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Paratrade Systems Weekly Research News

18 Apr

S&P Fuel Gauge Performance Review

Every few months I try to look at how the gauges are working. This is necessary partly because trial subscribers need to get a complete understanding of how they work. All the gauges range between zero and a hundred. The higher the gauge level the more bullish we must be. Each gauge has its own (non-normal) distribution so I try to alert people when we hit bullish and bearish thresholds. In the case of the S&P, a level of 55 (and higher) is bullish and if we get below 30 we should look to short the market – especially if the market becomes overbought on a short term basis.

The currency gauges swing more violently than the equity (S&P) gauge so we must wait for higher levels (>75) to become bullish and < 25 to get bearish. In between, we can trade the market using overbought and oversold indicators. Bonds are stickier, like the S&P gauge, since they follow some long term variables that are not that volatile.

The first chart below shows the recent periods of price weakness that were sufficient to be identified as “trauma events”. This is not always true. We do see many instances where significant price weakness does not trigger a buy. I’ve shown the gauge levels in the 2nd plot so you can see how the gauge reacts to such events.

We can see periods where the market continues to rally even though the gauge has fallen to bearish levels. We must be patient and expect to sometimes miss a very extended rally. One way to handle this is to use trailing stops to stay in a trade that was triggered as long as 2 or 3 months ago.

Here we see the day counts since the last trauma event. (I apologize for the small font.)  We are currently at 19. I often tighten stops when we get above 20 if the gauge has fallen below 50. There is no magic number for the day-count since it is only one of three primary variables in the gauge calculation. If bonds are rallying then the gauge will not fall that easily and shorts will not (normally) be rewarded. If you want more detail then just let me know and I will send you the essay that describes the equity market gauge’s components. All in all, I am extremely pleased with the performance over the last 2 months.

CE

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