We make trading decisions based on our quantitative models. We have 2 models.
- Medium-long term model. This predicts bull markets, bear markets, “significant corrections” within bull markets, and “big rallies” within bull markets.
- Easy Trading model. This determines when we buy and sell UPRO (3x S&P 500 ETF).
The medium-long term model
This model predicts:
- Rallies in bull markets. We call these “big rallies”.
- Significant corrections in bull markets. We call these “significant corrections”.
- Bear markets and bull markets.
Following the model to the letter will maximize long term investment performance.
Go 100% long UPRO (3x ETF for the S&P 500) when the model states that the S&P is in a rally in a bull market right now. Shift to 100% cash when the model predicts a significant correction or bear market. Go back to 100% long when the model says that the significant correction or bear market has bottomed.
The model has a 100% accuracy rate for predicting bull and bear markets. It has only failed to predict 3 significant corrections in the past 67 years. The market made a significant correction every time our model predicted one. Sometimes the significant correction began several months after our model predicted one, but the market always fell below our SELL price.
Our medium-long term model has yielded an average annual return of 30%+ since 1950. Keep in mind that our model does not “fit” the data. Instead, we implement a wide margin of error and utilize back up indicators in case our model is wrong.
Why does the medium-long term model not predict “small corrections” and “small rallies”? Because historically speaking, “small corrections” (6%+ corrections) are impossible to consistently and accurately predict. Many “small corrections” are random and happen for no fundamental/technical reason at all.
Here’s an example of what a “big rally”, “significant correction”, “small rally”, and “small correction” are.
The medium-long term model today
Our medium-long term model states that the S&P 500 is in a “big rally” within a bull market right now.
Our model produces a value between 0 and 100.
- When the model hits 100, the model predicts a significant correction or a bear market.
- Anywhere else between 0 and 100 means that the S&P 500 is in a “big rally” within a bull market right now.
- The closer the value gets to 100, the closer the model gets to predicting a significant correction or bear market.
Click below to find out our model’s value right now. If you don’t have social media, feel free to contact us and we’ll email you with our model’s value.
Our model’s value is 39 as of June 23, 2017. Last week the model’s value was 35. This was a rather big jump in the model’s value. However, the next significant correction or bear market is still far away. The model is updated daily. We post the model’s value here once every week.
Easy Trading model
We don’t maximize our investment returns by sticking to the medium-long term model because:
- The medium-long term model will only provide the best future performance IF it continues to work well. But what if the model fails to predict a significant correction? No model is perfect. Our model is based on historical backtesting. If the S&P falls 20% and we don’t shift to cash, our UPRO will be down 50-60%! Sitting through a 50% loss and then waiting months for the market to recover is very difficult.
- We built a second model which reduces our performance (to an average of just under 30% per annum) while cutting our portfolio’s volatility in half. We call this the Easy Trading model. It helps us sleep better at night.
When the medium-long term model predicts a “significant correction”, we shift into 100% cash. Then we go 100% long UPRO when the medium-long term model states that the significant correction is over. If the medium-long term model states that this is still a “big rally” within a bull market, then the Easy Trading model takes over.
The Easy Trading model helps us trade the “small corrections” and “small rallies” within the “big rally”.
- We shift from 100% cash to 100% long UPRO when the S&P makes a 6%+ “small correction”.
- The Easy Trading model tells us to hold onto 100% UPRO during the easiest, most risk-free, and most guaranteed part of the “small rally”. The Easy Trading model predicts when the easiest, most risk-free part of the “small rally” is over.
- The Easy Trading model uses a combination of more than 10 price (technical) and economic (fundamental) indicators to determine when the “easiest, most risk-free” part of the small rally will be over.
- When the easiest, most risk-free part of the “small rally” is over (according to the model), we shift to 100% cash and wait for the next “small correction” before buying UPRO again.
This means that sometimes we will sit on cash for months before the next small correction occurs. By doing so:
- We will miss out on some of the S&P’s gains. This is why following the medium-long term model is optimal for investment performance. The medium-long term model yields an average of 30%+ per annum, while the Easy Trading model yields an average of just under 30% per annum. But…
- We also cut our portfolio’s volatility by half!
Since we use a 3x leveraged ETF (UPRO), we don’t always have to be in the markets. We can wait for the best, most risk-free opportunities and then swing for a home run. Here’s an example of our Easy Trading model’s signals.
Here’s why the Easy Trading system yields an average of 30% per annum.
- There is an average of 1 “small correction” per year. When the S&P makes a 6%+ decline, hits bottom, and makes a new all time high, UPRO will be up 20%! Our Easy Trading system typically keeps us in the “small rally” for another 7%, which means that UPRO will gain another 20%!
- So in an average year, our portfolio will be up 40%. Yes, some years will be lean years and some years will be fat years. But the two average each other out.
- The Easy Trading model shuts down when our medium-long term model predicts a bear market. During a bear market, our primary concern is capital preservation. We lower our performance target to 5%.
- So on average, our trading strategy yields just under 30% per annum.
Our short term discretionary outlook for the S&P 500 has no impact on our trading. Every once in a while, our discretionary outlook will help us improve our models. Analyzing the market each day from a discretionary perspective is an interesting and fun excercise.
Go to our homepage for our latest market outlook.
*Our models completely ignore pullbacks. Pullbacks are 100% random and unpredictable.