Trading model for the UK stock market

The UK’s stock market is heavily influenced by the U.S. stock market. This is because the U.S. accounts for 50% of the world’s financial markets, which makes it the elephant in the room.

A nation’s stock market typically moves in the same direction as its economy. But here’s the interesting point: the UK’s stock market is more influenced by the U.S.’ economy than the UK’s own economy!

1. In the U.S. stock market, a downwards trending U.S. unemployment rate = bullish for U.S. stocks.
2. But in the UK’s stock market, the market can trend upwards even when the UK’s unemployment rate is rising!

For example, the UK’s unemployment rate went up in the 1950s and 1960s even though the UK’s stock market went up!

Like the Australian stock market trading model, we can use U.S. economic data to trade the UK’s stock market and significantly beat buy and hold.

*The U.S. is the elephant in the room. When the U.S. stock market goes down, every stock market goes down. That’s why we can use U.S. economic data to trade the UK’s stock market.

Model

Use the BUY and SELL dates from our Golden/Death Cross Model with Initial Claims Filter for the UK’s stock market (FTSE 100). This model was originally built for the U.S. stock market.

BUY indicator

1. Indicator: BUY FTSE 100 when the S&P 500 makes a “golden cross”, AND… the 50sma remains above its 200sma for 5 consecutive trading days (in other words, the S&P made a “golden cross” 5 days ago).

Position size: 100% long

*”Golden cross” is when the S&P 500’s 50 daily moving average rises above its 200 daily moving average.

SELL indicators

Only SELL the FTSE 100 if both of these indicators occur:

1. Indicator 1: When the S&P 500 makes a “death cross”, AND…
2. Indicator 2: Initial Claims is above its 52 week (1 year) moving average for 8 consecutive weeks (2 months).

Position size: when you sell, shift to 100% cash.

*A “death cross” occurs when the S&P 500’s 50 daily moving average crosses below its 200 daily moving average.

The model’s returns for the UK stock market

Buying and holding the FTSE 100 from 1950 – present would have yielded an average annual return of 6.06%

This model yields an average annual return of 7.33% from 1950-present. More importantly, this model reduces your portfolio’s volatility (short term losses).

The following chart demonstrates when you should be long the FTSE 100, based on this model.

Click here to download this model in Excel

Here is this model’s historical BUY and SELL dates

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