Our firms long term model is close to generating a new “buy” signal but let me show you why that may prove to turn out to be nothing more than a false signal should it trigger.
Our firm’s model has done an excellent job over time of identifying both cyclical bull and cyclical bear trends that tend to last for months or even years. As a trend trader and an investor of other peoples money I want to invest in only those markets that have a chance of sustaining an upward bias for something longer than a few weeks. A sustainable low volatility trend is what I am looking for. I have zero interest placing other’s money at risk in volatile high risk markets that are prone to nasty reversals. Waiting for a fat pitch, as they say, is what I do best.
Some might say that taking a longer term approach may cost you some upside, since no trend is apparent until after a rally gets under way. This is true, but trend trading is about waiting for a lower risk entry while capturing the majority of the up move. Let’s also be very honest, if you are a shorter term investor/trader, you’re not capturing the entire initial rally anyway. Take the recent 14% rally the $SPX just had. Raise your hands if you went long on 10 am October 4th, the very bottom? Let me just say that despite what you hear online, they didn’t. I am sure there were some. For some there was an element of skill, for some it was blind luck. Let’s say you had a little of both and did get in. Did you sell 2pm on October 24th and capture the entire 14%? The point here is that even the best traders captured maybe 50% of this recent rally. I am not suggesting that my way of trading is superior, it’s not. This is what works best for me and especially for managing my client’s money.
Moving on to my RCI Long Term model:
The RCI is currently reading 77.5. A buy signal is produced when the 80 level or above is breached. Sell signals are produced when the level reaches 17 or lower. This on the surface appears to be a positive development as it is close to potentially signaling a new bull market. I say not too fast. Though my model has done a nice job at showing these cyclical market moves there have been times it has produced false signals (what!? It’s not perfect?).
In Bull markets: Notice in cyclical bull markets the oscillator typically breaks 80 and in almost every case hits 100. From there, it will oscillate between 80-100. This is signaling tremendous market strength. Notice though that in bull markets the oscillator can and does at times dip down to the around the 17-20 level which may initiate a trigger to sell. However, in bull markets it never gets so weak it dives to 0. The false signals in bull markets generally happen when the market sells off enough to bring it around the sell trigger but never to 0.
In Bear Markets: In bear markets the opposite is true. In real bear markets, the signal not only breaches the 17 area but will hit the 0 line several times over the course of the bear. Again, you can find instances in a bear market rally, where it hits up and around a potential new buy signal, but will never gain so much strength where it hits 100.
Where are we now?: The RCI signaled a potential new bear market August 5th on the $SPX when it broke the 17 area. The bigger development was on September 28th when for two days 0 was nailed to the floor. Experience tells me this is the signature of a bear market. We are prepared to act should a buy signal occur, but not without an exit plan should it be a false signal.
All bear markets will end at some point. Possibly this one sooner due to QE or any other number of variables but If history is any judge then my model is suggesting you are doing nothing but pissing into the wind and any new buy signal could turn out to be nothing more than a false signal.
~the cynical advisor
