Today’s model is a pure fundamental trading strategy (i.e. only uses economic data). As you probably know, Initial Claims is a leading indicator for the economy. And since the economy and stock market move in the same direction in the long run, Initial Claims is also a leading indicator for the stock market.
This model is very simple. It only has 3 lines:
- Buy and hold SSO (S&P 500 2x leveraged ETF), UNLESS…
- Initial Claims is above its 52 week (1 year) moving average for 8 consecutive weeks (2 months). When this happens, SELL SSO and shift to 100% cash.
- Shift back to 100% long SSO when Initial Claims is no longer above its 1 year moving average.
This strategy yields an average of 12.55% per year from 1969 to present.
In comparison, simply buying and holding SSO from 1969 to present would yield a 11.4% return.
It sounds like this strategy isn’t a big improvement vs. “buy and hold”. But here’s the main advantage behind this model: it is less volatile than buying and holding SSO because it helps you avoid some parts of bear markets during which SSO will get clobbered.
Leveraged ETFs like SSO can lose 90%+ of their value during bear markets. And while these leveraged ETFs will eventually recover during the next bull market, it’s still a gut wrenching experience to buy and hold leveraged ETFs during bear markets. This model helps you avoid that gut wrenching experience. It’s hard to believe in buy and hold when you watch 90%+ of your net worth evaporate in 1-2 years.
Since bear markets destroy leveraged ETFs like SSO, this strategy allows you to sidestep the bulk of bear markets, even though there are some false signals.
*This strategy is purely fundamental. It assumes you don’t include technical indicators.
Click here to download the backtest and data in Excel.
I include the historical BUY/SELL dates and prices.
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