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muck

Muck's Model

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+3 it is

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It's linear in so much that the average P&L from a "-1" week is worse than the average "0" week, which is worse than the average "+1" week, which is worse than the average "+2" week, which is worse than the average "+3" week.

 

The model is constructed off of nearly 100 different inputs and their derivatives. Some times, if one input moves above / below certain levels, there is a compounding effect accross multiple derivatives of that same input, and as a result, give a stronger signal (or reduce a signal), as appropriate.

 

This sort of thing is relatively common in quantitative trading strategies.

 

I think of it as a confidence level in flipping a coin. In this particular case, if we get a "0" score, about 54% of the time the market rises, and the average return is +0.07% for the week ... HOWEVER ... if we get a "+3" score, about 75% of the time the market is up, and the average return for those weeks is +1.17% ... and so, because the odds of being right (i.e., the market going up) are greater than 'normal' and when you're right, you're really right (+1.17% vs. +0.07%), you "bet" a little more on this particular coin flip.

 

Another way to think of it is that, say, you like redheads. You're told you have a blind date with a redhead. You don't know until you walk in the restaurant whether your redhead is Peppermint Patti or Ann Margaret ... or whether the 'redhead' is really more of a strawberry blonde, and you're dinner date is Nicole Kidman. We're about to walk in the restaurant. You'll know what sort of redhead you're looking at based on the closing price of the S&P500.

 

...I hope that analogy wasn't too obtuse...

Not obtuse at all, in fact I'd say it was outstanding. Thanks.

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+3 it is

 

This coming week will be another week of "+3".

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It looks like if S&P500 closes Friday below 1325-ish, we'll move to cash.

 

If the S&P500 closes Friday above 1325-ish, we'll stay "+3".

 

*******************

 

It looks like the model beat the market last month ... +1.9% (after estimated fees and expenses) vs. -1.4% for the S&P500.

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This coming week will be another week of "+3".

Not counting Wednesday..............

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It looks like if S&P500 closes Friday below 1325-ish, we'll move to cash.

 

If the S&P500 closes Friday above 1325-ish, we'll stay "+3".

 

As a result of early trading, it looks like the dividing line is going to be 1321, not 1325.

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Does your new cash position imply that your model is forecasting a market decline?

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Does your new cash position imply that your model is forecasting a market decline?

 

No. If it were forecasting a decline, it would be short.

 

Generally, a "cash" signal indicates that there isn't enough information to be long or short, and so, we're in cash. Over the past (nearly) 27 years, over half the weeks have been in cash in this model ... missing out on returns of the next week ranging from +7.8% to -9.1% ... so, when the market is up nearly 8% in a single week and you're in cash it's frustrating ... but, at the same time, when you're in cash and the market drops -9%, you're pretty pleased.

 

The average return for the 723 weeks of "cash" signals is +0.07%, which annualizes out at 3.7% / year. In other words, you miss out on a bunch of volatility and earn pretty close to what you'd have earned had you simply been in money markets for those weeks (i.e., the long-term money market rates are not that much different than 3.7% / year, which is what you'd have earned had you been long the markets during those 723 weeks).

 

BTW, 723 weeks is 13.9 years ...

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Does your new cash position imply that your model is forecasting a market decline?

 

Debbie Elliot wave . . . ride the waaaaave. Downer

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Does your new cash position imply that your model is forecasting a market decline?

 

it won't be long now.

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Thanks, Muck. Your model is interesting. I'm not sure how your model has preformed since May 1, but the market is down 5%+ since May 2. Interesting to see if we make a new high by 1st quarter 2012 or the high is in as of May 2 and we decline from here. Either way, brace yourselves. I'm serious. If you have any intuition, heed the warning signs.

 

The worst is yet to come.

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Thanks, Muck. Your model is interesting. I'm not sure how your model has preformed since May 1, but the market is down 5%+ since May 2. Interesting to see if we make a new high by 1st quarter 2012 or the high is in as of May 2 and we decline from here. Either way, brace yourselves. I'm serious. If you have any intuition, heed the warning signs.

 

The worst is yet to come.

 

May 1st is an interesting cutoff.

 

Well, in May, the model was up and the market was down. In June, the model and the market are both down; the model moreso due to leverage.

 

From January 1st through May 31st, the model is up between 15-16% (exclusive of any fees / expenses that would actually have been incurred) and the market was up 7%.

 

Over the past five years, the model outperformed the market by more than 30% / year (exclusive of any fees or expenses that would have actually been incurred by a client).

 

I'm not particularly concerned with the under performance of the past three days.

Edited by muck

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It looks like another "+3" week.

 

While we lost money each of the last two +3 weeks, I thought it worth noting that:

 

The last ten "+3" weeks are up a total of 3.5% (19.4% annualized), with making money five weeks and losing money five weeks.

 

The last twenty "+3" weeks are up a total of 44.1% (159.2% annualized), with making money 12 weeks and losing money eight weeks.

 

PS -- it looks like going to cash last week was a good idea...

Edited by muck

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With the end-of-day action, the signal is to be in cash for the coming week.

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With the end-of-day action, the signal is to be in cash for the coming week.

Or the next several years.

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Or the next several years.

 

I promise, I'll make a call for more than the next week when I'm good and ready.

 

Right now, I'm just sticking to the next five trading days.

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I promise, I'll make a call for more than the next week when I'm good and ready.

 

Right now, I'm just sticking to the next five trading days.

Looking forward to it. The cash over the next several years is my call.

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Looking forward to it. The cash over the next several years is my call.

I'm no eggspurt and don't pretend to be, but if I listened to that (your) advice a year and a half ago it would have cost me thousands.

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I'm no eggspurt and don't pretend to be, but if I listened to that (your) advice a year and a half ago it would have cost me thousands.

You wouldn't have lost thousands but you would have missed out on profit (presumably in the thousands). To be fair, I have preached that the safest investment was cash, not necessarily the best investment or most profitable. I also was and still am forecasting a global depression. If you look at investing as a long-term event then a year or two of missed profits has little significance to the final sum.

 

If you didn't listen to me and you did make profit in stocks but the market does turn and you stay in stocks - you could lose your entire portfolio. Again, I have always preached safety during these times because there is too much uncertainty. Safety doesn't necessarily make you money and it may even cause small losses in the short term. But the ultimate goal of safety is to prevent big losses. With this I have been consistent. I have never intended on trying to make people money. I have always intended on minimizing losses.

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By way of a general observation, if the business community wants people to continue investing in it's casino stocks and other offerings, at some point the ridiculous endless knee jerk volatility based on nothing is going to have to be brought under control.

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It looks like we're going to be in cash again next week ... probably ...

 

I'll try to let the world know if trading activity moves us long some time around mid-afternoon tomorrow.

 

In any event, we're not going short. Either cash or long.

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Cash it is.

 

I cannot imagine that the long series of changes in the market that would need to occur to make us go long would actually occur prior to the close today.

 

Have a good weekend, all.

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Probably cash again this coming week.

 

More specifically, if tomorrow trades flat or up, we'll be in cash for next week. If the market is down, we may be in cash or we may be long, depending on the sell-off.

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For the record, we're pretty much at the level at which if we finish above it, we'll be in cash for the coming week and if we finish below it, we'll be long a +1 for the coming week.

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