Wow! What a nerve-racking market we have had in the last few trading days. As of today's date, the S&P 500 is close to "giving back" all of the gains it made in 2018.
Seems like everyone wants to know "Is this a relatively small "dip" or a big "drop", as in an official correction? Or even, is this the beginning of a full fledge market crash.
I am very comfortable that MIPS would protect us form the "sting" of a crash (as in 2008, shown below), and I don't believe this is even in the cards at this time. The only "indicator" that I know that works 100% of the time is that market crashes DO NOT happen during strong economies with rising corporate profits. And, we have both at this time.
If I am correct above, this leaves us with either a smallish dip or a correction. If we are in for a smallish dip, this has already happened (-9%) and the market should head back up for a while (for about as long as our economy stays strong). But, we do not want the economy to get over-heated, because this will cause the Fed to stick their nose in and screw thing up by overreacting (like they almost always do).
I think we all know (or believe) that the two culprits that have caused the fast dip in market prices so far has been the very highly "overbought" market and the Fed's plans for interest rate hikes.
Let's look at the dip in the market a little closer and see how bad it actually has been before we discuss the reasons for the drop and how we are going to protect our portfolios now (see graph immediately below).
1) From Dec'16 to Nov'17 the SPY moved in a "near perfect" long-term trend.
2) In mid-Nov'17, the SPY picked up steam and moved above the upper line in the channel.
3) Between Jan 1, 2018 and Jan 26, 2018 the SPY took off like it was launched as a rocket.
4) Most investors knew this would come to an end, but not when.
5) Almost all pure reversion-to-the-mean models and algorithms were warning to get out, but
trend following models (like MIPS) usually would not trigger a cash or short signal as long
as the SPY remained above the long-term trendline (along with what the other indicators
and algorithms in the model were advising)
As you know (and can see below), the SPY dipped on Jan 29, 2018 and then dropped all he way
down to the long-term trendline on Feb 5th, and bounced back up some on Feb 6th. The SPY held
above the trendline again today (Feb 7th). Most likely, the SPY will again "test" the long-term
trendline; and, of course, it is of utmost importance for the SPY to remain above the trend-line.
Otherwise, look out for trouble.
Note: The graph below is using Monthly Bars.
So, as we can see, the market could go either way at this time and MIPS members want to know if MIPS can react fast enough to protect us from losing money (or even help us to make money in a down market)
This leads to the question "Can MIPS respond quickly to a drop of 8-9%?"
The simple answer is that MIPS absolutely, positively CAN (and does) react to drops of -9% or less,
but it depends on the market circumstances at that time.
- e.g., MIPS can react to a 4-5% drop if the market has been relatively flat or growing very slowly, but
- MIPS will not react too quickly to a 8-9% drop if the market has been growing fast and substantially
(as in the last several months)
- this decision is made by "relatively" algorithms that are built into the MIPS computer code
- and, these algorithms GREATLY reduce the probability of getting WHIPSAWED
To show this, look at the actual MIPS3 signals below in the stock market CRASH of 2008
- this CRASH started at the end of Oct 2007 and recovered in mid-March 2009
In the graph below from TimerTrac.com, you can see that:
- MIPS issued a critical "short signal" in mid-Dec 2007
- and, this was after about a -5% drop
- during this time, the SPY dropped -60% and MIPS3 was up +140% (verified by TimerTrac.com)
PS - this performance resulted from trading the SPY Long/Short/Cash with no leverage
Note: Red dots designate MIPS3 trade Signals
Hope this helps !!!
-- Contact Info ---
Paul Distefano, PhD
MIPS Timing Systems, LLC