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Market Timing

Monday, 07 September 2015

Many MIPS members are asking us if we think that this market in 2015 is headed for "A Crash or A Correction".  My answer, of course, is that nobody knows for sure.

From an economic viewpoint, things look "bleak".  The US economy is not in good shape (barely growing at all); the Fed is getting ready to mess things up again; China is in deep trouble as its growth rate is slowing dramatically and its stock market is about to collapse; Japan is stagnant; Greece is still waffling; etc.

From the view of technical analysis, things are just as bad!  Different charts show different outcomes (more below).  And, even if all of the charts in the world agreed today, that DOES NOT mean that they can predict the direction of the market next week or longer.

What this equates to is that the only hope we have to determine the intermediate-term direction of the market is a good mechanical, mathematical timing model that can interpret the near-term directional changes in market trends as they develop (not daily, and not for 6 months from now, but more like the weekly/monthly trend). And, of course, that is what the MIPS models do, and do well.

Back to technical analysis of the market price movements and charts... Of course, technical analysis would not still be around if it did not as least show us the "probable" moves of the market and when certain directions are highly possible.  However, many times there are contradictory views, and that is where I think we are now.  See a brief explanation of this below.



The Case For a Market Crash
Without going through the details, many chartists think that the market is in a "Topping Pattern", where the big guys (institutional investors) are dumping heavily to prepare for a big market crash (one that they are basically causing). That happened both in 2000 and 2008 (and probably preceding all market crashes). 

The chart below is what is driving this belief of most chartists today.  See the graph immediately below. Does the market behavior today look very close (i.e., almost identical) to the markets in 2000 and 2008, when the fat kats took away 40-55% of our hard-earned money in two big crashes? 
If so, why not just go to cash now and wait out the drop?  Read on...





The Case for a Market Correction
We do not have to simply bet on this "big drop" now, and possibly be wrong and lose big $bucks$.  It is possible that the markets now may NOT be heading toward a "Crash" (like in 2000 and 2009), but merely to a "Correction" (like in 2011). The "chartist" evidence for a Correction below is almost as compelling as the evidence for a Crash, as above

The Market in 2015



The Market in 2011


Compare the last two graphs above (2015 vs 2011).  Do they look similar (or almost dead on)?  Did the market in 2011 lead to a full blown market "Crash" as it did in 2000 and 2008?  Read on...


The Market After 2011
Sorry, the drop in 2011 did not lead to a 40-50% "Crash", as you can see below in 2011-early 2012. The 2011 market suffered through a Correction and recovered to new highs over the next 3 years, before "flattening out" again in 2015.  See graph immediately below.




So, you see that trying to predict the market behavior beyond the scope of what you can see now is very dangerous. It's better to wait for MIPS to "drive us" in the right direction.  After each "topping" process the market drops, and then seems to waffle for a relatively short while (like weeks) before it "breaks", and heads back up or continues down. This is a critical "trend change", and that is where MIPS shines (and what it is developed to do). 


MIPS in 2008
it is easy for a market developer (like me) to "claim" that their model will do well in any type of market (like in a big bear market), but our MIPS3 model was "live" in 2008 and "tracked" by TimerTrac.com And, remember, MIPS3 is also the "core" of all of our newer models, like MIPS4 and MIPS/Nitro

So, see the graph below for how MIPS3 did in 2008... 
MIPS +90%  SPY -40%.

 
(The red dots are trades.)

Posted by: Dr. G. Paul Distefano AT 08:53 pm   |  Permalink   |  Email
Sunday, 06 September 2015

How has MIPS performed YTD in 2015 ?

2015 has been one of the toughest markets for timing models, mainly because of its volatility. It does not matter to mathematical models why the market is volatile (the Fed, Greece, China, etc.).

It is difficult for timing models to make money when the indices stay flat (plus or minus 2.5% around mean line), but change direction every 3-6 days (flat market in a very tight trading range).  Most models will get whipsawed if they try to trade in a market like this (e.g., trying to trade every time the market "changes direction"). 

In the graph below, it can be seen that the 2015 market (aka the SPY) changed direction 28 times before it broke the flat trading pattern to the downside (starting on 8/19/15).  That is a directional change (short-term trend change) every 4-6 days.  Most timing models that tried to trade these "swings" got cremated.  Through the end of July 2015, the MIPS models traded only 3-4 times, and was slightly ahead of its index (the SPY) at that time.  And, all MIPS models issued a CASH signal on 8/18/15, the day that the "big drop" started !


 

MIPS in August 2015

ONE BAD DAY
So far, so good.  MIPS issued a Cash signal on 8/18/15.  On that day, the SPY closed at 210.0 and it opened the next morning (8/19/15) at 209.1.   By issuing a Cash signal on 8/18/15, MIPS avoided a lot of "damage" until 8/21/15 came along.  On 8/20/15, the SPY closed at 204.0 while MIPS was still in Cash, so up until that time we had avoided a drop of about 2.4%.

But then, starting on 8/21/15, all hell broke loose.  In two trading days (Friday and Monday), the market experienced extreme volatility and dropped dramatically.  On Monday of 8/24/15, the SPY hit an intraday low of 182.4, a drop of  10.6% in two trading days  from the 8/20/15 close.  That extremely large two-day drop resulted mainly from the one-day drop of 15.2 points in the SPY from the close on 8/21/15 (Friday) to the intraday low on 8/24/15 (Monday).  This is roughly equivalent to about 150 points in the S&P 500 Index, and a near 1200 point drop in the Dow). This day was one of the largest one-day drops in the history of the US stock markets.  Wow, that really was ONE BAD DAY !!!     

MIPS issued a short signal on 8/21/15, which of course was executed on the open of 8/24/15 at 187.5.  This was near the low and when the SPY was ready to "rebound" from the dramatic drop.  After MIPS issued a cash signal on 8/27/15 (three trading days later), this one trade had lost about 6%.  In effect, we "shorted" very near the bottom - ONE BAD TRADE !!!

For a model like MIPS4 that compounds with a CAGR of approximately 25-30%, this is like a "blip", so don't worry (see the MIPS4 growth graph at the bottom of this blog).

Please remember, whether a timing model did well on this one-day drop or not is basically pure luck.  One bad day can happen at any time, and no timing model can consistently predict any one day's price action to the day.  In this case, it stands out because the one-day change was so dramatic. This one-bad-day was going to happen whether MIPS (or any other model) was long, short, or cash.  Good timing models recover, like MIPS did in 2011 and should do again in 2015.  After a flat 2011, MIPS3 was up 9% in 2012 and 23.3% in 2013.

                                                                            MIPS4 in August 2015
                                                                          (Red dots are Trades dates)

 



MIPS YTD in 2015

The graph from TimerTrac.com below shows the MIPS4 performance YTD thru August, 2015 (you can see the "one-bad-day" in the graph).   

As discussed above and can be seen in the graph below, MIPS was hanging in there until late August, when MIPS was down only 2%, while the SPY was down 9%. Then the one-bad-day came along and upset the cart.

Now, through August 2015, MIPS and the SPY are both down about 7%.  So even after all of  the hoopla and "bad luck", MIPS has not done any worse than buying and holding the SPY.

             
                                                                           MIPS4 YTD in 2015
 
                                                                     (Red dots are trade dates)

 


MIPS3 in 2008
Whether this drop is a correction or the beginning of a market crash, we have plenty of time to make money,  After backtesting in 1987 and 2003, and observing MIPS live in 2008, we feel 99% sure that MIPS will make us money in down markets.  See MIPS3's "actual performance" graph in 2008 as "verified" by TimerTrac.com immediatelybelow:

                                                                               MIPS3 in 2008
                                                                      (Red dots are trade dates)


MIPS4's Long-Term Performance (2003-2015 ytd)
o When looked at from a "Long-Term View", the ONE BAD DAY goes away !!!
- So, don't let one-bad-day scare you away...





Stay tuned…

Posted by: Dr. G. Paul Distefano AT 12:46 am   |  Permalink   |  Email

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