In an article dated 2/15/2018, titled “Trend Following in One Minute a Month”, I wrote about one of the simplest trend-following methods I’ve ever discovered. The original idea was based on work by investor and Forbes columnist Kenneth Fisher (his original idea is discussed in this article – How to Tell a Bull Market from a Bear Market Blip).
For full details plus facts and figures please see the original article of mine linked above. For now:
Jay’s Monthly SPX Bar Chart Trend-Following System
a) When the S&P 500 Index goes three calendar months without making a new high, then
b) Draw a horizontal line at the low price for those three calendar months.
c) An actual sell trigger occurs at the end of a month during which SPX registers a low that is below the “sell trigger price” (i.e., the trade takes place at the month regardless of when the signal occurs during the month), HOWEVER,
d) If SPX makes a new monthly high above the previous “swing high” BEFORE it registers a low below the “sell trigger price” the sell signal alert is aborted.
For the record, sell signals since 1970 have been right roughly 50% of the time, so this is NOT a “sure thing, you can’t lose” strategy by any stretch. Still the average losing trade witnessed a decline of roghly-16%, with 3 generating a loss of 20% or more, and two of those were in excess of -30%.
The latest status appears in Figure 1 below. As you can, 3 of the last 5 “sell” signals ended in whipsaws which resulted in buying back in 6%, 9% and 8% higher, respectively. However, the key point is that the other two sell signals would have allowed an investor to miss the crushing -33% and -31% declines.
Figure 1 – Jay’s “One Minute a Month” Trend Following Method
(For more signs of potential trouble see also Two Charts Worth Watching)
The Bottom Line
If the S&P 500 Index closes below 2,532.69 without first making a new 6 month high, it could be a significant warning sign of trouble ahead (Or – in the interest of full disclosure – it could just be setting up whipsaw; sorry folks, that’s how the market works sometimes).
Welcome to the exciting – and occasionally frustrating – World of Trend-Following!
Jay Kaeppel
Disclaimer: The data presented herein were obtained from various third-party sources. While I believe the data to be reliable, no representation is made as to, and no responsibility, warranty or liability is accepted for the accuracy or completeness of such information. The information, opinions and ideas expressed herein are for informational and educational purposes only and do not constitute and should not be construed as investment advice, an advertisement or offering of investment advisory services, or an offer to sell or a solicitation to buy any security.
