November 14th, 2008

"Navigating The Lost Decade" vs. my Market Timing Indicator

Barry Ritholtz, in his Big Picture blog, featured the following chart from an article entitled “The Lost Decade” by Jack Ablin, Chief Investment Officer with Harris Private Bank and U.S. Portfolio Strategist for BMO Capital Markets (Bank of Montreal):

What caught my eye were the simple trading rules which are: “Buy when the S&P moves more than 5% above the 200-day moving average and hold until it breaks 5% below its 200-day moving average”. Ablin gets the big bucks as CIO at a major bank and I earn nickels from the all too infrequent click throughs on Google ads.

The cat’s out of the bag. We both have come up with market timing rules that lead to similar, if not essentially the same, outcomes. While the BMO rule may have signaled a reentry into the market earlier (late in 2002) than the MTI (April, 2003), the MTI signaled a market exit earlier (December 28, 2007) than BMO did (Spring, 2008).

Regular readers are familiar with my many posts describing what it will take before a reentry into the market would be considered safe (in MTI parlance, the “all-clear” or “green light”). Looking at the slightly out-of-date BMO chart above and their trading rules underscores the base building work that needs to be done, the time it will take and the recovery rise in the Index that is required for risk to be declared “reduced”. Either is preferable to the S&P Oscillator that Cramer used to tout; its absence from his show since August hopefully indicates that it’s been discredited even in his eyes.

The major, and significant, difference between the BMO model and the MTI is that the MTI uses a number of moving averages the reinforce and validate (other than a 5% margin of safety) the Index’s cross above its the 200-day MA (or 180-day in MTI’s case). The MTI requires also requires that the Index and its faster MA’s (60-, 90- and 180-day) also be in proper alignment.

Follow BMO or MTI (of course, it’s cheaper if you follow MTI because you get it free here), but follow one in deciding when you want to aggressively put your money back to work in the market.

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