Market Timing

I am writing this for five reasons:
I.)  to explain how and why a MIPS trading signal (which gets to our subscribers in a “Signal Change” email)
      can last for a really long time (so-called “signal life”),
II.) to clarify how MIPS issues new signals and how we make our subscribers aware of the “Signal Status” for
      each MIPS model EVERY DAY,
III) to show that more (unnecessary) trading usually yields worse results,
IV) to show the MIPS performance over the last 12 months, with and without leverage, and
V.) to show how MIPS3 performed in 2008
 

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I.) All good timing models have a foundation upon which they determine if investors should be in a Long, Short, or Cash position.  Some of the underlying “foundations” of these models are trend following, reversion to the mean, momentum, relative strength, rate of change, etc.  In general, the MIPS models are Trend Following models.  But, believe it or not, they contain some of all of the above foundations (the MIPS models contain up to 165 standard technical indicators, artificial intelligence, pattern recognition, and applied math algorithms).

MIPS’ strength lies in its ability to determine when the market has “turned over” from up-to-down or from down-to-up (mathematically called “Inflection Points”). 

We all know that the market basically moves in “cycles”; from short-term (days to weeks), to intermediate-term (weeks to months), and to long-term cycles (months to years).  And, an intermediate-term cycle basically ignores short-term cycles and a long-term cycle ignores both short-term and intermediate-term cycles. 

MIPS tracks intermediate-term cycles.  “Cycles” in the stock market move from tops-to-bottoms, and then turn around and move from bottoms-to-tops.  An up-trend is a series of higher highs and higher lows, and the up-trendline is a line along the bottoms (and the inverse for a down-trendline).  See graph below.

A good trend following model will rarely change position unless the market breaks the trendline with force, and which has the support of a strong majority of the other technical algorithms confirming a market breach in the current direction.

With enough strength in a strong up-market, an intermediate-term cycle can turn into a long-term cycle. As can  be seen in the graph below, in the last 12 months the market has moved up on what could be called a “near-perfect” up-trend, AND all of the MIPS models have remained LONG during this entire period (a new record of time for a MIPS “signal life”).

Remember, a good timing model not only needs to know when to trade, but it also needs to know when NOT to trade.




BTW:
The S&P 500 just set an all-time record for the number of consecutive days when the S&P 500 did not have a 3% loss. As of today’s date (10/30/2017) that would be very close to one year (247 trading days) !!!  Of course, this usually means that it is very difficult for most timing models to “trade the dips”.  It would be better to stay long with some leverage (like 1.5x leverage).

 

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II.) Moving on to Section II in this Blog, the MIPS models send out “Signal Change” emails every time that any one or more of the models instructs MIPS subscribers to “change” position (like from Long-to-Short, or from Short-to-Cash, etc).  Of course, at MIPS we “run the models” EVERY DAY (in triplicate) to determine if any of the MIPS signals have changed.  If so, we send out a "Signal Change" email after the close that day.  If not, we send "Signal Status" emails to our subscribers every weekend. This way, if a subscriber missed a Signal Change email or forgot to trade it, they will be aware over the weekend that they missed a Signal Change.

A few market timers send out daily Signal Status emails.  But we (along with most others), do not do so mainly because most of our subscribers and RIA customers do not want to be inundated with emails from MIPS unless there is a Signal Change (remember, there are about 240-250 trading days each year).  Unfortunately, because we do not send out daily emails, some subscribers feel as if we are not paying attention to MIPS or the markets, which of course, is dead wrong.


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III) Regarding trading frequency, no one should change a winning position (execute another trade) unless the trend that the model is tracking has changed direction (in other works, “Don’t Fight The Trend”).  And remember when you make a trade (like buy) you will ultimately need to reverse that trade (like sell or short).  So, on each new trade, you must be correct on when to buy AND when to sell.  A good example of this can be displayed by showing the performance of most of the timing models that were tracked by TimerTrac.com over the last 12 months (see Table below).

The table below from TimerTrac.com over the last 12 months shows (a) the performance (Gain/Loss %) with no leverage, and (b) the number of trades from over 75 of the models that it tracks.  The MIPS models are at (or near the top), with only 2 trades from MIPS3 and no new trades from MIPS4 and Nitro. 

Average:
Over the last 12 months

- the MIPS models averaged a gain/loss of 21.2%, with a average of 1 trade each.

- other models with over 80 trades averaged a gain/loss of  -13.3%, with an average 117 trades each.
PS – Of course, this does NOT mean that models that trade less perform better…

Long-Term trading
Since Nov’05, the MIPS models have averaged 12-15 trades/year, with the lower ones being 2-4 trades/year and the high end being 16-20 trades/year.   In the 18 months of the last market crash (Oct’07 – Mar’09) MIPS3 issued 18 trades.

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IV) MIPS performance over the last 12 months (from TimerTrac.com)
      - MIPS/Nitro with 2x leverage (blue line)  + 50%
      - MIPS4 with 1.5x leverage (gold line)       + 36%
      - MIPS3 with no leverage (green line)         +21%
      - SPY (red line)                                              +21%
 

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V.) How did MIPS perform in 2008
    The graph below is:
       (a) to prove that MIPS not only performs well in up markets, but also
       (b) to show how fast MIPS3 actually responded to the market crash in 2008.
            - MIPS3 issued its first short signal in 4Q’07 (verified by TimerTrac.com),

  
         MIPS3 – 4Q’07 thru 1Q’09

             - MIPS3 - blue line   +106%

             - SPY - red line           -48%

             Red dots indicate actual signals …     
   .  

In summary, it seems that many “investors” get such a big “kick” out of trading, they lose track of the objective of making money.  Many will not tolerate a lower frequency trading model, but seem to love higher frequency trading models that do not perform nearly as well as MIPS.  You tell me why…
 

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Best Wishes…

Paul Distefano, PhD

CEO / Founder
MIPS Timing Systems, LLC

Houston, TX
281-251-MIPS(6477)

Support@mipstiming.com
www.mipstiming.com

Recently it seems that the major concern from almost all investors in the stock market is: “How much longer will this market continue to run up?” That is a very legitimate question, and it has a very simple answer (which, of course, is unusual in stock market behavior).  More later …

BUT FIRST …

The recent Bull Run (since election in Nov’16) in this very strong Bull Market (since 2009) has been very consistent, and with very low volatility. 

Some of the characteristics of this strong Bull Run are:

• Using data all the way back to 1928, this Bull Run has just tied an 11-month “streak” from the 1990’s where the market did not experience a “correction” worse than -3%.
• This is the first time in 20 years that the DOW was up for 8 quarters in a row.
• The Dow and SP500 experienced 9 monthly gains in a row, with both reaching multiple new highs in September.

Going forward, some interesting historical statistics from Market Watch (4^th Quarter Reputation) are:
           1) Historically the 4^th quarter is the strongest quarter of the year.
           2) Since 1950, the 4^th quarter has been up 80% of the time, with an average growth
               of nearly 4%.
           3) September is usually the worst month the year, but not this year.

                 4) In 11 of the last 12 years, when the S&P 500 was up more than 10% through the
                     3^rd quarter and it made a new high in September, the average 4^th quarter returns
                     have been +5.9%.





WHAT IS DRIVING THIS MARKET?

Like almost all other times in the market, the ultimate driver of stock prices is CORPORATE EARNINGS. The market is certainly somewhat influenced by other things (like, inflation, interest rates, global instability, etc.), but these are not consistent predictors of future market direction.  For example, over the last 20+ years, the market has moved both with and against inflation.  So, when following anything other than earnings, usually the effect is temporary (like BREXIT) or way off in time.

From Morgan Stanley
Blue Line (Left Scale)     =   Earnings

Gold Line (Right Scale)  =   Stock Gains/Losses
 

As can be seen above, stock prices ultimately follow corporate earnings. But in many cases, stock prices move first, in anticipation of earnings growth.  The recent behavior in the market is a good example of this. Investors began pushing stock prices up immediately after the presidential election in anticipation of Trump’s economic agenda (fewer regulations, lower corporate taxes, better international tariffs, etc.) leading to more jobs and higher earnings.  Since then, economic conditions have improved nicely and stock prices continue to rise.

So, why are so many investors so skeptical?  Mainly because they feel that the stock market is greatly “oversold”, because stock prices are way too high as measured by the Price/Earnings (P/E) ratios of the major Indices.  For example, the P/E ratio for the S&P 500 Index is now over 25, when the long-term average is closer to 15.  That is indeed high and could lead to bad future returns; but it does not necessarily have to.

Many investors mistakenly interpret the above as a condition when prices must drop in order to bring the P/E ratio back down closer to past averages.  BUT, what most of them seem to miss (or discount) is that the P/E ratio of an Index (like the S&P 500) also comes down when Earnings rise, even if stock Prices remain about the same.  [Remember, the value of a “ratio” like A/B comes down when the denominator “B” goes up if the numerator “A” stays the same.]  And, the “E” (earnings) in the PE ratio is now on the rise at a high pace and this should continue, given lower corporate taxes and more attractive international tariffs for US companies. 

WARNING:
Please be aware that, if the economic progress in our country gets derailed (failed tax cuts, lower job creation, lower corporate earnings, North Korea, etc), the current Bull Run could (and most likely would) quickly “stop running” and it may even turn into a classic market crash.
 

So, how have the MIPS models performed in the last 12 months?
 
RECENT Performance of the MIPS3 model:
- 12 months ending 10/20/2017
- with and without leverage *

MIPS3  (last 12 months)
- Trading SPY Long / SH Short
Green Line 1.5 x Long / 0.5x Short    +31%*
Blue Line 1.0x Long / 1.0x Short       +20%
Red Line - SPY Buy/Hold                   +21%



Best Wishes…
 

Paul Distefano, PhD
MIPS Timing Systems, LLC
Houston, TX
281-251-MIPS(6477)

 

Can anyone develop a "perfect timing model"?  Not at this time, but with advances in quantitative modeling (applied mathematics, artificial intelligence, pattern recognition, big data, etc.), the accuracy of quantitative modeling is improving amazingly fast.  In 10-15 years, computer trading will be dominant.

In fact, outside of the investment community, the rest of the world has had "near perfect" models in use for many years now.  Some examples are: (a) auto-pilot in commercial aircraft, (b) auto-control of nuclear power plants, (c) rockets that send men to the moon and back safely, and (d) fighter jet software (F-15 and F-35) that seeks, finds, tracks, and shoots down enemy aircraft amazingly fast. 

Immediately below, let's look at an illustration of a "Perfect Timing Model" beating buy-and-hold in the stock market.  After that, we can see how a real timing model actually worked in 2007-2017, as verified by TimerTrac.com.  Then, you can determine for yourself if a model like this is "near-perfect enough" for you, or if you think that you can do better yourself.


PERFECT TIMING MODEL

Every investor (large and small) wants to make money in both up and down markets, but they don't know how.  Indeed, this is difficult but not impossible. The illustration below shows the hypothetical performance with both a Buy-and-Hold Strategy and a Perfect Timing Model (Buy/Short).  Even though a perfect Timing Model does not exist, some models on the market today (like MIPS) come close as they soundly beat Buy/Hold over time.

Let's suppose the market performs as in the table immediately below for 4 "Legs" of ups and downs:
 I.) The middle column in the table and the graph below on the left show the performance of Buy/Hold.
II.) The rightmost column in the table and the graph on the right represent the performance of a 
      Perfect Timing Model.
                             
                                            
     

 

A REAL TIMING MODEL (near perfect?)

The section shows the actual  MIPS3/MF.org performance in a market moving something like that of the first 3 "Legs" depicted above, by using actual data from the period of 2007-2017 ytd (verified by TimerTrac.com).  Why just 3 Legs?  Because, since 2009. the market is still on the 3rd Leg.  The next big drop will be like the 4th Leg above, and it is definitely coming. 

If you asked hundreds of investors questions about investing in the stock market, you would get diverse answers to each question.  There is one question, however, that they would all answer with a resounding "YES".  That question is: "Would you have a lot more money today had you not lost 35-60% of your portfolio value in the market crashes in 2000 and 2008?"

That is why the primary objective for a stock market timing model should be to beat the major indices (like the S&P 500 ETF "SPY") in UP and DOWN markets.  But, in real life, it would be more realistic to say that the objective should be to keep up with or beat the SPY in up markets, and either go to cash or soundly beat the SPY in down markets.  It's sad to say that only a very few timing models meet that objective on a long-term basis.  Most do well in up markets but not so well in down markets, or vice versa. 

To this end, below you will find results from TimerTrac.com for our MIPS3/MF.org model between 2007 and 2017 ytd.  For this, we traded with a popular investing strategy, namely 1.5x SPY Long and 0.5x SH Short (0.5x SH Short for lower risk).                                                              

           

                                                                    GRAPHS      

                        The vertical "scales" on the graphs below are different from each other
                             (scales optimised to show the complete graph in the same space) 
 
                   
 I.) MIPS3/MF.org                   
      Trading 1.5x SPY / 0.5x SH  
   
       2006-2007  <==
       Up Market                                                           
       MIPS 1.5x Long /0.5x Short    +20.5%            
       SPY Buy-and-Hold                    +15.5%                                   
* Red dots designate trade dates

          
       

II.) MIPS3/MF.org                   
      Trading 1.5x SPY / 0.5x SH  
   
       2008  <==
       Down Market                                                           
       MIPS 1.5x Long /0.5x Short    +22.0%            
       SPY Buy-and-Hold                    - 38.5%          
   * Red dots designate trade dates
 



III.) MIPS3/MF.org                   
        Trading 1.5x SPY / 0.5x SH  
   
         2009-2017 ytd  <==   
         Up Market                                                           
         MIPS 1.5x Long /0.5x Short    +370%            
         SPY Buy-and-Hold                    +170%             
* Red dots designate trade dates