I thought I would share some of the indicators that I use to determine whether the conditions are favourable for being long global equities. I use VT as my proxy for global equities. When these indicators are bullish, I look to be long global equities. It does not mean that a correction is impossible. Only that the odds favour more up than down. Really bad things (bear markets and drawdowns greater than 20%) tend to happen only after these indicators turn bearish. The tricky thing is that most corrections in bull markets tend to end just as one or more of these indicators turn bearish, resulting in whipsaws. No way to avoid that. It is the cost of following any trend indicator.
Percentage of Stocks on NYSE Trading Above 200 Day EMA
I use 50% as the sell signal. As you can see, we are nowhere near that level. The percentage of stocks trading above their 200-day EMA is over 80%. This is extraordinarily strong breadth.
US High Yield Spreads
I use the 3-month rate of change in the performance of junk bonds (JNK) to 5-7 year US treasuries (IEF). When the rate of change is positive, credit conditions are improving which is usually bullish for equities. As you can see, it has been above zero for a long time. No sign that credit conditions are deteriorating.
I use the 3-month rate of change in the copper/gold ratio. When it is positive, it is usually bullish for equities. This makes sense as copper’s price is more dependent on economic activity than gold’s price. The rate of change is currently positive and has been for some time.
NYSE New Highs – New Lows
I track the 20-day moving average (roughly one calendar month). I consider it bullish if it is above zero, which it is currently.
Price Above 200 DMA
This is probably the most common trend signal. There is nothing special about the 200 DMA, other than its popularity. I could just as easily use 175 or 225. Price is currently well above the 200 DMA.
So, in summary, all 5 of my trend indicators are positive, which means that I expect higher prices. That said, they are very extended at the moment and the market may need to correct or consolidate for a bit before eventually proceeding higher, so for shorter term traders there may be opportunities on both sides in the near term.
I backtested these 5 signals versus buy and hold VT. Here are the results, individually and collectively:
Each indicator underperformed a buy and hold strategy, but each indicator also had a smaller maximum drawdown. As a collective portfolio of strategies, they also underperformed a buy and hold strategy, but the maximum drawdown was notably lower. On a risk adjusted basis the combined portfolio is more attractive and could be moderately levered to achieve buy and hold performance. I would note that these results do not include commissions, slippage or tax.