Tuesday, April 22, 2014

April 21 2014 - Short Term Timer Confirms Long

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My short-term timer has confirmed a move to the long side; the intermediate-termed timer is "mixed" (I'll explain that shortly), and the long-term timer is still in cash:


Although the short-term timer moved long with Friday's action, it was a weak signal and was not confirmed.  Monday's action confirmed it, at least to the extent that the short-term trend is intact.

First order of business:  how reliable is this timer?

It's a short-term timer, so you have to be agile.  If you can't move intraday, then it's probably not for you.  Here are the stats:


This is not a stellar timer because it takes every signal.  Hence, the 45/53 win/loss record.  Despite this, it does have a good expectation of making money over the longer term (ME = 0.56 > 0 ---> positive means money maker), and the SQN value of 2.44 means that it outperforms random chance (random chance ~ less than 1.7-ish).  I'm not betting the farm.  I'll commit no more than 25% of my non-TSP monies to this signal, and I'm going to do it in a liquid ETF.  Which one?

GGT is an equal-weighted index comprised of nearly 3000 stocks.  It behaves differently depending upon the focus of the markets, so keeping an eye on how it is performing relative to the markets is important to me.  To do this I look at the VTI, SPY, QQQ, and the IWM.  The VTI is literally the total market index, the SPY tracks the S&P500, the Q's track the NASDAQ technology stocks, and IWM tracks the Russell 2000.

Here's the latest correlation matrix between the GGT index and the VTI, SPY, QQQ, and IWM over the past 34, 65, and 100 days:



What this is telling you is that on a performance basis, the IWM and the GGT index are tracking each other incredibly well over the last 34d, 65d, and 100d.  A value of 1.00 would be a perfect score -- a value of 0 is no correlation.  Values of 0.957 - 0.976 indicate that there have been no "disconnects" between the two, so the choice is simple:  IWM.

I plan to purchase IWM in my accounts, not to exceed 25% of my holdings.  I'll hold onto this position until the short-term timer signal reverts to CASH.

For the math to work, I'll want to enter at last night's close of $113.45 or lower.  Hence, I'm setting a buy limit of this amount.

From the timer statistics table above, if this is a winning trade, I have a reasonable expectation of making about 3.49% on this transaction.  If this is a losing trade, I have a reasonable expectation of losing -1.46%.  Your crystal ball is as good as mine.

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The timer statistics table also indicated that the intermediate timer has moved to "Mixed".  What does this mean?

Mixed means uncertain.  Internally, there are a number of conditions that are necessary to move the intermediate timer to "LONG".  When these conditions are met in part, but not 100%, we have a mixed condition.  We see mixed status when the signal is weak -- when the market is at thresholds and not moving aggressively one way or another.  It's also a cautionary time, as the market is not confirming a move.

Volume yesterday (Monday) was incredibly low -- 25% below the 50d average for the GGT index.  So while the GGT index was up +0.34%, the volume that moved us here was not confirming.  Whether folks were still on Easter holiday or whether they are on the sidelines if for you to guess.  When trend-following systems lack on volume, noise creeps in, and this is what we have now.

The "Mixed" signal is just that -- we need price and volume action to confirm movement.  We're not seeing it -- only price -- and hence, the yellow flag.  Tread carefully if you decide to move long in this market.

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I am quite some distance from committing 100% of all my available monies to the market.  The main "gate" on my decision process remains with the 13d/65d timer "gate", and this is still in the "off" position, effectively blocking any full-scale commitment.



Critics are writing me telling me that I've missed the last run-up.  No, I haven't because I'm not a short-term trader.  My systems are designed for the longer-termed horizons, and for now, it is better to wait for the long-term trend to recover.  This 13d/65d signal is incredibly simple:  it looks at the difference of the 13d/65d MAs:


Note that it's negative, and until it turns positive, I'm mostly on the sidelines.  The risk does not justify moving long with 100% of my monies at the present time.

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Recapping:  I intend to move long in the ETF IWM with no more than 25% of my monies at a price limit of $113.45.  I'll stay in that position until the short-term timer transitions to CASH.

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As always, you are responsible for your own investment/trading decisions and I am not.  Please do your diligence, and please take ownership for your actions.

Regards,

pgd