The first step to successful investing is to identify the Market’s “Big Picture” Environment in terms of risk versus reward. This is critical to success over the long term because different “environments” require different strategies. For example, in Bull Markets the objective is to maximize returns, while success in Bear Market Environments demands an emphasis on capital preservation. By reviewing the Environment every single week, we are assured that we will remain “in-tune” with conditions and not be surprised by environment changes.
At the center of our risk management work are our Exposure Models (see below). The models detail the current conditions for the Trend and Momentum of the Market and help guide us to the proper exposure to market risk.
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Executive Summary For: January 13, 2016
- Current Environment:
Stocks are taking a breather this morning following the worst start to a calendar year in history. The main concerns in the macro landscape are the ongoing yuan devaluation debacle in China, oil prices falling (still), and geopolitical tensions in the Middle East. However, it is important to note that the recent swoon has nothing to do with the U.S. economy, which is in decent shape at the current time. This decline is more about the potential contagion risk out of China than anything else. With the Chinese government intervening heavily this week to try and stop the bleeding, we will have to wait and see how U.S. markets react.
S&P 500 – Last 3 Months
Risk Management Models Summary
Our disciplined approach to managing risk is designed to keep our Portfolios “in-line” with the major trends of the market. We strive to keep portfolios mostly invested during Positive Environments and to Reduce Exposure to Market Risk during Bear Markets and severe corrections.
We focus on our two proprietary Risk Management System Models. Both systems are robust market models incorporating the entire spectrum of market indicators. In short, our disciplined systems act as our primary guide to exposure to market risk. (For more details on each risk management system, see model summary below)
Current Readings – Risk Management Systems
- Graduated Risk Management System
Recommended Exposure to Market Risk (Short-Term): 30.00%
- Long-Term “Big Picture” Trend Management System
Current Signal: Neutral
Graduated Exposure System (Intermediate Term Time Frame)
The Graduated Exposure Risk Management System is our guide to determining the appropriate exposure to market risk.
The system is a “Model of Models” comprised of of 10 independent Models. Each model includes has proved successful in its own right and gives separate buy and sell signals, which effects a percentage of our exposure to the market. Our Trend models (Short-Term Trend, Intermediate Term Trend, Trend & Breadth Confirm, and Sentiment) control a total 40% of our exposure. The 3 Momentum Models and 3 Environment Models each control 10% of the portfolio’s exposure to market risk. The model’s “Recommended Exposure to Market Risk” reading (at the bottom of the Model) acts as our longer-term guide to exposure to market risk.
Risk Management Models
(Our Guide to Intermediate-Term Market Exposure)
Trend Signals (40%) Signal Portfolio Exposure Rating S.T. Trend Outlook Model Sell 0.00% Negative Int. Trend System Sell 0.00% Negative Trend and Breadth System Sell 0.00% Negative Investor Sentiment Hold 5.00% Neutral Momentum Signals (30%) Market Diffusion Index Sell 0.00% Negative A/D Thrust Sell 0.00% Negative Long Term Momentum Sell 0.00% Negative Market Environment (30%) Monetary Conditions Hold 5.00% Neutral Economic Model Buy 10.00% Positive Valuation Model Buy 10.00% Moderately Positive Recommended Exposure to Market Risk: 30.00%
Long-Term “Big Picture” Trend System
Designed for Long Term Investors who do not wish to make a lot of adjustments to their holdings (i.e. 1 to 2 adjustments per year), our “Big Picture” Trend System focuses on the overall Environment of the market. The goal is to identify the “Major Trend” of the market and keep portfolios on the “right side” of the market’s current cycle. The Model includes hundreds of indicators (both long term and short term) in the areas of “the tape,” monetary conditions, investor sentiment, economics, valuation, overbought/oversold conditions, and industry leadership.
When the Environment is rated as “positive” (about 32% of the time) our studies have shown that the S&P has advanced at a rate of +38.4% annually. However, when a negative environment exists (about 20% of the time) the S&P loses almost -21% per year. The Model recently switched to a “Neutral” signal on January 13, 2016 in response to the model registering a low neutral condition from a positive condition.
“Big Picture” Trend System Signal Analysis Current Signal Hold Date of Last Signal 1-13-16 Price (S&P 500 Index) 1938.68 Current Price (S&P 500 Index) 1938.68 Gain/Loss N/A Model Analysis Model Score (out of 10) 4.7 Rating Negative Projected Annual Return -25.90% Model History (From June 1982) % of Trades Profitable 87% Model Gain Per Year +16.7% S&P 500 Per Year +10.0% Recommended Exposure to Market
(For Long Term Accounts Seeking Minimal Trading)
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Returns for the Big Picture Trend System are a hypothetical implementation of the model signals. When a signal is given, the closing price for the S&P 500 is used. Hypothetical returns do not reflect actual trading. Please note that hypothetical test results do not take into account market conditions which could adversely affect management decisions.
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