Monday, May 28, 2012

Update for Tuesday, May 29th -- Short Term Signal Moves Long

Effective with the close of markets on Friday, May 29th, GGT models are indicating that a short-term long entry into the market is warranted.  This is based on two key indicators:

1) the 4d average of the Long-Cash Ratio has been crossed from below by the daily LCR, and
2) the slopes of the 2d, 3d, and 5d exponential moving averages of the LCR are now positive.

When we get this type of signal we typically can enter on the long-side as close to or below the closing price on the day of the signal.

Overall, statistics for this signal are okay at best but not the best of the GGT systems:

There are a fair number of trades with this methodology -- 66 -- and there are favorable independent metrics such as the System Quality Number (SQN), the Mathematical Expectation (ME), and Pessimistic Return Ratio (PRR).  We want these values to be above 1.7, 0, and 1.0 respectively, and as you can see, PRR is on the threshhold.  Nevertheless, all show a positive edge.

Note that if using the GGT index (close proxy is the ETF Vanguard Total Index, symbol VTI), the worse signal of the 33 losses is a realized -7% and the best trade of 33 wins is + 12.5%.  Median is 0% so the tails are balanced -- this is truly a balanced system.

The evolution of the SQN tells me how the system has been behaving recently:

The number of trades is listed across the bottom and the SQN is on the y-axis.  The system seems to bounce between 2.00 and 2.65, which is higher than the recommended level of 1.7 and indicates a better-than-chance edge at long-term success with this model.

Working against me is that the intermediate-termed timer as well as the long-termed timer are both quite negative and are indicating CASH:

This means that we are swimming up stream with this signal, and when trout swim up stream, they tend to get eaten by the bears.

In terms of familiar price and slope charts, here you go:

Note that the 5d EMA slope of the LCR is now positive, and note that it is on an upward trajectory.  Any failure of this below 0 will cancel our short-term buy signal.

Somewhat disconcerting to me is that we have a significant narrowing of the price slopes for all time frames. We can break up or down from here -- up is good/bullish, down is not good.  Note how these have fallen back below the zero line or are right at thresholds -- it's never good to buy at thresholds because of potential whipsaws.

Time will tell.

I intend to enter a 1% @ risk position in VTI near the open on Tuesday morning, with a stop loss at -7% below by entry point.