Model Details and how to invest for each phase


Overview

The model is composed of two sepearte models. 1) The Stock Market Bull/Bear indicator and 2) the Macro Trend indicator.

The Stock Matrket Bull/Bear indicator is our short term model that helps us determine if we are in a real uptrend or downtrend.

The Macro Trend indicator is our medium term prediction of the economy.

The Stock Market Bull/Bear can be used on its own for shorter term trading, but when combined with the Macro Trend model, it helps us make better choices of the types of investments to make based on where the economy is heading.


How to use the Stock Market Bull/Bear model:

When the model shows a 1 we are bullish and want to be invested. If NOT combining with the Macro Trend model, I personally use the "SPY" ETF for this. It tracks the S&P 500 index. So to be clear when the model is a 1 you would purchase SPY with the amount you are willing to risk/invest. When the model is 0, we are bearish. There are several ways to go bearish. One is to sell and go to cash. The other more aggressive way is to purchase TLT which represents 10-15 year US Treasuries. TLT typically will rise when we have corrections. Another even more aggressive way would be to short the S&P 500 with an inverse ETF like SH. For the returns mentioned on the homepage, the model only goes to cash and it assumes non interest bearing cash.


This is NOT a day trading model. It's goal is NOT to avoid all market dips. The goal is to avoid major market downturns and also to get us back in once downturns have finished and markets turn up again.


Please only invest what you are willing to lose. Nothing is guaranteed, so please use this site as something to help with your other reading/research/models.


NOTE: This model may give a sell/buy signal when we are not entering an extended trend. You can see this in the chart on the home page where there are quick transitions from 1(buy) to 0(sell). These short sell/buy signals are really non events. You might end up making or losing a little when they occur but we need to trade as the model says. We only know after the fact if the trend was extended or if it was as false signal. Our goal is to be safe, so we follow the model and trade on these events.


Macro Trend Indicator:

Our Macro Indicator is used to provide a longer-term market trend. It is based on the rate of change (2nd derivative) of economic growth and earnings. If the rate of change is increasing it is bullish over the next 3-4 months. If the rate of change is slowing it is bearish over the same period. The level is not important, it is the rate of change that matters.


We use this indicator to help determine what investments we should make as described below.


Combining the models to identify stages 1 - 4:

The two models when combined give us four possible states that each have preferred investments. They are:

1) Stock Bull/Bear = BULLISH and Macro = BULLISH: Combined: VERY BULLISH

2) Stock Bull/Bear = BULLISH and Macro = BEARISH: Combined: CAUTIOSLY BULLISH - Aticipating an eventual down market. (Stages 3 or 4)

3) Stock Bull/Bear = BEARISH and Macro = BULLISH: Combined: CAUSTIOSLY BEARISH - Anticipating an eventual up market. (Stages 1 or 2)

4) Stock Bull/Bear = BEARISH and Macro = BEARISH: Combined: VERY BEARISH


What to invest in based on the combined model stage number above:

1) Buy the broad market. Everything is going up!

  • Average Risk: SPY, DIA, QQQ, IWM, or similar
  • Aggressive Risk: SSO, DDM, QLD, UWM, or similar

  • 2) Be cautious and be ready to go bearish:

  • Average Risk: SPY, DIA, QQQ, IWM, TLT, raise some cash
  • Aggressive Risk: SSO, DDM, QLD, UWM, TLT, ZROZ, be ready to raise cash and be bearish

  • 3) Be cautious and be ready to get bullish:

  • Average Risk: SH, PSQ, DOG, RWM, raise some cash
  • Aggressive Risk: SDS, QID, DXD, TWM, be ready to go bullish

  • 3) Get agressively bearish:

  • Average Risk: SH, PSQ, DOG, RWM, TLT, ZROZ
  • Aggressive Risk: SDS, QID, DXD, TWM, TLT, ZROZ