Instead of just looking at the recent quarter we’ll look at the success and failure of the three daily indices over the last year. We must keep in mind that we cannot expect the gauges to be perfect timing indicators all by themselves. They will often give buy signals before a move begins and you will have a chance to accumulate. We may also suffer a little pain but such is the fate of PM’s and advisers trying to catch turning points.
The S&P Daily Gauge
Here is a chart showing the gauge and the market:
I have tried to honestly mark buy and sell signals.
- The gauge got you long in February,
- It got you out or short in May
- We got good reentry levels in May and especially in June for the post Brexit vote rally.
- We got perfect 100 scores just before the US election.
- During the March rally the gauge failed to stay at exciting levels forcing positions to be held by virtue of reasonably wide stop loss orders.
- Buy levels in September suggested a better rally than we got.
- Post election gauge levels faded after Nov 16 and failed to give another strong buy signal before the early December rally.
Overall we are very happy. Buying when the gauge was high proved to be hugely successful. Sometimes it got us out too early but that depended on how the positions were managed. When you have a sort of blastoff there is a momentum effect that can be captured best by using trailing stops.
The Daily Bond Gauge
Here is the chart of the bond gauge and the US 10-year futures contract:
- Except for late February and the third week of March the gauge was resilient until mid April. That worked out very well.
- In the second week of June the gauge became bullish again which worked well
- At the highs of June the gauge crashed giving us re-entry signals in early July.
- September buy signals also caught a short-lived rally.
- I issued an IGNORE warning after the election due to tariff fear and I posted a special research essay explaining why that variable is not measurable and not a component of the index. I clearly explained why post-election buy signals were to be temporarily switched off.
- Some of the March sell-off was not foreseen by the gauge.
- The gauge expected a rally from mid-July to mid-August … all we got was a choppy shallow decline.
The gauge is more volatile than the equity gauge so it helps to dig into a more detailed picture. Except for the May rally a follower would have caught all of the meaningful moves and only been hurt in the summer.
The Daily Risk Parity Gauge
Here is the chart of RP vs its gauge:
- The Gauge perfectly predicted the huge rally of mid-January to early March.
- The sale in late April and subsequent buy in mid-May was superb.
- The gauge got nearly perfect reading of 100 from mid-June to mid-July and the market rallied most of that time.
- The bearish readings after that worked well right up to the election.
- The late March rally was largely missed (buy sell signals were not implied).
- Buy signals just before and after the election were wrong, entirely due to the bond factor which I warned about.
This gauge had a nearly flawless performance in 2016. Aside from a late March rally I can find almost nothing wrong with the signals.
Our Weekly Gauges
I have not, for the sake of brevity, included a complete review of the weekly gauges. They have a similar success/failure profile to the dailies. If anyone wants to see pictures of their historical levels vis a vis their respective markets then email me.
Looking Forward to 2017
The first hurdle is to overcome political unknowns like the imposition of giant tariffs. This is impossible to model so one has to be sure that the bond market has returned to trading off of conventional variables such as economic growth and inflation before we can trade it again. I’d like to see a stable negative beta versus S&P futures as a start.
Post-election repricing should happen quickly as equity managers move into stocks and indices that have companies which will benefit the most from new trade and tax policies. Instability of this type may resume once Trump’s team is in place and we see actual legislation. Weak returns in the New Year would tell us that fear and greed will be working normally.