Improving on Buy and Hold: A Sell Signal

By Georg Vrba, P.E.
November 19, 2012

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My model described in the article, Improving on Buy and Hold: Asset Allocation using Economic Indicators has produced a sell signal when it was updated on November 16, 2012.

The chart below shows the buy and sell signals obtained from the model for the time period 2009 to 2012. Since the December 2011 buy signal the S&P 500 has gained 10.9% to the date of this sell signal.

Sell basic is the initial signal required for either a sell-A, sell-B or sell-C signal, which are the signals when the model exits the S&P 500.

 

 

The initial basic sell signal occurs when economic conditions deteriorate, which is mainly indicated by the short EMA of the U.S. Weekly Leading Index's growth rate moving below its long EMA. At the same time the yield curve must be inverted, or to provide for conditions of prolonged economic weakness real interest rates must be negative. A basic sell signal is generated when the following simultaneously applies:

  • The [short EMA of WLIg+1] moves below the [long EMA of WLIg+1] while the [long EMA of WLIg+1] still shows positive growth but which is steadily declining, and
  • the EMA of the Forward Rate Ratio FRR2-10 is at or below 1.00 (indicating an inversion of the yield curve), or if the average of the 3-month T-Bill, 2-year and 10-year T-Note yields minus the annual inflation rate is less than -1.00%, and
  • when X is greater than the maximum of X over the preceding 130 days 0.5%, where X = the maximum Federal Funds Rate (FFR) over the preceding 130 days minus the minimum FFR over the preceding 650 days.
  • A Type A sell signal is generated after a basic sell signal:

  • 2 days after a basic sell signal, if at the same time the 15-day MA of the S&P 500 is less than the 35-day MA of the S&P 500, and 10-day slope of the 12-day EMA of (MACD 9-day EMA of MACD) is negative. (MACD= 12-day EMA of S&P 500 minus 26-day EMA of S&P 500),
  • or later when the 15-day MA of the S&P is less than the 35-day MA of the S&P after a basic sell signal,
  • but not later than 65 days after a basic sell signal.
  • In May 2012 the model generated a sell basic signal but no sell-A signal because a buy-A signal was generated before a sell-A could be generated according to the conditions above. This time a sell-A signal was generated 2 days after the sell basic signal, the first condition of the three listed above.


    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 vrba@snet.net.

    Past performance is no guarantee of future returns or that the models referred to in this article will be profitable at all. The opinions stated here could be wrong due to false signals generated by the models, or that the models were incorrectly structured and/or interpreted.

     

     

     

     

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