My colleagues have just built a new trading model that complements our existing one. As promised in our June 23 market outlook, I’m going to explain what this model does.
To read about the new model in detail, go to the Our Model webpage and scroll down to the “Easy Trading model” section.
Here’s a brief explanation of the new model – the Easy Trading model.
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- The old model is now called the medium-long term model. Nothing has changed here. It still predicts bull markets, bear markets, significant corrections, and “big rallies”.
- We no longer use the medium-long term model to trade “big rallies” within bull markets.
- When the S&P is in a “big rally” within a bull market, the Easy Trading model takes over.
- Big rallies are broken down into “small rallies” and “small corrections”.
- The Easy Trading model tells us to buy UPRO when the S&P makes a 6%+ small correction.
- The Easy Trading model tells us to sell UPRO and go to 100% cash when the “easiest, most risk-free, most guaranteed” part of the “small rally” is over.
- The Easy Trading model uses a combination of more than 10 price (technical) and economic (fundamental) indicators to determine when the “easiest, most risk-free” part of the small rally will be over.
Essentially, we are no longer trying to catch the entire rally. We are simply catching the easiest/most risk-free part and letting go of the rest. In doing so, we will miss out on parts of the S&P’s rallies (and miss out on some profits). But we cut our portfolio’s volatility in half. Here’s an example of the Easy Trading model’s signals.
With the Easy Trading model, we average an annual return of just under 30% per annum. All of our trades are now determined by these quantitative models.
We will have some lean years and some fat years. But on average, we are able to achieve approximately 30% per year. That is our performance target over the long run.
The Easy Trading model today
The “easiest, most-risk free” part of the current “small rally” is over. We have been sitting on 100% cash since May 23 when the S&P was at 2392. We are up 17% year-to-date, so we’re a little more than halfway to achieving our annual performance target.
We don’t know exactly when the next small correction will occur, but we are patiently waiting.
What about our discretionary outlook?
As the fund manager, I enjoy writing a discretionary outlook each day here on the Bear Market blog. This no longer has any impact on our trading. We are purely quantitative.
However, I will still analyze the market each day from a discretionary outlook. Every once in a while, I pick up on something that can improve our models.