Skip to main content
site map
my account
our facebook page
Latest Posts


Market Timing

Wednesday, January 28 2015

The main question on the minds of our MIPS members is "Is this Six-Year Bull Market Pausing or Topping?"  We don't know that now, but we will soon.  A bull market does not just run out of steam.  Some run for over 10 years, as in the 1990's (until the tech bubble burst).

To turn a bull, at least two things have to happen: (1) there has to be a "catalyst" to kill the bull (degradation of the oil industry, death of the Euro, etc.), and (2) the big guys/fat kats (Goldman Sachs, etc.) have got to make it happen or at least let it happen.  Please understand that these big guys "cause" bottoms and tops when they decide to buy or sell.  And, the big guys will not let the big drop happen until they have liquidated most or all of the holdings that they want to dump. Since these fat kats own about 65% of all shares on the NYSE, dumping their shares can take lots of time (many months), because selling faster would lead to driving prices through the floor.

If you look at daily charts, the current market looks like a total mess (see the chart immediately below). To some people, the last 2 months (pink rectangle) look like the market is about to totally collapse (high volatility, etc.). But in reality, this horrible-looking price action boils down to plus or minus 2.7% around a mean-line at $203.5 on the SPY.  That is certainly NOT enough for a long-term investor to lose any sleep over.

I will get really worried if the market (the SPY) stays in the trading range of $198-$209 for several more months.  Why, because in 2000 and 2007/08, the SPY "topped" for 10 months in a tight trading range (like now) and then fell apart. From my analysis of the volume, this 10-month period is when the fat kats are dumping. They will dump in a tight trading range (plus/minus 5% or less).  When their chore is done, their selling AND buying will dry up. Then, the little guys panic and continue the selling over the next 1-2 years (or until the market is way back down where it was 5 years before, or less).  See the graph immediately below. As you can see, the SPY traded in a tight trading range in 2000 and 2007/08 for exactly 10 months both times, and then collapsed.  As of the end of January 2015, the SPY has been in a tight trading range for 5 months.  If this continues, it could lead to a market crash in July 2015 !!!

Of course, if the SPY breaks out of this tight trading range to the upside in the next few weeks/months, this would continue the nearly perfect 6-year uptrend and make us good money on the upside.

MIPS will be watching the SPY market movements (and the selling volume from the big guys) to help us react quickly to whichever way this market is heading.  Stay tuned !!!

Posted by: Dr. G. Paul Distefano AT 01:02 am   |  Permalink   |  Email
Sunday, January 04 2015

Anyone who has developed and programmed a mathematical model for managing a real-life process (like controlling a nuclear power plant, controlling a jet aircraft, sending a man to the moon in a spaceship, or forecasting changes in the direction of the stock market), knows the criteria for a good model.  

The main conditions for a good model are:
  1) the math has to realistically represent the actual situation that it is controlling/predicting,
  2) it must be written to represent the real situation, and be tested against real data (or close to real data),
  3) the backtesting cannot actually result in "curve-fitting", 
  4) it has to be update-able to work with "new" data, 
  5) the model should have built-in self-learning and self-correcting algorithms, and
  6) the model needs to contain algorithms that stop the main model if it is not working properly and switch
      to others.

Given the above, all good developers frequently forward-test their models against known and unknown changes in the environment (in our case, erratic market behavior). To that end, we are always looking at how our models might work in a new market crash.  On average, investors face a market crash almost every 7 years (the so-called "Seven Year Market Cycle").  This comes from market data over many years that shows that the market continually goes up in cycles of 4-6 years up and 1-2 years down (say an average of 5 years up, then 2 years down).  We should know, as we have faced two almost perfectly devastating 7-year market cycles in this very young century.

And, on this basis and many others, the 6-year bull market we are in is overdue for a big crash.  And yes, we are aware that a bull market can last for 10-12 years as in the 1980's and 1990's, but the 7-year cycle is much more popular than 12-year bull markets. So, that leaves us highly vulnerable this year.

Even if we are not vulnerable to a big drop in 2015, as developers of the MIPS models we want to make sure that MIPS is ready if and when a big drop does happen.  It is better for the MIPS models to fail to identify a major crash in forward-testing than in real life.  At least we would have a chance to "fix it" before it happens, rather than after.

So, we dug back in time and used some real data from previous market crashes to see how MIPS would perform if the market started down now.  We are pleased to say that the MIPS4 model would have performed nearly PERFECTLY (see below).  [The MIPS3 and MIPS/Nitro models also did well, but their results are not shown herein.]


In the graph below from 2007-6/30/2016, the data through 12/31/14 is real SPY data (in % changes), and
the data from Jan 2, 2015 to about 12/31/2015 is our assumed drop in the S&P 500 (rebounds after).
- you can see that our "test data" included a -43% drop in the S&P 500 in the full year of 2015, and a
  rebound of  +22% over the next 6 months (through to 6/30/2016).


So, how did the MIPS4/MF+ model perform in this assumed (but highly possible) drop.  The graph below makes us prematurely proud (only to be really proud when it does what it is designed to do in the next real market drop).

Performance of MIPS4/MF+ in the assumed market crash of 2015.
In 2015-6/30/16, MIPS4 would have been up about +55% (made money on the dip and on the rebound).

Posted by: Dr. G. Paul Distefano AT 12:17 am   |  Permalink   |  Email

MIPS Timing Systems
P.O. Box 925214
Houston, TX  77292

An affordable and efficient stock market timing tool. Contact MIPS
281-251-MIPS (6477)