I received the following comment and I think it will be useful to reply publicly to it as you will all learn from it. Here is the comment:

“I like the commentary which makes a change from some of the hyperbole you see around market experts – but Nick, I have a query – can you explain what happened in October of this year? On your performance page your Risk on/Risk off model is showing a loss of over 9% – what happened to cause such damage? Seems to have soured the result for the year.”

Where to start?  First of all, with the purpose of the model. The model has two main purposes for me:

  1. To give me the direction of the MAIN TREND in equities: UP when positive scores, DOWN when negative scores. This helps me with my trading as it helps me size my trades. I always do much larger size in the direction of the main trend from strong support/resistance. It improves my odds.  I could publish the trading results that follow, but then no one would believe them.
  2. To help me OUTPERFORM a buy and hold strategy over the long term in my retirement accounts.

And you have to remember that it is a model which follows the main trend, so it is NOT designed to be lightening fast. On purpose.

So, what happened in October?  The model scores started going down dramatically in the first days of the month and the daily model gave a sell signal on the 10th of October when the moving averages crossed over. The same day a counter-trend buy signal was triggered. A few days later, the weekly model gave a sell signal and the same day a counter-trend signal gave a buy signal.  Indicating the market was oversold. All this is documented in the daily member blog and you will find my remark that this had never happened before, which indeed it had not. The net result was that it actually under-performed the S&P500 by a couple of points, when the counter-trend buys failed, which is perfectly acceptable. When finally everything aligned, the market broke down hard again and the model had me successfully in TLT from 114ish to yesterday at 118+, when with the counter-trend signal it got me back in SPY and out of TLT.  Net-net the model again outperformed a simple buy and hold strategy over the course of the fourth quarter 2018 to date, and that will be reflected in the November and December performance.  Moreover it gave me some excellent short positioning signals in the past few days when I was able to make 100+ SPY points on the downside, as a bonus, in my trading. And as I write this, I am up over 50 SPX points on a counter-trend trade. Therefore the model more than proved its usefulness to me:

  1. It warned that something was very wrong in early October
  2. It got me long of TLT and out of SPY just in time.
  3. It helped me outperform a buy-and-hold strategy over the course of Q4, which is all it is designed to do.
  4. It gave me excellent trading pointers.

All this is documented in the daily member blogs for each day, which I very much encourage you to read every day, as it gives you every move in plain English, in real time.  What makes the ultimate performance of any model great is not that it makes money all the time but that it outperforms its benchmark.  If you keep doing that, quarter in, quarter out, you will end up with remarkable compounded numbers.

Always happy to answer member questions and provide additional explanations.

Nick

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