Market Momentum Meter
Approximately 50% of the average stock’s behavior is impacted by the market’s action. Knowing when to buy and sell is even more crucial than knowing what to buy and sell.
“….a neutral, unmanaged buy-and-hold strategy delivered $17,022, or a compounded average annual return of 6.20% over the test period between March 12, 1963 and December 31, 2009. Applying the 200-dma market timing rule to that same hypothetical portfolio over the 46-year period improved the results marginally and delivered an ending portfolio of $21,938, or 6.62% compounded average return before considering taxes, interest and transaction costs.
Selling when the Index crosses below the 200-dma is a simple rule that marginally improves total long-term results but it has disadvantages. For one thing, it works best in secular, or long-term, bull markets as contrasted with markets that have shorter-term (2-3 year) fluctuations like the period between 2000 and 2010. Over the 45 years in the database, the indicator suggested all-cash positions 33.4% of the all trading days….
The strategy produces a marginal improvement but not one that would have made you rich. You would have avoided some losses and wound up with a $4,748 higher ending balance. “
The problem with the indicator is that it over-prescribes an “all-cash” positions, periods when investors who follow the rule are out of the market when they should actually have been fully invested.
The problem can be remedied by combining the 200-dma rule with another common indicator and moving into an all-cash position only when both selling rules simultaneously proscribe an all-cash, risk-off posture. Only when the signal of one of the rules confirms the other should you actually assume the worst.
I combine the different configurations of these two indicators (plus some minor tweaking for instances that fall between them) into what I call a Market Security Meter, an indicator based on a study of market behavior over the past 50 years.
Prior to the Financial Crisis Crash of 2008, the Indicator unequivocally signaled that the market was entering a dangerous and risky period that warranted a total exit from the market. As a subscriber, you will have access to the current value of the Indicator in the form of the Market Momentum Meter. In addition, you’ll be able to see the indicator’s position Track for past 20 days and instantaneously whenever it changes.