19th Apr '21 by Edmund Shing

27 comments 4520 reads

One Indicator to Rule Them All

Summary:

There are market timing systems, but none are the holy grail
Dual Momentum is one such simple trend-following system
The 200-day moving average breadth indicator is my preferred timing indicator

New Podcast: The Future of Transport

In today’s podcast, Edmund and Charlotte discuss the future of transport, challenges and prospects.

Transport: Back to the Future

What effect has the drastic reduction in travel had on the global economy?
What will rebound to pre-pandemic trends?
What will the “green” means of transport run on?
Is transportation an attractive sector to invest in?

Market Timing: is it possible, and if so, how?

Market timing, knowing when to buy and sell stock markets, is one of the holy grails of investing. Many assert that it is simply impossible over time, and thus push buy-and-hold of cheap broad stock market ETFs as a simple investing solution for the long-term - Vanguard, for instance.

I would argue that there are market timing systems that one can follow to enhance returns and reduce risk over and above a simple buy-and-hold equity strategy, but that there are no “perfect” systems, of course. Each has their own advantages and drawbacks.

One that has been shown to work well over the long term is Gary Antonaccci’s Dual Momentum trend-following system, which has the merit of being very simple to operate.

This employs the twin concepts of relative and absolute price momentum to time investment in stock market indices or bonds.

But a second system, that I find superior, is that of using a particular indicator of breadth of stock market advance to time exposure to stocks or bonds.

This indicator is simply the percentage of stocks in a broad stock market index that at any given point, are above their own 200-day moving averages.

When this percentage is above 65%, then one should be 100% invested in the stock index. When this percentage is between 50% and 65%, one should be 50% invested in stocks, and 50% in bonds. When the indicator drops below 50%, one should be 100% invested in bonds.

The concept is simple: when the majority of stocks are trending higher (as indicated by…

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Tim Duffy

19th Apr '21

Looking at the Breadth chart, it spends most of the time above 65%. This would agree with the view that its better to be fully invested most of the time. Would be interesting to count the number of days it dips below 65% or 50%. In reality these downward moves occur so quickly that acting on them may be difficult, so it may not work well as a "Sell" indicator in practice.

Can you overlay the S&P index onto the Breadth index to show the interaction between them.

Apart from 2008 the Breadth index rebounded very fast, it may be that a low Breadth Index is a good "Buy" signal.

ACounsell

Hi Edmund,

A few thoughts on your podcast re Transport in the future:

The increase in second hand car purchases (which will be mainly petrol, hybrid and possibly diesel) to travel to work will work against the move toward zero pollution and reduced congestion. Mass transit systems are I would argue a fundamental requirement for modern cities to function. Pre Covid there was much talk about Employers charging employees for parking cars at their place of work to discourage travelling to work by car - this trend is a 360 degree switch!
Electric bikes are fine - though bad winter weather and good old English rain mean they are not always ideal. I lived in Cambridge and transporting two children and all their kit (sports stuff, musical instruments, school books, etc.) on three normal bikes meant at times it was like a pack horse train! Three electric bikes wouldn’t have solved this problem and then there is the issue of cost (ebikes are not cheap) and security. If you live in a small flat in a London and have no where to store an ebike if it is left outside, even locked up, it will be stolen or vandalised as many ordinary bikes are. Insurance might get very expensive!
There is a large degree of scepticism around the hydrogen economy and heavy goods vehicles. This link is to an article by a Cambridge academic who clearly has an agenda (anti fossil fuel companies) but is nevertheless an interesting read http://www.csrf.ac.uk/2020/12/...

Andrew

Indie

Thanks for the S&P 500 Stocks Above 200-day Average ticker. Do you happen to know if there’s one for any UK indices? I had a search but didn’t come up with anything.

Edmund Shing

20th Apr '21

Interestingly yes Tim, a very low breadth indicator that then rebounds from eg 20 or below, is a good "Buy" signal, that I have tested in the past...

Edmund

Again Graham, the aim of the system was not so much to outperform in the good times, but to protect in the bad times. This is did back in 2000 and 2007 - the point of this indicator being that it gives the average investor a much better chance of staying invested rather than being scared out at lows.

Hi Andy,

In this simple backtest, there is only one check per month, so the moving average is calculated using closing price only over the past 200 days, and effectively when lines are crossed on the monthly check, then 50% goes in or out of equities (100% equities <-> 50:50 equities:bonds <-> 100% bonds

Possibly Alan, I have to admit, I haven't really tested that...

I agree dfs12,

always the problem is getting reliable total return data that goes back far enough. I will give it a try though...

For the S&P 500 at least (this can be used as a proxy indicator even for UK or European indices I find), you can use this link:
https://www.barchart.com/stock...

Where you will find the latest value and chart for this indicator based on the S&P 500...

There are but I have only found them available on Bloomberg, for the moment...

dfs12

Sorry for creating the extra aggro - you've done lots of work already!

Rusty2

“Right now, what are these stock market breadth indicators suggesting? Well, for the US, Europe and UK stock markets, they are all in the 87%-97% range, thus all indicating that one should remain 100% invested in equities, for now.”

With the US markets at 97% which is the highest level on your chart, does this not indicate that they are over valued and due a correction? Also levels above 90% have been short lived. Corrections can happen quickly as we saw last year.

Thanks Andrew for your comments,
Yes in a 10 min podcast, one can never cover every angle! But I would certainly agree with your Point 1, and I note that the Mayor of Paris has been proactively moving towards this type of approach with less and less car parking in the streets, and more and more promoting of more metro lines, trams and buses.

Ultimately, if we are to be serious about this climate issue and efficient transport, we cannot expect to have personal space in our personal cars as well... My son will certainly agree about your London bike parking point, as he lost a back wheel of his bile outside his flat that way, to then discover how expensive it was to replace even just a back wheel!

On the hydrogen economy, it is one possible solution, but clearly there may be others we do not know about yet...

Indeed Wilkonz, a simple 200d moving average index strategy does work in trending markets, not not in choppy sideway markets, as you can imagine... There are simple ways to improve on t his, for instance by testing whether or not a stock index is in a confirmed up or down trend using a strength-of-trend indicator like the ADX (a component of the DMI technical indicator).

William K

Agreed Edmund. I would want to see a steadily rising 200 day MA before trying any moving average strategies. Ideally (as Minervini suggests) the 150 day MA should be above the 200 day MA and either parallel or diverging away from it.

PS The ADX - which I have hitherto overlooked - seems an interesting way of measuring relative strength. If a share price has an ADX value of 49, and the relevant index has a value of 26, it would seem to indicate that the share price in question is outperforming the market.

Kiewit

Hi Edmund, Is the same approach you mention in your book - The Idle Investor? Is it good enough to follow that?

Fegger

21st Apr '21

FYI in our London street a bike hangar has just been installed. These are being installed across our borough ( not without controversy as the cost is being questioned) These are designed to remove this problem of having no storage space in your residence and of security as they are locked .

Hi Kiewit, not quite! there are actually 3 ETF-based approaches in my book, this is an extra rules-based strategy.

But they are all valid, some perform better than others at different times, but all have been strong over the long-term.

Best, Edmund

yes herbie47, in the short-term this is all true.

But medium-term, this strategy still works well!

Dave83

23rd Apr '21

Thanks Ed - very useful; is the converse also true? Take profit/lower exposure on very high readings (esp. to the extent that it arises NOT immediately following a market crash - when it might be justifed)?

Market Musings 19/04/21: One Indicator to Rule them All

One Indicator to Rule Them All

Summary:

New Podcast: The Future of Transport

Transport: Back to the Future

Market Timing: is it possible, and if so, how?

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About the Author

Edmund Shing

27 comments

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