*** PREDICTION for the Next Trading Day:
For Friday we say: “We may very well have a strong opening on Friday because of the Facebook IPO, but in any event our indicators suggest going to Cash. We have very few Shorting signals, however, and it may very well be that the worst is behind us; our long-term (mutual fund) signals, for example, remain in the BUY state. Although there is still considerable negativity in the Market Timing Indicator (MTI) (now at 0.1996) and the Market Assessment (BNB) indicator (still 'Bearish'), our neural networks are continuing to improve – suggesting an impending bounce (that is long overdue). Despite some 'misses' in the past week, we think that the market will likely do well on Friday”.
*** SCORING of Previous PREDICTION:
For Thursday we had said: “We believe that pressure is continuing to build to provide support for a relief rally, especially with decent news in the Fed minutes on Wednesday and the upcoming IPO and job reports. We shall see. Anyway, we have a dichotomy between our Market Timing Indicator (MTI) and Market Assessment (BNB) indicators, which indicate a below-neutral situation (the MTI is at 0.6373 and the BNB status is 'Bearish'), and our neural networks which are slowly strengthening. Our key financial signal (XLF) remains SHORT (as it has been since 4/24/12), and this seems to reflect the overall malaise stemming from the European financial crisis. Nonetheless, the majority of our signals remain in the BUY state – and this is fortunate since we don't want to get 'whipsawed' at this point. We believe that the market will stay 'stable' on Thursday, but has an excellent chance for gains as buyers step in … finally”.
How did we do? Ouch. The Forecast for Thursday was obviously wrong and ratcheted our drawdown higher. We have now, however, adopted our XLF signal (as well as the MTI itself) as triggers for reducing Long exposure at specific times. While our analysis over our 10-year back-testing interval is still not complete, the idea is t add an 'optional' rule for Long investments – and especially for trading in the highly-volatile IWM (Russell 2000) and its 2x and 3x variants: Optionally reduce the Long funds in play to a 50% level whenever (1) the Market Timing Indicator (MTI) is < 1.0000, or (2) the XLF (financial) signal is in a SHORT state. This will be an optional rule because it is trading some long-term performance to reduce drawdown risks.
*** Note: The MTI can range from about -2.5 to +2.5, with a 'neutral' value of 1.0. A value of 1.0 will generally be associated with a market that is either stable (holding its valuations) or rising slowly and erratically. Values greater than 1.0 signify a 'long' market, while values substantially below 1.0 (and especially zero or negative) signify shorting situations. Although the MTI is extremely useful (especially in the construction of equity-specific models), bear in mind that it has a reaction time of several days. It is thus not sufficient to use this indicator alone for trading specific equities