As an active trader my trading process hinges on determining the environment of the market. I want to be long when the environment is conducive to owning stocks and not when it’s not. Asking the question, and finding the answer to “Is the market in an uptrend or is it in a downtrend,” is of peak importance. The answer to this question is what I call the direction of the wind. I want to trade in the direction of the wind. I have 3 models I primarily use to help in determining the direction of the wind:
Intermediate Trend Model
ERM
Alpha Signals Model
This post is about the Intermediate Trend Model. It’s a very simple Model. In general, is price above the 30 Week Simple Moving Average (SMA) or is price below the 30 Week SMA? When price is above the 30 Week SMA this is a Bullish signal to be long. When price is below the 30 Week this is a Bearish signal to not be long.
It’s easy to visually recognized that from an intermediate perspective (Weeks - Months) that when price is above the 30 Week SMA (Green) price tends to be in an uptrend and when price is below the 30 Week SMA (Red) price tends to be in a downtrend or is choppy.
Trend Life Research is for Entertainment purposes only. Information contained herein is not and should not be construed as investment advice. The information and content are subject to change without notice.
In addition to visually inspecting the chart. I ran some tests to help with clarity.
12/30/1951 - 12/30/2023:
Looking at 70+ years of market data. Buying when the Intermediate Trend is Bullish and going to cash when its Bearish yielded some very positive results. Following this strategy and trading with the Intermediate wind was a winner. A $10,000 investment in 1951 turned into $13,347,899, thats a return of 133,379%. By comparison a $10,000 investment in the SP500 (SPX) would have been flipped into $2,334,719.
12/31/2003 - 12/30/23:
Reviewing the last 20 years. A $10,000 investment in the SP500 could have turned into $42,897. Whereas, only being long the market when price is above the 30 Week SMA and in cash when price is below yielded $79,477 on the same $10,000 investment. Just shy of ‘double’ the outcome. A .39 Beta is steller. Less than 1/2 the risk and almost double the returns.
12/31/13 - 12/30/23:
Narrowing the time span down to 10 years. Buying the SPX on 12/31/13 and holding for 10 years flips $10,000 into $25,869. Over that same period with the same initial investment but playing it long when price is over the 30 week and moving to cash when price is below the 30 week yielded $27,264, another victory. Beta landed at .42. Beating the market with half the risk.
Looking At some Probabilities: 5/29/1951 - 12/30/2023
Since 1951, The SPX triggered a “Buy” 337 times as price crossed above the 30 Week SMA. That’s about 4.5 “buy’ signals a year.
Output in 6 weeks (31 trading days) after trigger
There was a 62.31% chance of a positive return 31 days after trigger. A 62.31% probability of a win in 31 days is decent. The mean return is 1%. The best 80 percentile averages +5.54%. The worst 20 percentile yields an average of -3.75%. At the extremes that gives a 62% chance of a positive return with a 1.477 to 1 upside return. Not bad.
Output in 3 Months (62 Trading Days) after trigger
The stats get more favorable to the long side when looking out 3 months after trigger. There was a 66.27% chance of a positive return 62 days after trigger. The mean return is 2.32%. The best 80 percentile averages +8.24%. The worst 20 percentile yields an average of -4.47%. At the extremes that gives a 66% chance of a positive return with a 1.84 to 1 upside return.
Conclusion
The Intermediate Trend Model is a “highly” valuable tool when analyzing the intermediate environment. Utilizing the Intermediate Trend Model as a gauge for when to be long or not is valuable when aligning positions in the same direction as the intermediate trend as defined by the model. This is evident when comparing the Intermediate Trend Model at longer timeframes vs. a traditional “buy and hold” process. Implementation of this strategy does appear to provide an edge.
Notice: Information contained herein is not and should not be construed as an offer, solicitation, or recommendation to buy or sell securities. The information has been obtained from sources I believe to be reliable; however no guarantee is made or implied with respect to its accuracy, timeliness, or completeness. Authors may own the stocks they discuss. The information and content are subject to change without notice.