Today was another terrible day for the stock market. The big drop today drove all of the major indices into "Correction" territory (between a -10% and -20% drop). For most of us, it's pretty tough to experience a drop like this over just a few days.
Without trying to figure out how we got into this mess (rising interest rates, inflation worries, overbought markets, etc), let's try to figure out where the market is going from here. Tomorrow's market performance is very important and that is why I designate tomorrow as a "Critical" day (see graph below).
As you can see, the drop in the market since the end of Jan 2018 has been steep and vicious; as it resulted in about a -10% loss for all of the major indices. Thankfully, today's drop in the SPY shown below held just above its "support" level of $257.6/share on both the Long-Term Trend Line and the 150-day EMA. That is why tomorrow's market performance is critical. If this "support" level does not hold, this bull market could be in trouble (at least, short-term). For example, the only thing left to stop this drop now is the 200-day EMA; and I surely do not want to go there.
Of course, these commonly used "indicators" are a very small part of the MIPS models. But, they are interesting to watch, mainly because many other quantitative models rely 100% on several of them (NOT recommened).
Even though MIPS seems to be on the verge of triggering a Cash or Short signal, anything can happen.
So, stay tuned to MIPS...
Paul Distefano, PhD
MIPS Timing Systems, LLC
<<< Yesterday's MIPS Blog >>>
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-fledged market crash.
I am very comfortable that MIPS would protect us from 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. We have both at this time, and expect them to continue.
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 overheated, because this will cause the Fed to stick their nose in and screw things 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 have 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 dwell on 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 up-channel.
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 like 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 the 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 for trouble.
Note: The graph below is using Daily 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 big 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.
- MIPS can react to a 4-5% drop if the market has been relatively flat or growing very slowly, but
- MIPS will not react quickly to a 8-9% drop if the market has been growing fast and strong (as now)
- this decision is made by "relativity" 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 !!!
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Paul Distefano, PhD
MIPS Timing Systems, LLC