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November 20, 2007

Timing
by Bill Rempel

Timing attempts to provide market equivalent returns over the long term, with a substantial reduction in variability of returns. The two components of the Timing program are EZ+Macro and Fear/Greed. This system trades rarely and splits its allocations between ETFs tracking the S&P 500, the intermediate-term U.S. Treasuries, and cash.

Information is as of the close on November 16, 2007.

EZ+Macro

EZ Trend is up for the U.S. stock market as approximated by the S&P 500. While the U.S. Ten-Year Treasury price is also bullish by EZ Trend, my latest backtesting hasn't indicated that a position in bonds is warranted in this EZ+Macro configuration.

Fear/Greed

The Fear/Greed model signaled a buy for the U.S. stock market in early November. It would signal a sell only if $VIX relative to actual volatility fell to a historically low level. This is a tough model to follow, as it demands a buy and hold when fear is high and most people would like to sell.

Model Allocation

S&P 500 SPDRs (SPY) - 100%
iShares 7-10 Year Treasury Bond Fund (IEF) - 0%
Cash - 0%

Tracking

There are no changes to the allocation from last week's message.

Charts and Commentary

My charts are 700px wide and this site is best viewed at 1280×1024. If the chart is truncated in your browser, click to view it in full size.

(1) EZ Trend components. This is the lowest the spread has been in the past 52 weeks, but the signal is a cross of the averages, not a spread distance.

(2) Fear/Greed buy signal. As long as options estimates of S&P 500 volatility are spiking in relation to actual volatility, this system will be on a "buy" signal. Monday's market drop may have been distressing to many long traders, but that very distress was a bullish signal by this method.

(3) Note that all price action in the last week was contained in the congestion period marked during the July to September correction.

(4) Volume spike, with a long lower wick on the candle chart, on July 26. Lower prices were tested and the index bounced back to a large degree, then fell more on the following day with volume that was slightly lower, but still significantly above the average volume at that time. Most of the price action in the remainder of the correction stayed near that second day's price range.

(5) Looks familiar to me. No guarantee that it will play out the same, but I'm not thinking there's much downside here.

(6) 2-day RSI is neither oversold nor overbought. Any short-term signal is probably days away.

Note the breadth in the following charts.

The index is near low levels in breadth that have, over the last several years, indicated being at a significant bottom. I don't have information going back before the recent five-year bull market, so I can't compare this to the breadth indicators of the bear in 2001-2. Monday's drop made the breadth measurements on the 50- and 200-day simple moving averages worse than they were at last week's message, but breadth has improved since then. Bullish percent has fallen, however. The Bullish Percent Index (BPI) is a popular market breadth indicator that is calculated by dividing the number of stocks in a given group (an exchange, an industry, etc.) that are currently trading with Point and Figure buy signals, by the total number of stocks in that group. I am likely to consider very low breadth as a contrary buy signal. There's no guarantee that the members of the index won't become more oversold as a group, but I view it as unlikely to happen here.

Regression models show 90/100 for 20-day "potential" and 79/100 for 20-day "safety." Twenty trading days is approximately a month. These are bullish values. I don't include the regression model in the timing system because I specifically want the system to be "lazy" i.e. not trading very often.

Bill Rempel
The Rempel Report

Disclaimer: Nothing at The Rempel Report, or any communication from The Rempel Report or its author, should be construed as personal advice, on investing or anything else, and at all times you are responsible for your own actions and you should perform your own due diligence. I'm not an investment professional, and you should probably consult with one, in addition to doing your own due diligence, before making any investment decisions.

I may have a beneficial position in any potential investment I mention. My positions in, and opinions of, those potential investments may change over time. I have no obligation to reveal those positions, and if I should reveal those positions, I am under no obligation to notify you, though this site or through any other means, if I change those positions.

While I do try to verify much of the data presented, I can make mistakes. I rely on third party vendors for data, and sometimes that data could be incorrect. Therefore, I cannot and will not be held liable for incorrect or erroneous data presented in text, table, chart, or other format. This is one more reason why you should consult with an investment professional, in addition to doing your own due diligence, before making any investment decisions.

Modeling is prone to error, and no statistical model is perfect. The output from statistical or predictive modeling should be viewed with skepticism.

Fundamental analysis is based on examinations of company filings such as income and cash flow statements, balance sheets, quarterly and annual filings, proxies, and other such items. Even though a company appears fundamentally sound today, that doesn't imply they actually are, or will remain, fundamentally sound. Fundamentals can change over time, and there is always the possibility that the company filed information that was either fraudulent or incorrect. I might make an oversight or error when examining company filings. In many cases, I will rely on a third party's presentation of filing data, such as a stock screening program's output, without actually reviewing the filings personally.

Technical analysis is based on the study of historical price, volume, and sentiment data over time. Past performance is no guarantee, and there are no certainties hidden in patterns, charts, indicators, or formulae.

FundaTechnical analysis involves those items which mix elements of Fundamental and Technical analysis, including valuation metrics such as the Price/Book or Price/Earnings ratios. Therefore all the warnings for both Fundamental and Technical analysis apply.

Take responsibility for your own actions. You should consult with an investment professional, in addition to doing your own due diligence, before making any investment decisions.

Copyright © 2005-2008 Bill Rempel

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