Risk Avoidance
Risk is Not a One Dimensional Problem
MarketGuard
Bear Market Composite Indicator
MarketGuard is our risk mitigation protocol and is measured by our Bear Market Composite Indicator. This indicator is a composite of the 6 indicators described below, and is how we determine whether we are running Bull Market Strategies or Bear Market Strategies
MarketGuard
Bear Market Composite Indicator
MarketGuard is our risk mitigation protocol and is measured by our Bear Market Composite Indicator. This indicator is a composite of the 6 indicators described below, and is how we determine whether we are running Bull Market Strategies or Bear Market Strategies
Market Trend Indicator
The Market Trend Indicator was determined from the application of Matched Filter Theory that examines daily returns of the broad market (S&P500) and determines when to exit (and re-enter) the market to optimize overall investment performance. This first component of MarketGuard behaves similarly but better than the classic Death Cross Indicator (which is based on the 50-day/200-day simple moving average crossover of the S&P500).
The Market Trend Indicator was determined from the application of Matched Filter Theory that examines daily returns of the broad market (S&P500) and determines when to exit (and re-enter) the market to optimize overall investment performance. This first component of MarketGuard behaves similarly but better than the classic Death Cross Indicator (which is based on the 50-day/200-day simple moving average crossover of the S&P500).
Institutional Momentum Indicator
The PLF Institutional Market Momentum Indicator is similar in design to the Market Trend Indicator but further incorporates daily volume information. Note that a “Wall Street momentum trader“ generally defines momentum as (volume)x(price change) just as a physicist defines it as (mass)x(velocity). However, ordinary trend followers typically ignore volume and use “trend” and “momentum” interchangeably.
The PLF Institutional Market Momentum Indicator is similar in design to the Market Trend Indicator but further incorporates daily volume information. Note that a “Wall Street momentum trader“ generally defines momentum as (volume)x(price change) just as a physicist defines it as (mass)x(velocity). However, ordinary trend followers typically ignore volume and use “trend” and “momentum” interchangeably.
Value Sentiment Indicator
The Value Sentiment Indicator is similar in design to the Market Momentum Indicator but further incorporates new highs and lows statistics. This Indicator acts as a “poker tell" that indicates a change in behavior of value traders that are concerned with where a stock’s price is relative to its previous highs and lows over the past 52 weeks. When the percent of new highs declines relative to new lows, it may be a sign that value sentiment traders have paused in favor of seeking safety.
The Value Sentiment Indicator is similar in design to the Market Momentum Indicator but further incorporates new highs and lows statistics. This Indicator acts as a “poker tell" that indicates a change in behavior of value traders that are concerned with where a stock’s price is relative to its previous highs and lows over the past 52 weeks. When the percent of new highs declines relative to new lows, it may be a sign that value sentiment traders have paused in favor of seeking safety.
Delta Oversold Indicator
The Delta Oversold Indicator is similar to the published Delta Market Sentiment Indicator which tracks the price performance of about 3,600 stocks relative to a medium-term moving average. MarketGuard incorporates it as an oversold indicator that will trigger mean reversion behavior in the momentum algorithm after a particularly sharp decline and also incorporates it as an indicator for early re-entry if the recovery is sufficiently strong.
The Delta Oversold Indicator is similar to the published Delta Market Sentiment Indicator which tracks the price performance of about 3,600 stocks relative to a medium-term moving average. MarketGuard incorporates it as an oversold indicator that will trigger mean reversion behavior in the momentum algorithm after a particularly sharp decline and also incorporates it as an indicator for early re-entry if the recovery is sufficiently strong.
Black Swan Indicator
A “black swan” event is rare, unpredictable, and beyond the realm of normal expectations. The market’s fall from its high on Feb 19, 2020, to bear market territory was the fastest on record. Fortunately, its unusual characteristics in volatility, downside volume, and a flight of capital to treasuries make early detection possible. The indicator is both a logical and linear combination of these measures. It is integrated into MarketGuard and can trigger an early exit at any time during the month.
A “black swan” event is rare, unpredictable, and beyond the realm of normal expectations. The market’s fall from its high on Feb 19, 2020, to bear market territory was the fastest on record. Fortunately, its unusual characteristics in volatility, downside volume, and a flight of capital to treasuries make early detection possible. The indicator is both a logical and linear combination of these measures. It is integrated into MarketGuard and can trigger an early exit at any time during the month.
Sea Change Volatility Indicator
The Sea-Change Volatility Indicator measures the combined rate of change of 12 diverse funds relative to the S&P500 to indicate the pace and extent of rotation between recent trend leaders and former trend laggards. The funds include primary sectors, disruptive subsectors, and traditional style-funds. Values over 15% indicate rapid and broad rotation. Momentum strategies take about two months to confirm and execute a change in leadership. A trade will be profitable only if its momentum continues for one or more additional months.
The Sea-Change Volatility Indicator measures the combined rate of change of 12 diverse funds relative to the S&P500 to indicate the pace and extent of rotation between recent trend leaders and former trend laggards. The funds include primary sectors, disruptive subsectors, and traditional style-funds. Values over 15% indicate rapid and broad rotation. Momentum strategies take about two months to confirm and execute a change in leadership. A trade will be profitable only if its momentum continues for one or more additional months.
NOTE: Bear Market Composite Indicator, like a smoke alarm, is not perfectly clairvoyant but helps improve your long-term batting average.