSE 100: A Top European Index - 12th June 19
Gold Surprise! - 11th June 19
How Forex Indicators are Getting Even More Attention in the Market? - 11th June 19
Stock Market Storm Clouds on the Horizon - 11th June 19
Is Your Financial Security Based On A Double Aberration? - 11th June 19
What If Stocks Are Wrong About Interest Rate Cuts? - 11th June 19
US House Prices Yield Curve, Debt, QE4EVER! - 11th June 19
Natural Gas Moves Into Basing Zone - 11th June 19
U.S. Dollar Stall is Good for Commodities - 11th June 19
Fed Running Out of Time and Conventional Weapons - 11th June 19
Trade Wars Propelling Stock Markets to New Highs - 11th June 19
Best Travel Bags for Summer Holidays 2019, Back Sling packs, water proof, money belt, tactical - 11th June 19

Market Oracle FREE Newsletter

Gold Price Trend Forecast Summer 2019

Leading Economic Indicators, S&P 500, and 10 Month Moving Average

Stock-Markets / Stocks Bear Market Jun 09, 2009 - 07:04 AM GMT

By: Guy_Lerner

Stock-Markets

Best Financial Markets Analysis ArticleOver the past month I have highlighted the strategy attributed to Mebane Faber. It is a simple but elegant strategy that probably gets more merit for its aversion to risk than its ability to time the exact bottom of a bear market. It is a strategy - a way of executing a plan of when to buy and sell. It is not a "call" or opinion on the market. That stuff I will leave to others.


I have adopted the strategy as a back stop just in case I have got it wrong. You see, I believe that the current rally from early March is a bear market rally and that this isn't the launching pad to a new bull market. So a monthly close over the simple 10 month moving average has become my arbitrary line in the sand to say, "Yes, I got it wrong".

Interestingly, the Economic Cycle Research Institute's Leading Economic Indicator (LEI), which is constructed from numerous fundamental variables, is now above its simple 10 month moving average. The LEI is about 60% correlated with the S&P500. So let's see if the LEI, which is a good barometer of economic activity, can add any value to the Faber model.

In all the models discussed in this article, I will be using monthly data on the S&P500 (or LEI) with a starting date of September, 1970. From this time period to the present day, the S&P500 has gained approximately 850 points. This is our buy and hold bogey. Slippage and commissions are not considered, and I am not considering any interest earned when the strategies are in cash.

The variables that I am assessing are in Table 1 and may require some explanation. The maximum MAE refers to "maximum adverse excursion". MAE is the amount in percentage terms you had to see a trade go against your entry price before the trade was closed out. MAE represents that period of self doubt when you ask yourself if you really have this one right. The bigger the MAE the more self doubt and loss you are likely to have. The other term is the RINA index. The RINA index is a measure of risk constructed from the strategy's points gained, draw down and time in the market. The higher the number the better, and ideally, we want a strategy to gain a lot of points with as little draw down as possible and within as little market exposure as possible. RINA is a measure of trade efficiency.

The Models

The Faber model is to buy the S&P500 on a monthly close over the simple 10 month moving average; the sell strategy is to sell on any monthly close below the simple 10 month moving average.

The second model is to buy the S&P500 when the LEI closes above its simple 10 month moving average; the sell strategy is to sell the S&P500 when the LEI close below its simple 10 month moving average.

The third model is to buy the S&P500 when both the LEI and S&P500 are above their simple 10 month moving average; the sell strategy is to sell the S&P500 when both the LEI and S&P500 are below their simple 10 month moving average.

The fourth model is to buy the S&P500 when both the LEI and S&P500 are above their simple 10 month moving average; the sell strategy is to sell the S&P500 when either the LE or S&P500 close below the simple 10 month moving average.

The fifth model is to buy the S&P500 when both the LEI and S&P500 are above their simple 10 month moving average; the sell strategy is to sell the S&P500 when only the S&P500 closes below its simple 10 month moving average.

Now let's look at Table 1. For the most part, adding the LEI model to the Faber model provides little value. The Faber model still has the most points gained and with the highest RINA index, it is the most efficient strategy. Adding the LEI does seem to improve the winning percentage and therefore, the LEI may prove to be an additional filter for the Faber model. The best exit strategy is the one based upon price - a monthly close by the S&P500 below its 10 month moving average.

Table 1. Strategies

The Faber model provides a simple methodology to participate in the market. Its greatest asset, I believe, is risk aversion and the sell strategy. Referring back to the table, note that draw downs in excess of 40% were seen in the strategies involving LEI as an exit signal. The Faber sell signal, a close by the S&P500 below its simple 10 month moving average, led to draw downs from the 17% to 24% range. Despite the "wonders" or "magic" of the simple 10 month moving average, there are risks to this strategy as noted by the high MAE and modest draw down.

By Guy Lerner

http://thetechnicaltakedotcom.blogspot.com/

Guy M. Lerner, MD is the founder of ARL Advisers, LLC and managing partner of ARL Investment Partners, L.P. Dr. Lerner utilizes a research driven approach to determine those factors which lead to sustainable moves in the markets. He has developed many proprietary tools and trading models in his quest to outperform. Over the past four years, Lerner has shared his innovative approach with the readers of RealMoney.com and TheStreet.com as a featured columnist. He has been a regular guest on the Money Man Radio Show, DEX-TV, routinely published in the some of the most widely-read financial publications and has been a marquee speaker at financial seminars around the world.

© 2009 Copyright Guy Lerner - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Guy Lerner Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Simon
09 Jun 09, 11:54
Stock market indicator

your turning into a great contrary indicator Guy.


Owen B
09 Jun 09, 16:50
10 mo ave arbitrary

my understanding of ecri's index is that much of the information is in the recent data, which should change direction in just ahead of a turning point in actual economic growth. your 10 mo average ignores this critical attribute, or more correctly, the whole point of the leading index, no?


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules