95% of my portfolio is run by my Medium-long term model. This model was developed back in my hedge fund days.
This model predicts bull markets, bear markets, “significant corrections” within bull markets, and “big rallies” within bull markets. Click here for the model’s historical BUY and SELL signals.
The other 5% of my portfolio is run by my Day Trading Model. I built and trade this Day Trading Model purely for fun. They say that a “good” day trader averages 15% per year. Can I beat that? Let’s find out.
The medium-long term model
This model is actually 2 models:
- The Long Term Model predicts bull markets (definition) and bear markets (definition).
- The Medium Term Model predicts “big rallies” and “significant corrections” in bull markets.
- A set of criteria define the term “significant correction”, but generally it is a 14%+ decline.
- A “big rally” is the S&P 500’s rally between 2 “significant corrections”.
Here’s an example (log scale chart).
Following the model to the letter will maximize long term investment performance.
Go 100% long UPRO (3x ETF for the S&P 500) when the model states that the S&P is in a “big rally” in a bull market right now. Shift to 100% cash when the model predicts a “significant correction” or bear market. Go back to 100% long when the model says that the “significant correction” or bear market has bottomed.
- The model has a 100% accuracy rate for predicting bull markets and bear markets.
- It has only failed to predict 3 significant corrections in the past 67 years. The market made a significant correction every time our model predicted one. Sometimes the significant correction began several months after our model predicted one, but the market always fell below our SELL price.
Using UPRO (3x S&P 500 ETF), our medium-long term model has yielded an average annual return of 45% since 1950. Our model does not “fit” the data. Instead, we implement a wide margin of error and utilize back up indicators (stop loss) in case our model is wrong.
- The stop loss indicators are only used if I fail to predict a bear market in advance. This prevents me from riding a bear market all the way down. Bear markets destroy leveraged ETFs like SSO (2x S&P 500 ETF) and UPRO (3x S&P 500 ETF).
- The stop loss indicators are not used for failing to predict “significant corrections”. This means that I will hold my long positions if the model fails to predict a “significant correction”.
- The stop loss indicators aren’t determined by price. They are determined by the economic data and price action. I.e. if the market goes down and “bear market symptoms” arise, then I will be stopped out of long positions.
- The stop loss indicators typically say SELL when the stock market has fallen 5-10%. Keep in mind that bear markets are usually 40%+ declines, so these stop loss indicators are timely.
The medium-long term model does not predict “small corrections” (6%+ corrections) and “small rallies” (the rallies between two 6%+ “small corrections). Historically, “small corrections” (6%+ corrections) are impossible to consistently and accurately predict. Many “small corrections” are random and happen for no fundamental/technical reason at all.
Since the model does not predict small corrections, my portfolio will sit through large drawdowns from time to time (i.e. a 7% decline in the S&P is approximately a 20% decline in UPRO). This is inevitable. It is not possible to average 45% per annum without occasional large drawdowns. I am investing to make money, not to minimize my portfolio’s volatility.
*I am currently using SSO (2x S&P 500 ETF) to reduce my portfolio’s volatility. Returns decrease but so does risk. I explained why I switch from UPRO to SSO.
Principles behind the Medium-Long Term Model
The U.S. stock market is very easy to understand. It is arguably one of the easiest markets to trade.
- Fundamentals (the U.S. economy) determine the long term (bull/bear markets). The stock market and economy move in sync over the long term. Leading economic indicators lead the stock market’s long term direction.
- The medium term (significant corrections & big rallies) is determined by a mixture of fundamentals and technicals.
- Technicals determine the short term (small rallies and small corrections). The short term is mostly random, but technical analysis does give traders a small edge.
*Corporate earnings aren’t as important as people think. The economy drives corporate earnings.
*Technical analysis does not determine the long term. Technical analysis has far too many false signals. For example, every bear market includes a “death cross”, but most “death crosses” don’t lead to bear markets. The economy is not determined by drawing a few lines on a stock chart.
The stock market has a long term (e.g. 30+ years) bullish bias because the U.S. economy spends most of its time expanding. Recessions are short in comparison to economic expansions.
This also means that when the stock market deviates from the economy’s direction (e.g. the economy improves but the stock market goes down), the stock market will eventually go up with the economy.
The medium-long term model today
Our medium-long term model states that the S&P 500 is in a “big rally” within a bull market right now.
Our model produces a value between 0 and 100.
- When the model hits 100, the model predicts a “significant correction” or a bear market.
- Anywhere else between 0 and 100 means that the S&P 500 is in a “big rally” within a bull market right now.
- The closer the value gets to 100, the closer the model gets to predicting a “significant correction” or bear market.
- I wait until the value reaches 100 before selling my long positions.
Our model’s value is 71 as of March 30, 2018. The model is updated daily. We post the model’s value here once every week.
Click here for the model’s historical BUY and SELL signals.
The model combines fundamental (economic) and technical data. The technical data is not standard indicators like RSI, Bollinger Bands, etc.
My short term discretionary outlook
I share my predictions on the short term direction of the market. This discretionary outlook has no direct impact on my investing/trading. Every once in a while, my discretionary outlook will help me improve the Medium-Long Term Model. Analyzing the market each day from a discretionary perspective is an interesting and fun excercise.
Go to the homepage for my latest market outlook.
Click here to learn more about my coaching sessions.