Improving on Buy and Hold: A Basic-Sell Signal
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Note from dshort: I received the commentary below earlier today from the Advisor Perspectives main office. It was dated June 2nd. I'm posting it late (apologetically). However, the call-to-action for anyone interested in following this strategy has not yet arrived (see the last two sentences in the text).
My model described in my article, Improving on Buy and Hold: Asset Allocation using Economic Indicators has produced a basic-sell signal when it was updated on June 1, 2012.
Figure 1 below shows the buy and sell signals obtained from the model for the time period 2009 to 2012.
Below is a further chart, Figure 2, showing two leading economic indicators, the "SuperIndex" from recessionalert.com and my "COMP". Both of these indicators have "rolled-over" and were simultaneously below their respective 9-week moving average at the end of last week. This "roll-over" has always occurred close to all the previous basic-sell signals that the model generated. The vertical red lines depict the basic-sell signal dates and the dashed blue lines represent the sell signals from the indicators.
The stock market has historically achieved further gains after a basic sell signal, as shown on Figure 3, which depicts the performance of the S&P 500 over time following the basic-sell signals obtained from the model. However, as one can see, this was not the case after the May 2011 sell signal, the red graph.
Historic precedent suggests that there should be good opportunities to reduce one's stock market investments in the coming weeks, but not during the next 5 weeks when the market has typically declined 3 to 5% from when the signal was generated.
The past is not an indicator of the future, but I expect the S&P 500 index to top out over the next 8 to 13 weeks.
Georg Vrba is a professional engineer who has been a consulting engineer for many years. In his opinion, mathematical models provide better guidance to market direction than financial "experts." He has developed financial models for the stock market, the bond market and the yield curve, all published in Advisor Perspectives. The models are updated weekly. If you are interested to receive theses updates at no cost send email request to firstname.lastname@example.org.