The Medium-Long Term Model predicts bull markets, bear markets, “big corrections” within bull markets, and “big rallies” within bull markets. Click here for the model’s historical BUY and SELL signals.
The Medium-Long Term Model yields an average of 43% a year when traded using UPRO (the S&P’s 3x leveraged ETF) and 30% a year when traded using SSO (the S&P’s 2x leveraged ETF).
Click here to learn about the Medium-Long Term Model’s exact components.
These charts demonstrate the model’s BUY and SELL dates.
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 “big corrections” in bull markets.
- A set of criteria define the term “big correction”, but generally it is a 14%+ decline.
- A “big rally” is the S&P 500’s rally between 2 “big 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 “big correction” or bear market. Go back to 100% long when the model says that the “big 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 big corrections in the past 68 years. The market made a big correction every time my model predicted one. Sometimes the big correction began several months after my model predicted one, but the market always fell below my SELL price.
My model does not “fit” the data. Instead, I implement a wide margin of error and utilize back up indicators (stop loss) in case my 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 when the model fails to predict “big corrections”. This means that I will hold my long positions if the model fails to predict a “big 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 43% 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.
The Medium-Long Term Model predicted each of the 4 massive bear markets from 1950 – present (1968-1970, 1973-1974, 2000-2002, and 2007-2009). In addition, it predicted the 1987 crash with stunning accuracy.
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 (big 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 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.
This is why the stock market is the easiest market to trade.
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. The risk of a “big correction” or bear market is low right now.
Go to the homepage for my latest discretionary market outlook.