Friday, March 26, 2010

Trends In Gold, 10 Year Treasury Yields, And Crude Oil Remain Extreme

Our composite indicator that assesses the strength in the trends of gold, 10 year Treasury yields, and crude oil will remain in the extreme zone by the end of the week. This represents a headwind for equities.

Figure 1 is a weekly chart of the S&P500 and the indicator is shown in the lower panel. If you had been so smart to only "buy" the S&P500 during those times when the indicator was extreme, then you would get those trades seen in figure 1. Winning trades are in green; the losing trades are noted by the red trend line. Since the March, 2009 low, the indicator has been at or in the extreme zone 6 times. If you bet long on the S&P500 when the indicator was extreme, these 6 trades resulted in 3 losses (-4.99%, -2.24%, -0.78%) and 3 wins (1.06%, 0.35%, 0.04%). The winning trades essentially were multi-week trading ranges for the S&P500. During the past 12 months when the indicator was in the extreme zone, the S&P500 either went down or side ways.

Figure 1. S&P500/ weekly

For a more comprehensive look at this indicator and how stocks under perform when the indicator is extreme, I refer you to the following articles:


Anonymous said...

Your analysis and trend indicator hold for the upturn since the bottom, but it completely failed during the crash on the left hand side of the chart. (and would have had you buying hand over fist during the crash). So seems like it has the usual problem of being right for some time until SOMETHING changes, and then you need a 'new' system.

Guy M. Lerner said...

Anon: you are correct but the indicator is not a stand alone indicator; if we combine the indicator with a simple strategy like buying over the 40 week moving average you get a very powerful strategy

On the site, put these words into the search box in the right hand: "trading strategy". Look at the two articles on developing a trading strategy.

Essentially you take two very good concepts and make one super concept when you combine together