Market Timing

Over the last few weeks/months, we have been asked many times,
1) Why is the recent MIPS trading frequency so low, and
2) Will the MIPS models react fast enough to catch real "market crashes" ??

First, the past trading history for the MIPS3 and MIPS4 models has been about 10-18 trades/year.  But, the trading frequency of the MIPS models in the last two years has been the very lowest in the nine-year history of any of the MIPS models.  This is basically because the market has been so strong recently (very strong up-trend) that it will take a lot of negative market action to get the MIPS models to change their direction.  For example, when the market is lackadaisical, MIPS3 or MIPS4 may change direction with a 2-4% market dive, but at other times (like now) when the market has been super strong, even a 9% dive was not enough to get the MIPS models to change direction.  In other words, the resistance of the MIPS models to a market change is somewhat "relative".  Its kind of like comparing the condition of a really strong, healthy young man that falls off of a high cliff while hiking to the condition of his grandfather who fell of the same cliff at the same time.  Most likely, the strong young man would be in a better condition a few days after the accident.  [Of course, there are hundreds of other factors that determine a MIPS change, so don't just bank on "relative" changes.]

Second, the only real "live" experience we have with market crashes in the U.S. markets was during 2008-09 (actually, the eighteen months from 12/01/2007 - 05/30/2009).  See the graph immediately below, with MIPS "trades" shown as red dots on the graph (during this time, MIPS3 traded 21 times  or approx 14 trades/year). You will see that MIPS3 went short well before much downside damage had been done, and the model performed brilliantly during this entire period.  Believe it or not, backtest results show that MIPS4 would have done even better !!!

                                                           MIPS3   +130%                 SPY    -38%



For the record, the actual, live trades from TimerTrac.com for this period are shown below.

TimerTrac.com
Trades for the strategy MIPS Timing Systems MIPS3/MF between
Saturday, December 1, 2007 and Saturday, May 30, 2009.
Times are mountain time, MST (GMT -7) / MDT (GMT -6).

* Note: For this strategy, any trades within the last 30 days are not shown.

The short-term view of the market looks terrible and simply could not look much worse.  In the last 3 weeks the SPY has fallen about 9% from its all-time high of $201.9, broke through the bottom of its most recent trading pattern, broke through both the 100-day and 200-day EMAs, etc.  Like I said, couldn't be much worse. One good note yesterday (Wednesday) was that the price action in the 2nd half of the day could represent a "One Day Key Reversal" pattern, which usually identifies a short-term rebound.




Should we be worried?
Remember, we are intermediate-term investors and not day traders. After the strong ride we have had in the stock market in the last 3-5 years, a short-term drop does not usually cause MIPS to signal a directional change in the stock market. [In other market conditions where the intermediate-term trend had only gained say 10-15%, a dip as small as 2-3% would catch MIPS' attention.]  In other words, all changes in the price movement of the SPY are looked at by MIPS on a "relative" basis. For example, a 3% drop in a market that has been up 10% represents a 30% setback, whereas an 9% drop in a market that has been up 50% represents only an 18% setback. And, a market that grows 50% will recover a 9% setback quickly.

Long-Term View
There is one thing that investors need to concentrate on to become successful long-term investors. They must be able to somewhat ignore short-term (daily) gyrations in the market and put more emphasis on the long-term view. Looking at the monthly chart below, we can see that the disaster on the daily chart above is hardly noticeable on a monthly chart.




Topping Process
- Is the market topping?
The good news is that strong bull markets (4-6 years up) do not turn around easily or quickly. For this, let's look at the two most recent market "crashes", one in 2000 and the other in 2008. From the graph below, we can see that it took 8-10 months for these bull markets to give up and collapse. At this time, we are about 1/2 of the way through this process. Of course, the market in October could be the catalyst for the "Big One".

Our Goal
Our goal in MIPS is to capitalize on at least 80% of each major market crash.  We do this by being willing to give up 10% on each end of the cycle to make sure that we capitalize on the other 80%).



What if this is the beginning of the "Big One" ?
For that, we have to rely on MIPS. All of the MIPS models are now on the edge of going short, but they have not yet issued new short "Signals".  Sometimes that is a blessing.

The MIPS models have been around since 2004, and the MIPS3/MF signals have been tracked by TimerTrac.com since 11/04/2005. During that time, we have had several intermediate-term downtrends and MIPS has profited from most of them (of course, MIPS also beats the SPY in up markets by detecting and shorting these intermediate-term downtrends).

We have had only one really big stock market "crash" in this 9-year timeframe from 2005 and that was from 4Q'07-2Q'09, when the S&P 500 dropped by over 50%.  How did MIPS do in that market?  For that, see the graph below for the period of the last big market crash using verified MIPS3/MF signals from TimerTrac.com.

               MIPS3/MF +120%                                             SPY -40%