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Market Timing

Thursday, April 16 2020

We all know that the “simple” positons we can have with our stock market investments are:
   1.) Long – Own equities (and bonds)
   2.) Short –
Own “inverse” equities (betting against the market)

   3.) Cash -- Own only cash

All quantitative trading strategies have formulas and indicators that they use to determine if the market is going up or going down,
hence telling the developers whether they should be Long or Short. These formulas and indicators include:

- following the trend,

- calculating the strength of a market’s momentum,

- calculating the “rate of change” (slow or fast),

- using formulas like “Fibonacci”,
- tracking the numbers of stocks hitting new highs (and new lows),

- tracking the number of stocks that are above/below their 50-day, 100-day and 200-day moving averages,

- using the MACD formulas, and

- including literally hundreds more.

From the strength of the combination of the above (and many more), quantitative models tell investors whether to be Long or Short.
The objective is to make money in both up and down markets by being Long in up markets and Short in down markets. Good models
do just that most of the time, and their  followers make money in both up and down markets.


Since we do not make money (other than a tiny amount from  bank interest or money market funds) when our money is in cash,
Cash signals seem to be useless.!!!

So, where do
Cash signals come from, and what does being in Cash do for us?


What Cash positions do for Investors:

 Cash positions do not make money for us, BUT cash positions often prevent us from losing lots of money (as in "avoiding the crash")

Where do Cash signals come from:

To my knowledge, there are no algorithms, indicators, formulas, etc. that calculate and “issue” cash signals. In fact, many timing
models only issue Long and Short signals (no Cash).  If model developers (like MIPS) want the safety of occasionally being in an
all-cash position, the developers themselves
need
to come up the ideas on how to determine when we should be in cash, and then
“program this” into their models.


How MIPS timing models were programed to issue Cash Signals:

Because the MIPS algorithms are proprietary, we do not explain exactly how we issue cash signals.

1.) Traditional “Stops”

     MIPS goes to cash after it has lost a certain (not fixed) percentage amount from a “high point” determined

     within the model; or from a certain maximum drawdown amount.  Stops really mean “I don’t know why,
     but you are not doing well so I am going to shut you down until further notice”.  That is a Cash Signal.   

2.) Too Close to Call Decision

      MIPS literally uses hundreds of indicators and algorithms combined with mathematical equations to

      determine the % that is Long and the % that is Short, To issue a new signal, the winning position must be
      ahead by a significant amount, or the model will default into a Cash position (too close to call).  For

      example, if the resulting decision is 55% long and 45% short, the model may issue a Long Signal; but if
      the result is 51% long and 49% short, it would almost surely issue a Cash Signal (to close to call Long or
      Short).     

 

3.) Volatility Too High

      There are many different definitions of volatility (like the VIX, standard deviation, etc).  The greatest
       impacts on quantitative models are (a) how fast are the market changes and (b) how “large” are the changes
       relative to other similar changes in the past. Recently, we experienced some of the biggest changes in the
       history of the US stock markets. In March 2020, the SPY fell the fastest and lowest in one week
than at
       any
other time since 1933 (almost 90 years ago). The daily changes in 2020 are shocking when compared to
       the long-term performance of the market.

       For  example, it is reported that the US stock market (Dow or SP 500) has risen close to 7% per year (after

       inflation) for over the last 80 years.  That  means that the annual percent change would have been between
       9-10% per year with inflation.  

       To make my point,  let’s use 10%  gains per year. That amounts to 0.8% per month (or approx. 0.04% / day).
       - In the
first 5 days of March 2020, the SPY dropped over 11.5%, which is more than the 1 year
average
         change in the past.

       - One month after 2/19/20, the SPY was down 29% (took almost 3 average years in the past to change that much).
       - Between Mar 2 - Apr 15, there were 15 days with changes greater than 4%; and 4 days with greater than 9%.
      
       In the past, where one might have lost an average of 1.5-2,5% in five bad days, one could have lost
       over 25% in three bad days in 2020. With odds like that
,
the risk/reward ratio does not fit well for an
       investor concerned about preservation of capital.  In this environment, the potential losses (risk) are far
       higher than possible gains (rewards). This high risk show lead to more time in cash.

            

4.) Market Moving too Fast

     In a fast-moving market, like now, many commercial timing models are not programmed to handle fast moving
     changes with such elevated daily changes. A good model would determine this and spend more time in cash.


Trading in this market environment is comparable to testing a new race car on a track that was built 20 years ago.
Let’s say that until now, there had been no “crashes’ from race cars making 180 degree turns on this track.  Of course,
the embankments on these turns were designed to be quite a bit higher on the outside to prevent race cars from simply
flying off the track.
Even
if this track had been used successfully for the past 20 years by race cars going at 200 miles/hour;
it would not be surpris
ing
if a race car going 300 miles/hour went flying off the embankment. The reason, of course, is that
the track was not designed to handle cars going that fast. This is
similar to the market we are in now. Numerous
models
in use today were NOT designed for this
extreme volatility. Additionally, many models are not prepared to internally make
that determination
and go to CASH until after the market settles down, but MIPS is programmed to act long before then.

 

With respect to all of the above, MIPS has internal algorithms that address each issue. This helps investors attain good returns during
the trading day, and still sleep well at night.

 

Good trading…

 

Paul Distefano, PhD
Founder / Developer
MIPS Timing Systems

Houston, TX

Posted by: Dr. G. Paul Distefano AT 10:12 pm   |  Permalink   |  Email
Wednesday, April 15 2020
One of the most proven patterns in the stock market occurs during "Crashes".

About 80% of the time that the market (like SP 500) drops 20% or more (like Leg 1 at -34% in the graph below) and then experiences
a retracement of over 50% of the drop, that usually means that the bottom has been reached.

But, if the market stalls at the 50% retracement point level and heads back down, it will either:
  (a) test the recent bottom and head back up to new highs over time, or
  (b) continue the drop at a faster pace and end up dropping to up to 2 times more than the first drop (Leg 2) before it heads back up

In the graph below, you can see that we are basically "there now" (D-Day is here) !!!
- instead of guessing, let's let MIPS tell us what to do next...

Paul Distefano, PhD
Founder / Developer
MIPS Timing Systems
Houston, TX
Posted by: Dr. G. Paul Distefano AT 12:32 am   |  Permalink   |  Email
Saturday, April 04 2020
There are many things that make the current stock market a dangerous place to be.  We all know most of them, but I wanted to point out that the SP 500 Index broke below its 11-year Trend Line in early April 2020.  See graph below... More later.!!!
image.png

Paul Distefano, PhD
Founder / Lead Developer
MIPS Timing Systems, LLC
Houston, TX
Posted by: Dr. G. Paul Distefano AT 10:24 pm   |  Permalink   |  Email
Sunday, March 22 2020
The title above kind of speaks for itself.  Rather that me going on about what happened so far in 2020, and my opinions as to why, let's just get to the point.  In 2020 YTD, the SPY is down -29% and the MIPS models are down only -3%. That, we are very proud of. 
 
Graph #1
- In 2020, SPY -29%

 More Bad News - The SPY hit and fell below its last support level (#3 below) and the next one is "way down".
image.png


Graph #2 - In 2020, MIPS -3%  (from TimerTrac.com)
More Good News -- If the SPY goes down further, MIPS will go up higher (as in 2008, to over +50%)
image.png

Note: The above charts from TimerTrac.com are calculated from actual, verified signals from MIPS (all MIPS models
issued the same signals in 2020). When MIPS models issue a signal after the market close, MIPS members are to trade
on the next days open. The calculated numbers are not 100% equal to the numbers from real trades because: (a) signals 
issued to trade on the open may execute 2-3 minutes late (and 3-4% different than the open), and (b) buying the SH is not
quite the same as shorting the SPY, and (c) the SPY is not exactly the same as the S&P Index which it follows. 
The GOOD NEWS is that these number are indeed close enough for us to analyze and track our performance.

Good Trading...
Paul Distefano, PhD
Founder / Owner
MIPS Timing Systems, LLC
Houston, TX
281-251-MIPS(6477)
www.mipstiming.com
Posted by: Dr. G. Paul Distefano AT 03:18 pm   |  Permalink   |  Email
Thursday, March 19 2020
In the graph below, you can see that the SPY is sitting just on top of it's last support level from Dec'19  ("Support 3").
If the SPY breaks Support 3, there is not another one until way, way down (like near a real "Bottom").
- all of the MIPS models (except MIPS1) are "Short", so we are not worried, yet !!!
Stay tuned...
image.png
Paul Distefano, PhD
MIS Timing Systems, LLC
Houston, TX
281-251-MIPS(6447)
Posted by: Dr. G. Paul Distefano AT 12:21 am   |  Permalink   |  Email
Wednesday, March 11 2020
Big news is giving investors a rough time. This is mainly because, independent of the bad news they are preaching (mainly Virus), it is bad news for us whether it true is or not.  Remember, the markets can tolerate "actual" bad news, but it cannot tolerate "Uncertainty" !!!   And remember, in times like this, markets take the stairs up and the elevator (or jumps) down.

The market (SPY) has reached what I would call a critical support level on the close today at about $274.36.  Before a real bad total "CRASH" takes place, the SPY has only one more "support level" (at $234.34 or almost 15% lower than today's close) before free falling. Just going to that support level after what we are going through now will feel almost as bad as a total "crash".  We need to watch the next few days carefully. Of course, we could almost guarantee that MIPS would go short well before taking a fall like that (unless it happens in one day).
 
image.png

Paul Distefano, PhD
CEO / Founder
MIPS Timing Systems
Houston, TX
www.mipstiming.com
Posted by: Dr. G. Paul Distefano AT 06:44 pm   |  Permalink   |  Email
Thursday, March 05 2020

We know that we have sent lots of emails in the last two weeks, but the short article below is a good one to read at this time.
 

https://seekingalpha.com/article/4329444-1918-spanish-flu-and-stocks


Paul Distefano, PhD
CEO / Founder
MIPS Timing Systems, LLC
Houston, Tx

Posted by: Dr. G. Paul Distefano AT 10:03 pm   |  Permalink   |  Email
Saturday, February 29 2020
Last week was a historic one in the stock market, with a horrific one-week drop.  The drop last week was one of the top six one-week drops in the stock market since 1929.!!!  And, that hurts.  But still, last week's drop was NOT a stock market "crash".  Remember, in street talk a "dip" is a drop less that -10%; a "correction" is a drop between -10 to -20%; and a "crash" (or bear market) is a drop of more than -20% (usually between -35% and -60%).
Furthermore, strong up-markets (bull markets) normally DO NOT just drop from all-times highs to a bear market in a matter of days or weeks. There are way too many things that go into the conditions that would turn a bull market into a bear market in a one-week period (or even in a one-month period).  To see that in more detail, please look at the graph immediately below.  This graph is with monthly bar-charts.  As you all know, the last two bear markets happened in 2000 and 2008.  What you may not know is that both times the S&P 500 market "waffled" near the top for 12-15 months in a tight, rather flat range; and they DID NOT collapse until the market broke the up trend-lines to the downside.  At this time, the S&P 500 Index is way above its trendline, but that could change in s short period of time.

 
STOCK MARKET CRASHES SINCE YEAR 2000
 
image.png

 
THIS IS WHERE THIS BLOG GETS INTERESTING.
There is a good possibility that what is happening now in the market now is just another of the many "V-Bottom" patterns that are popular in bull markets, and you most likely would like to see how MIPS has performed when in these patterns. The graph immediately below shows V-Bottom markets in 2014, 2016, 2018-19; and the graphs following that one is how MIPS3 actually performed in each V-Bottom pattern (as verified by TimerTrac.com). As you will see in the graphs below, with V-Bottoms sometimes MIPS goes to cash, other times it stays long; and in true prolonged bear markets MIPS will be short or in cash most of the time. 

See the 2008 graph below.  Between 2007-09, MIPS3 was up +138% when the SPY hit its low point with a -55% loss !!!  Please note that the stock market had degraded slowly for several months before the big drop hit.
image.png  x
2014
Red - SPY
Blue - MIPS3
image.png
Paul Distefano, PhD
CEO / Founder
MIPS Timing Systems, LLC
Houston, TX
 
Posted by: Dr. G. Paul Distefano AT 06:45 pm   |  Permalink   |  Email
Saturday, February 29 2020
2016
Red - SPY
Blue - MIPS3
image.png
2018-19
Red - SPY
Blue - MIPS3
image.png

2008 - Between Oct 2007 and March 2009, MIPS3 was up +138% when the SPY hit its -55% low !!!
Red - SPY
Blue - MIPS3
image.png
Now, here we are 10+ years later, with a strong bull market and with still very good economic conditions; but who knows what's next.  Most likely the next big moves in the market will be determined by the following "conditions":
  •  the COVID_19 virus,
  • the inverted bond market,
  • a highly over-bought stock market (high P/E ratios),
  • the 2020 elections, and
  • recession fears.
This is why we need MIPS to keep us out of trouble.
- if this market becomes a bear market, MIPS will make money like it did in 2008 (but most likely not that much);
  and if it becomes a V-Bottom, MIPS should ride it back to where it started.
- But, of course, in either market MIPS could be whipsawed (not likely)
- MIPS3 is a very good model, but MIPS/Nitro is better !!!


Paul Distefano, PhD
CEO / Founder
MIPS Timing Systems, LLC
Houston, TX
Posted by: Dr. G. Paul Distefano AT 06:45 am   |  Permalink   |  Email
Monday, February 24 2020
Today was the worst day in the stock market in quite a while. It is not often that the Dow drops 1,000 points and the S&P 500
drops over 100 points in one day.

Many times, large daily drops in the market result from rumors or fake news, and the negativity does not last long. But, this time, 
there are two good reasons behind this big drop. One is the Coronavirus from China (and spreading) and the "inverted" interest
rate curve (i.e., where the interest rate on 3-month bonds are higher than the rates on 10-year bonds).  If this virus spreads like it
could, production and trade would suffer all over the world quickly.  And, if the interest rates stay inverted, the Fed could be forced
to lower rates, possibly even to zero or negative.  The many awful implications of these two "reasons" are way too broad to cover
in this blog, but you can find readings about these all over the Internet.

For now, let's see how worried you should be about this drop (and future drops) at the time. First, let's see how bad today's drop
really was. Of course, a drop like today is short-term bad no matter what, but not really bad when compared to recent gains. In
mathematics this could be referred to as "relativity"; where a 3% drop in one day in a market that has grown 25-30% in the last
12 months is actually not nearly as bad as a market that has dropped 3% in one that had grown only like 6% in the last 12 months.

Graph #1 immediately show us what today's market looks like after today, and Graph #2 shows us what this looks like after
stepping back and looking at the graph from afar (like seeing a forest fire from a helicopter instead from inside the fire itself).
Graph #1
image.png
Graph #2 is the same as Graph #1, but when you step back and put it in perspective as in Graph #2, the situation does not look
as horrific as you thought (and this may keep you from panicking like an amateur).
Graph #2
image.png


Of course, the may not be the end of this mess

All of the MIPS models are still Long, but the upside support in the model is getting weaker . 
DON'T Panic - This may not be the end of this mess, but we have MIPS to tell us what to do.

Paul Distefano, PhD
CEO / Founder
MIPS Timing Systems, LLC
Houston, TX
281-251-MIPS(6477)
Posted by: Dr. G. Paul Distefano AT 09:36 pm   |  Permalink   |  Email

MIPS Timing Systems
P.O. Box 925214
Houston, TX  77292

An affordable and efficient stock market timing tool. Contact MIPS
281-251-MIPS (6477)
E-mail: support@mipstiming.com