My trend following strategy and experience

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Locked
Barsoom
Posts: 262
Joined: Thu Dec 06, 2018 9:40 am

Re: My trend following strategy and experience

Post by Barsoom » Sat Feb 22, 2020 10:17 pm

The linked articles in the OP suggest several leading indicators of recessions, and analyzes the impacts of these indicators on the annualized returns of a portfolio that takes action based on these indicators.

The question, however, is this: do these "leading" indicators actually "lead" in a meaningful way, that is, do they give advance notice sufficient to take action?

I decided to take a closer look into this question.

A few weeks ago I came across this article from CNBC titled "There's a 70% chance of recession in the next six months, new study from MIT and State Street finds". This article introduced me to the Mahalanobis Distance (MD for short), a technique for correlating multivariate data sets. The MD determines a "center point" of the multivariate sample population, and then calcuates the distance from that center point to a candidate point. The MD is indexless, except that the closer it is to zero (the center point), the more likely the candidate is to be a part of the set. If the variables don't relate, the result is noise.

I applied the MD technique to my data model based on the linked articles in the OP, to see if it can really identify a recession from the set of leading indicators in the articles. (See this website for instructions on how to build this in Excel: Example of Calculating the Mahalanobis Distance).

The Variables

The variables that I used were those listed in the OP articles, with some adjustments described below.

S&P 500
I am using a 9-month moving average as a proxy for a 200 day moving average. The set is S&P 500 month-end closing price (Shiller data) relative to its 9-month moving average (the percent difference).

Unemployment
The set is the unemployment rate (from FRED) relative to its trailing twelve month (TTM) average (the percent difference).

YoY Job Growth
The set is simply the YoY percent change in jobs as reported by FRED.

YoY Industrial Production Growth
The set is simply the YoY percent change in industrial production (FRED).

YoY Retail Sales Growth
The set is simply the YoY percet change in retail sales (FRED).

YoY Personal Income Growth
The set is simply the YoY percet change in personal income (FRED).

YoY New Housing Starts
The set is simply the YoY percet change in new housing starts (FRED).

S&P 500 Total Return Earnings Per Share (TR EPS) Growth
The set is described in the OP linked article Introducing the Total Return EPS Index: A New Tool for Analyzing Fundamental Equity Market Trends, based on Shiller data. For this analysis, the set was converted to log10 and then relative to its linear trend (percent difference).

New Jobless Claims
The set is simply the four week average of the weekly jobless claims (FRED). This is NOT a part of of the OP article leading indicators, but I added it to my model.

The Historical Data

The S&P 500 data in my model is sourced from the monthly Shiller data set. The accounting oddities in 2003-2009 as indicated in the TR EPS article above have been corrected as described in the article. (Source for correction data: https://us.spindices.com/documents/addi ... s-est.xlsx.

Periods of recession (start/end dates) were gotten from Wikipedia. I separately indicate "bear market" recessions as those with significant S&P 500 price drops, and extend the dates (before and after) to reflect the beginning and end of the price drops.

The Shiller S&P 500 data set goes back to 1871. United States industrial production data begins in 1920. Unemployment data begins in 1929. Retails sales data begins in 1948. Jobs data begins in 1949. Housing starts and personal income growth, begins in 1960. Jobless claims begins in 1967.

The sample population was built to be all the above indicators as of 1967, filtered ONLY for the months that were indicated as "bear market" recessions.

The Process

The "candidates" are all the months from January 1967 to the present. The MD is the distance of the candidate month from the "center point" of the sample population. Because this is an indexless number, I normalized the MD to a 0-100 scale and then inverted it. Therefore, closer to 0 means the candidate is NOT likely to be in the "bear market" recession population, and closer to 100 means that the candidate IS likely to be in the "bear market" recession population.

I ran the analysis using different combinations of the leading indicators to see how they behaved in the model. I won't recount that initial analysis here, but it was sufficient to give me confidence that the above indicators do work using the MD technique.

First Pass Results

The chart belows shows the MD "score" from 1967 to present.

Image

As you can see, the MD index is at or greater than 90 during the bear market recession periods (dark grey areas), and then drops off after recessions.

Note the spike at the end of 2018. This is the whipsaw at the end of 2018 which is not in the bear market recession sample population, but was identified by MD. Also note how low the MD index goes in non-recessionary periods, down to the 20s and low teens.

Now take a look at this next chart, which calculates the MD index using ONLY the S&P 500 and Unemployment, as the OP is using in his strategy.

Image

The indicators still identified the bear market recessions, but the non-recessionary months don't fall as low. There is a floor of about 50 when only using these two indicators. This also identified the light recession of 1990-1991, and gave it the highest score (closest to the MD center). The fuller indicator analysis did not call out the 1990-1991 recession.

Conclusion 1: The MD technique can identify bear market recessionary periods.

What should also be obvious from these two charts is that, while they both identified the recessions, did they "lead" enough to act? Based on these charts, I'd say no.

The Second Pass Results

It occurred to me that if the MD technique was successfull in identifying the bear market recessions, could it also identify the months leading up to the recession? Let's find out.

I added a new flag to my data to identify the period leading up to the bear market recessions. I played around with different durations and finally settled on defining this new sample population as the six months BEFORE the start of the bear market recession. I figured this would give sufficient time to forewarn, review the results, and handle some of the lag time in obtaining the data.

Here's the chart.

Image

The periods leading up to the recession can be clearly seen with scores exceeding 95. They drop off during the recession, because they are identifying the months before the recession. The scores do get high the months further back from the recession, so a certain amount of judgment is necessary to determine the threshold, but 90+ is good (maybe even 95+).

Let's see how the unemployment-only set fared.

Image

The unemployment-only approach could not identify the period leading up to the recessions. It is only noise. However, it clearly identified the recessions as NOT leading up to the recessions.

Conclusion 2: The MD technique can identify the months leading up to bear market recessionary periods. This should give enough lead time to exit the equity market prior to a deep correction.

This then begs the question... if MD can find the months leading up to a recession, can it also find the final months of the recession? If it can, then it would be nice to know when to move back into the equity market near the bottom, before the recovery begins.

Third Pass Results

I added another flag to my data to identify the last four months of the bear market recessions to define my sample population. I went with four months to account for data gathering lag.

Image

Once again, the MD technique seems to have identified the periods at the end of the bear market recessions.

Now let's look at the unemployment-only set.

Image

It appears that unemployment-only was better at finding the last months of a recession than the months before one, likely because it was still in a recession. However, it isn't as clear at finding the last months.

Conclusion 3: The MD technique can identify the last months of a bear market recessionary period. This should give enough lead time to buy back into the equity market near the bottom in advance of the recovery.

Final Thoughts

I think the first question is, is this just data fitting? I don't know. The MD technique works off of mean and variance, and set covariance. I don't know if that's precise enough to be data fitting, or general enough to define a population. I do know that using the same data with different combinations of indicator variables leads to different results. This suggests that it is not data fitting.

I can use more data by dropping some of the indicators (which I tested). By limiting the sample population the S&P 500, unemployment, industrial production growth, and TR EPS, the data goes back to 1929. The question is whether the trade-off of data for indicators is informative?

Here is the recession chart.

Image

The recessionary periods are not as clearly defined.

Now the months prior to the recession.

Image

And the last months of the recession.

Image

In this case, the extra data did not make up for the loss of additional indicators. I will leave it to the discussion to see if this is germane.

Also, I looked at calculating the means and variances for each variable separately based on available data, letting Excel handle the missing data. This proved to be error-prone, as the covariances and following matrix multiplications led to square roots of negative numbers. I discarded this analysis and settled for the set of data where all variables had the same number of data points.

I look forward to any comments or questions.

-B

User avatar
BlueEars
Posts: 3838
Joined: Sat Mar 10, 2007 12:15 am
Location: West Coast

Re: My trend following strategy and experience

Post by BlueEars » Sun Feb 23, 2020 10:50 am

Here are some comments regarding the MD method. First, I don't have the stat background to understand the underlying MD calculation. Sounds sexy though. I would check out the math more deeply if the method produced outstanding bottom line results.

When I do check out a methodology I want to get to the bottom line. I would like to see just one chart with the indicated exit and entry points. What is the CAGR, trades/year, and number of good trades vs bad trades ? Other data I personally look at is how each trade did if invested in 5 year Treasuries (the proxy is VFIUX), months out of market, and the drawdown before exiting the market. Since I do this in spreadsheets it's easy to produce this data.

Barsoom, you have invested a lot of effort in this. I think it deserves its own thread. If it were me I'd worry a bit about getting slapped down by some of the posters on this site though. Will has done an amazing job of taking on the snide comments that are an unfortunate part of this site's dialog. I revisited the "Forum Policies" and market timing topics should be within the guidelines.

Barsoom
Posts: 262
Joined: Thu Dec 06, 2018 9:40 am

Re: My trend following strategy and experience

Post by Barsoom » Sun Feb 23, 2020 2:57 pm

BlueEars wrote:
Sun Feb 23, 2020 10:50 am
Here are some comments regarding the MD method...
Thanks for your comments.

I'm not mathematical either, but I can build Excel. The MD technique was originally developed in the 1920s to identify similarities in skull measurements. It is essentially a pattern recognition technique based on the relationships between normal distribution measures.
BlueEars wrote:
Sun Feb 23, 2020 10:50 am
When I do check out a methodology I want to get to the bottom line...
For the OP-linked articles, the original strategy described in the article for when to exit and enter the markets would still stand. I wanted to see if this technique could identify patterns in the signal indicators to provide more lead time; it appears that it does, but I will have to wait for the next recession to know for sure that it isn't really just data fitting. The actual returns from the strategy would still be what the OP-linked articles suggest.

One point that I failed to call out in my post is that the original CNBC article says that there is a 70% chance of a recession in the next six months, based on their use of the MD technique with their set of leading indicators. My charts in the second pass section seems to say the opposite, that we are currently NOT in a six-month window prior to a bear market recession. That puts me against the MIT and State Street researchers. :confused
BlueEars wrote:
Sun Feb 23, 2020 10:50 am
Barsoom, you have invested a lot of effort in this. I think it deserves its own thread...
Honestly, I feel that I'm still pretty new here and didn't want to be so bold. I thought it would fit well here since I have been posting measure updates based on the OP-linked full strategy, as opposed to Will's specific results of his modified strategy. Before putting this post together, I searched BH for "mahalanobis distance" and only found one hit, so it's not a known (or at least posted) topic. Maybe, if the reaction inside this thread is generally positive, I might incorporate the feedback into a rewrite of the post for its own topic. We'll see how it goes, if it goes at all.
BlueEars wrote:
Sun Feb 23, 2020 10:50 am
I revisited the "Forum Policies" and market timing topics should be within the guidelines.
I would think so.

You may remember that in this thread back in December I suggested that because there are two types of investors, accumulators and decumulators, that "buy and hold" morphs into "protect and sell" for retirees who are no longer accumulators. A forum dedicated to "buy and hold" strategies should include "end of life" strategies as well, that is, how to decumulate what was held. Even if B&H retirees see it as simply reallocating their holdings from equities to bonds and selling the bonds as needed, I'd think that they still react to bear markets by adjusting their spending (if not their holdings). Therefore, a technique like MD that can give a reasonable lead time warning to plan for reduced spending, rather than waiting until a recession is among us, might be a useful thing to know -- if it works.

-B

User avatar
Forester
Posts: 918
Joined: Sat Jan 19, 2019 2:50 pm
Location: UK

Re: My trend following strategy and experience

Post by Forester » Sun Feb 23, 2020 3:00 pm

Yes deserves it's own thread and IMHO any straightforward systematic strategy based on evidence & common sense fits under the Boglehead umbrella, that includes taking risk off the table based on unemployment, moving averages etc.

Uncorrelated
Posts: 541
Joined: Sun Oct 13, 2019 3:16 pm

Re: My trend following strategy and experience

Post by Uncorrelated » Sun Feb 23, 2020 4:33 pm

Barsoom wrote:
Sat Feb 22, 2020 10:17 pm
very long post
Is there any specific reason you choose to classify recessions, rather than classifying periods (or months) of low return? Additionally, recessions are retroactively classified by NBER based on economic variables. The same economic variables that you use to use to predict them. This appears as if it can cause substantial data leakage issues.

Furthermore, the analysis you carried out can be used to determine whether it is possible to identify previous recessions given perfect hindsight. Since all data is in-sample, this analysis can not be used to determine whether future recessions can also be predicted. It might be interesting to 'train' the algorithm on recessions prior to 1990, and then see if it can correctly identify the recessions after that date. Or vice-versa.

CNBC: Looking at data back to 1916, the researchers said that the index was a reliable recession indicator since it rose leading up to every prior recession.
Either this is a misquote or the researchers don't understand what overfitting is.

Barsoom
Posts: 262
Joined: Thu Dec 06, 2018 9:40 am

Re: My trend following strategy and experience

Post by Barsoom » Sun Feb 23, 2020 5:03 pm

Uncorrelated wrote:
Sun Feb 23, 2020 4:33 pm
Is there any specific reason you choose to classify recessions, rather than classifying periods (or months) of low return?
Because the original inked article in the OP did. The original linked articles laid out a strategy for exiting and reentering the market around recessions, and I wanted to stay consistent with that. I was looking at the leading indicators that were called out in those articles to see if they truly lead or just indicate. I suppose it could be extended to look at all periods of price decline, but I'm not really interested in looking for whipsaws, only extended periods of decline followed by recovery.

However, I did call out what I called "bear market recessions," which were only those defined recessions with significant S&P 500 price drops, with the dates adjusted for the price drops.
Uncorrelated wrote:
Sun Feb 23, 2020 4:33 pm
Additionally, recessions are retroactively classified by NBER based on economic variables. The same economic variables that you use to use to predict them. This appears as if it can cause substantial data leakage issues.

Furthermore, the analysis you carried out can be used to determine whether it is possible to identify previous recessions given perfect hindsight. Since all data is in-sample, this analysis can not be used to determine whether future recessions can also be predicted. It might be interesting to 'train' the algorithm on recessions prior to 1990, and then see if it can correctly identify the recessions after that data. Or vice-versa.
That's my concern. The data is assumed to be normal, because the MD method calculates means and variances, nothing more (except the covariances of the paired signal indicators). The rest is matrix multiplication. Since those means and variances are calculated from the set of months identified as bear market recessions, it shouldn't be surprising that the indicators successfully identify those periods.

The question is whether those indicators are generic enough that they will still revert to those means in future recessions? The indicators are things like the variance of the S&P 500 price to its 200-day moving average (or 9MMA as a proxy), the variance of unemployment to its TTM average, the YoY change in job growth, retail sales, new housing starts, and industrial production, and new jobless claims. Are those numbers date-specific to past recessions only or are they economic characteristics that will again return to the same values in a future recession? If it's the latter, then this technique should recognize them when they reoccur. Where I extended the analysis was in seeing if the same patterns that lead up to the recessions can be identified just like the actual recessions are, and then by extension the exits of recessions, too.

Note that the method did call out the brief 2018 whipsaw even though that data was not in the sample population.
Uncorrelated wrote:
Sun Feb 23, 2020 4:33 pm
CNBC: Looking at data back to 1916, the researchers said that the index was a reliable recession indicator since it rose leading up to every prior recession.
Either this is a misquote or the researchers don't understand what overfitting is.
No idea. I only posted the article for its introduction into the Mahalanobis Distance and an explanation of the leading indicators they used.

-B

User avatar
HomerJ
Posts: 14145
Joined: Fri Jun 06, 2008 12:50 pm

Re: My trend following strategy and experience

Post by HomerJ » Tue Feb 25, 2020 5:41 pm

Will,

Do you worry that your strategy won't work for black swan events like a pandemic virus?

Market could drop too fast for your system to work. Signals like unemployment may trail a market crash rather than predict a market crash.

Seems like a healthy dose of bonds protects against a market crash regardless of the reasons for the market crash. Your system may require the market to crash in a certain way to work.
The J stands for Jay

Lee_WSP
Posts: 2182
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: My trend following strategy and experience

Post by Lee_WSP » Tue Feb 25, 2020 5:51 pm

HomerJ wrote:
Tue Feb 25, 2020 5:41 pm
Will,

Do you worry that your strategy won't work for black swan events like a pandemic virus?

Market could drop too fast for your system to work. Signals like unemployment may trail a market crash rather than predict a market crash.

Seems like a healthy dose of bonds protects against a market crash regardless of the reasons for the market crash. Your system may require the market to crash in a certain way to work.
Wouldn't the system do exactly what it's supposed to do for a flash crash? Ie, nothing.

User avatar
HomerJ
Posts: 14145
Joined: Fri Jun 06, 2008 12:50 pm

Re: My trend following strategy and experience

Post by HomerJ » Tue Feb 25, 2020 11:39 pm

Lee_WSP wrote:
Tue Feb 25, 2020 5:51 pm
HomerJ wrote:
Tue Feb 25, 2020 5:41 pm
Will,

Do you worry that your strategy won't work for black swan events like a pandemic virus?

Market could drop too fast for your system to work. Signals like unemployment may trail a market crash rather than predict a market crash.

Seems like a healthy dose of bonds protects against a market crash regardless of the reasons for the market crash. Your system may require the market to crash in a certain way to work.
Wouldn't the system do exactly what it's supposed to do for a flash crash? Ie, nothing.
Sure, it if bounces back as fast as it crashed, no problem.

But if it crashes 30%-40% and THEN his signals are triggered, he'll have to get out per his system, locking in those losses.

He's going 100% stocks which is risky, but that risk is supposed to be hedged by the fact that his signals will let him get out early in the next big crash.

But if the cause of the crash is something that is not caught early by his signals, he may be taking more risk than he thinks.
The J stands for Jay

Lee_WSP
Posts: 2182
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: My trend following strategy and experience

Post by Lee_WSP » Wed Feb 26, 2020 12:02 am

Any timing system is susceptible to whipsaws. This is not new information.

User avatar
HomerJ
Posts: 14145
Joined: Fri Jun 06, 2008 12:50 pm

Re: My trend following strategy and experience

Post by HomerJ » Wed Feb 26, 2020 12:14 am

Lee_WSP wrote:
Wed Feb 26, 2020 12:02 am
Any timing system is susceptible to whipsaws. This is not new information.
Certainly, but I'm not talking about whipsaws.

Normally, a trend-following system like this will have whipsaws, where the market will crash a little, the trend-follower will get out to avoid the big crash, and then the market will go back up, and the trend follower will have to eat the small loss and get back in.

But the point is that when the big crash comes, the system will work and the trend-follower will get out early and avoid the big crash.

It's worth it to the trend-follower to take a few small losses in order to avoid the big crash.

But what if the big crash happens because of some strange black swan event, and the signals are triggered very late, deep in the big crash?

Monthly unemployment figures may not predict all possible crashes.
The J stands for Jay

User avatar
Forester
Posts: 918
Joined: Sat Jan 19, 2019 2:50 pm
Location: UK

Re: My trend following strategy and experience

Post by Forester » Wed Feb 26, 2020 3:21 am

There should be a price to a fundamental filter which reduces whipsaws. This would be (1) exiting a stock downtrend a little late (1930s), (2) a black swan which happens over 1 to 3 months which occurs so suddenly the fundamental filter reacts much slower than stock prices.

But eyeballing these numbers, US unemployment might trend higher as soon as the end of this month, no? https://www.bls.gov/web/empsit/cpseea03.htm

Lee_WSP
Posts: 2182
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: My trend following strategy and experience

Post by Lee_WSP » Wed Feb 26, 2020 9:49 am

HomerJ wrote:
Wed Feb 26, 2020 12:14 am
Lee_WSP wrote:
Wed Feb 26, 2020 12:02 am
Any timing system is susceptible to whipsaws. This is not new information.
Certainly, but I'm not talking about whipsaws.

Normally, a trend-following system like this will have whipsaws, where the market will crash a little, the trend-follower will get out to avoid the big crash, and then the market will go back up, and the trend follower will have to eat the small loss and get back in.

But the point is that when the big crash comes, the system will work and the trend-follower will get out early and avoid the big crash.

It's worth it to the trend-follower to take a few small losses in order to avoid the big crash.

But what if the big crash happens because of some strange black swan event, and the signals are triggered very late, deep in the big crash?

Monthly unemployment figures may not predict all possible crashes.
Ah, I see.

Well, then the trend follower will be no worse off than buy & hold. Which is why I didn't understand the topic. At worst there will be a whipsaw event at the bottom.

User avatar
HomerJ
Posts: 14145
Joined: Fri Jun 06, 2008 12:50 pm

Re: My trend following strategy and experience

Post by HomerJ » Wed Feb 26, 2020 9:58 am

Lee_WSP wrote:
Wed Feb 26, 2020 9:49 am
HomerJ wrote:
Wed Feb 26, 2020 12:14 am
Lee_WSP wrote:
Wed Feb 26, 2020 12:02 am
Any timing system is susceptible to whipsaws. This is not new information.
Certainly, but I'm not talking about whipsaws.

Normally, a trend-following system like this will have whipsaws, where the market will crash a little, the trend-follower will get out to avoid the big crash, and then the market will go back up, and the trend follower will have to eat the small loss and get back in.

But the point is that when the big crash comes, the system will work and the trend-follower will get out early and avoid the big crash.

It's worth it to the trend-follower to take a few small losses in order to avoid the big crash.

But what if the big crash happens because of some strange black swan event, and the signals are triggered very late, deep in the big crash?

Monthly unemployment figures may not predict all possible crashes.
Ah, I see.

Well, then the trend follower will be no worse off than buy & hold. Which is why I didn't understand the topic. At worst there will be a whipsaw event at the bottom.
It all depends on how fast the market bounces back. If a vaccine is discovered, or the pandemic is far less deadly than feared, the market could bounce back quickly, and the trend-follower could end up with huge locked in losses, if they sold near the bottom, and had to buy back in after a large recovery.

Trend-following IS riskier than buy and hold. Will here is 100% in stocks, because he expects his signals to protect him from a big crash. Most buy and hold people at his age use bonds to protect them from a big crash.

He and I have about the same risk profile... If I'm 50/50 stocks/bonds, and the market crashes 50%, I only lose 25%. If he's 100% stocks, and the market crashes 50%, but his signals get him out after a 20% decline, then he only lost 20%.

But that's assuming his signals will work correctly in all bear market scenarios. If his signals work incorrectly, he could experience most of the 50% crash, and not get out early. AND if his signals trigger at the wrong time, he could actually LOCK IN some of those losses by selling near the bottom.

The buy and holder gets what the market gives. Riding it all the way down and back up, you'll get whatever the market gives. A trend-follower, if following the wrong system, could indeed do far worse than the market.

I thought the coronavirus issue today is an example of something that may not be covered by his monthly unemployment signals.

There may be more risk in a trend-follower's system than people realize.
The J stands for Jay

User avatar
Rowan Oak
Posts: 556
Joined: Mon May 09, 2016 2:11 pm
Location: Yoknapatawpha

Re: My trend following strategy and experience

Post by Rowan Oak » Wed Feb 26, 2020 10:14 am

HomerJ wrote:
Wed Feb 26, 2020 9:58 am
Lee_WSP wrote:
Wed Feb 26, 2020 9:49 am
HomerJ wrote:
Wed Feb 26, 2020 12:14 am
Lee_WSP wrote:
Wed Feb 26, 2020 12:02 am
Any timing system is susceptible to whipsaws. This is not new information.
Certainly, but I'm not talking about whipsaws.

Normally, a trend-following system like this will have whipsaws, where the market will crash a little, the trend-follower will get out to avoid the big crash, and then the market will go back up, and the trend follower will have to eat the small loss and get back in.

But the point is that when the big crash comes, the system will work and the trend-follower will get out early and avoid the big crash.

It's worth it to the trend-follower to take a few small losses in order to avoid the big crash.

But what if the big crash happens because of some strange black swan event, and the signals are triggered very late, deep in the big crash?

Monthly unemployment figures may not predict all possible crashes.
Ah, I see.

Well, then the trend follower will be no worse off than buy & hold. Which is why I didn't understand the topic. At worst there will be a whipsaw event at the bottom.
It all depends on how fast the market bounces back. If a vaccine is discovered, or the pandemic is far less deadly than feared, the market could bounce back quickly, and the trend-follower could end up with huge locked in losses, if they sold near the bottom, and had to buy back in after a large recovery.

Trend-following IS riskier than buy and hold. Will here is 100% in stocks, because he expects his signals to protect him from a big crash. Most buy and hold people at his age use bonds to protect them from a big crash.

He and I have about the same risk profile... If I'm 50/50 stocks/bonds, and the market crashes 50%, I only lose 25%. If he's 100% stocks, and the market crashes 50%, but his signals get him out after a 20% decline, then he only lost 20%.

But that's assuming his signals will work correctly in all bear market scenarios. If his signals work incorrectly, he could experience most of the 50% crash, and not get out early. AND if his signals trigger at the wrong time, he could actually LOCK IN some of those losses by selling near the bottom.

The buy and holder gets what the market gives. Riding it all the way down and back up, you'll get whatever the market gives. A trend-follower, if following the wrong system, could indeed do far worse than the market.

I thought the coronavirus issue today is an example of something that may not be covered by his monthly unemployment signals.

There may be more risk in a trend-follower's system than people realize.
Maybe dropping the unemployment signal and just using a moving average signal during an event such as this would work better. Or not.
“If you can get good at destroying your own wrong ideas, that is a great gift.” – Charlie Munger

User avatar
BlueEars
Posts: 3838
Joined: Sat Mar 10, 2007 12:15 am
Location: West Coast

Re: My trend following strategy and experience

Post by BlueEars » Wed Feb 26, 2020 10:22 am

HomerJ wrote:
Wed Feb 26, 2020 9:58 am
...
The buy and holder gets what the market gives. Riding it all the way down and back up, you'll get whatever the market gives. A trend-follower, if following the wrong system, could indeed do far worse than the market.

I thought the coronavirus issue today is an example of something that may not be covered by his monthly unemployment signals.

There may be more risk in a trend-follower's system than people realize.
We all have to live with risk, both trend follower's and buy-holders. As other's point out your mention of a whipsaw here is nothing new and has been pointed out in this thread multiple times.

Was the 1929 crash a black swan? I don't know what the definition of a black swan is but here is what happened monthly before one moving average system (which I put together as an example) triggered in December 1929:

August 1929 +10.2%
September 1929 -5.2%
October 1929 -18.1%
November 1929 -11.6%

So what do you do in December 1929 when one trend following system triggered? A dyed in the wool trend follower would get out. And he would have done much much better then the buy-holder. It could have worked out differently of course.

We just don't know how far the market may decline or it's speed of recovery.

Lee_WSP
Posts: 2182
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: My trend following strategy and experience

Post by Lee_WSP » Wed Feb 26, 2020 10:30 am

We're just rehashing old arguments again.

Trend following has as good or better max drawdown as B&H the same assets, but has the potential to outperform & underperform the same.

Comparing a trend following strategy to a 60/40 portfolio is a very bad comparison.

There, I've basically summed it all up.

User avatar
HomerJ
Posts: 14145
Joined: Fri Jun 06, 2008 12:50 pm

Re: My trend following strategy and experience

Post by HomerJ » Wed Feb 26, 2020 10:56 am

Lee_WSP wrote:
Wed Feb 26, 2020 10:30 am
We're just rehashing old arguments again.

Trend following has had as good or better max drawdown as B&H the same assets, but has the potential to outperform & underperform the same.

Comparing a trend following strategy to a 60/40 portfolio is a very bad comparison.

There, I've basically summed it all up.
I agree with most of what you say. But trend following has a hidden risk. If the crashes in the future are different from the crashes in the past, the trend-following system (based on the past) may not work.

A possible crash based on a pandemic virus brought this to mind.

Not just talking small whipsaws, expected false positives (because no system can be perfect), but actual failure of the trend-following system. That is a risk trend-followers do not take into account.

Every investing "system" ever invented back-tested well at one point. And most of them failed going forward.
The J stands for Jay

Lee_WSP
Posts: 2182
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: My trend following strategy and experience

Post by Lee_WSP » Wed Feb 26, 2020 11:10 am

HomerJ wrote:
Wed Feb 26, 2020 10:56 am
Lee_WSP wrote:
Wed Feb 26, 2020 10:30 am
We're just rehashing old arguments again.

Trend following has had as good or better max drawdown as B&H the same assets, but has the potential to outperform & underperform the same.

Comparing a trend following strategy to a 60/40 portfolio is a very bad comparison.

There, I've basically summed it all up.
I agree with most of what you say. But trend following has a hidden risk. If the crashes in the future are different from the crashes in the past, the trend-following system (based on the past) may not work.

A possible crash based on a pandemic virus brought this to mind.

Not just talking small whipsaws, expected false positives (because no system can be perfect), but actual failure of the trend-following system. That is a risk trend-followers do not take into account.

Every investing "system" ever invented back-tested well at one point. And most of them failed going forward.
The potential max drawdown is the same regardless of the system. The realized losses aren't.

User avatar
HomerJ
Posts: 14145
Joined: Fri Jun 06, 2008 12:50 pm

Re: My trend following strategy and experience

Post by HomerJ » Wed Feb 26, 2020 11:29 am

Lee_WSP wrote:
Wed Feb 26, 2020 11:10 am
HomerJ wrote:
Wed Feb 26, 2020 10:56 am
Lee_WSP wrote:
Wed Feb 26, 2020 10:30 am
We're just rehashing old arguments again.

Trend following has had as good or better max drawdown as B&H the same assets, but has the potential to outperform & underperform the same.

Comparing a trend following strategy to a 60/40 portfolio is a very bad comparison.

There, I've basically summed it all up.
I agree with most of what you say. But trend following has a hidden risk. If the crashes in the future are different from the crashes in the past, the trend-following system (based on the past) may not work.

A possible crash based on a pandemic virus brought this to mind.

Not just talking small whipsaws, expected false positives (because no system can be perfect), but actual failure of the trend-following system. That is a risk trend-followers do not take into account.

Every investing "system" ever invented back-tested well at one point. And most of them failed going forward.
The potential max drawdown is the same regardless of the system. The realized losses aren't.
Ah point taken. Your comment was correct then. But realized losses are more important, of course.
The J stands for Jay

User avatar
Forester
Posts: 918
Joined: Sat Jan 19, 2019 2:50 pm
Location: UK

Re: My trend following strategy and experience

Post by Forester » Wed Feb 26, 2020 1:03 pm

HomerJ wrote:
Wed Feb 26, 2020 9:58 am
Lee_WSP wrote:
Wed Feb 26, 2020 9:49 am
HomerJ wrote:
Wed Feb 26, 2020 12:14 am
Lee_WSP wrote:
Wed Feb 26, 2020 12:02 am
Any timing system is susceptible to whipsaws. This is not new information.
Certainly, but I'm not talking about whipsaws.

Normally, a trend-following system like this will have whipsaws, where the market will crash a little, the trend-follower will get out to avoid the big crash, and then the market will go back up, and the trend follower will have to eat the small loss and get back in.

But the point is that when the big crash comes, the system will work and the trend-follower will get out early and avoid the big crash.

It's worth it to the trend-follower to take a few small losses in order to avoid the big crash.

But what if the big crash happens because of some strange black swan event, and the signals are triggered very late, deep in the big crash?

Monthly unemployment figures may not predict all possible crashes.
Ah, I see.

Well, then the trend follower will be no worse off than buy & hold. Which is why I didn't understand the topic. At worst there will be a whipsaw event at the bottom.
It all depends on how fast the market bounces back. If a vaccine is discovered, or the pandemic is far less deadly than feared, the market could bounce back quickly, and the trend-follower could end up with huge locked in losses, if they sold near the bottom, and had to buy back in after a large recovery.

Trend-following IS riskier than buy and hold. Will here is 100% in stocks, because he expects his signals to protect him from a big crash. Most buy and hold people at his age use bonds to protect them from a big crash.

He and I have about the same risk profile... If I'm 50/50 stocks/bonds, and the market crashes 50%, I only lose 25%. If he's 100% stocks, and the market crashes 50%, but his signals get him out after a 20% decline, then he only lost 20%.

But that's assuming his signals will work correctly in all bear market scenarios. If his signals work incorrectly, he could experience most of the 50% crash, and not get out early. AND if his signals trigger at the wrong time, he could actually LOCK IN some of those losses by selling near the bottom.

The buy and holder gets what the market gives. Riding it all the way down and back up, you'll get whatever the market gives. A trend-follower, if following the wrong system, could indeed do far worse than the market.

I thought the coronavirus issue today is an example of something that may not be covered by his monthly unemployment signals.

There may be more risk in a trend-follower's system than people realize.
This is why ETFs such as ROMO use a mixture of lookback periods, to reduce specification risk. So in late 2015 all trend systems lose money. However in late 2018 some even make money. Trend following hasn't lost much ground to buy & hold in the 2010s. On the one hand there are whipsaw losses for trend followers, on the other, Mr 60/40 has had a constant bond drag.

User avatar
tadamsmar
Posts: 8777
Joined: Mon May 07, 2007 12:33 pm

Re: My trend following strategy and experience

Post by tadamsmar » Thu Feb 27, 2020 11:56 am

Looks the the OP's trend follow strategy is close to giving a sell signal in early March

Unemployment has to tick up 0.1 points. The consensus prediction is no change, but some sources are predicting an uptick.

It looks like the VBMFX is above the SP500 in intra-day trading in percentage terms vs the July 31, 2019 prices. I think that is a pretty good proxy for the stock-based sell signal. But it is not exact and the actual trigger is based on whatever stock index funds the OP's fiduciaries have to offer.

But if I am way off on this assessment, please let me know. I am still a student of this trend follow strategy.

User avatar
BlueEars
Posts: 3838
Joined: Sat Mar 10, 2007 12:15 am
Location: West Coast

Re: My trend following strategy and experience

Post by BlueEars » Thu Feb 27, 2020 12:14 pm

tadamsmar wrote:
Thu Feb 27, 2020 11:56 am
Looks the the OP's trend follow strategy is close to giving a sell signal in early March

Unemployment has to tick up 0.1 points. The consensus prediction is no change, but some sources are predicting an uptick.

It looks like the VBMFX is above the SP500 in intra-day trading in percentage terms vs the July 31, 2019 prices. I think that is a pretty good proxy for the stock-based sell signal. But it is not exact and the actual trigger is based on whatever stock index funds the OP's fiduciaries have to offer.

But if I am way off on this assessment, please let me know. I am still a student of this trend follow strategy.
If unemployment ticks up this that would be a negative. However, one still has to wait until the end of March to see the final SP500 trend numbers. The signal would only come at the end of a month.

User avatar
tadamsmar
Posts: 8777
Joined: Mon May 07, 2007 12:33 pm

Re: My trend following strategy and experience

Post by tadamsmar » Thu Feb 27, 2020 1:54 pm

BlueEars wrote:
Thu Feb 27, 2020 12:14 pm
tadamsmar wrote:
Thu Feb 27, 2020 11:56 am
Looks the the OP's trend follow strategy is close to giving a sell signal in early March

Unemployment has to tick up 0.1 points. The consensus prediction is no change, but some sources are predicting an uptick.

It looks like the VBMFX is above the SP500 in intra-day trading in percentage terms vs the July 31, 2019 prices. I think that is a pretty good proxy for the stock-based sell signal. But it is not exact and the actual trigger is based on whatever stock index funds the OP's fiduciaries have to offer.

But if I am way off on this assessment, please let me know. I am still a student of this trend follow strategy.
If unemployment ticks up this that would be a negative. However, one still has to wait until the end of March to see the final SP500 trend numbers. The signal would only come at the end of a month.
Really? I thought that he would wait till the February unemployment rate was announced. That would be announced a few days after March 1. If the rate ticked up to 3.7 or above, then I thought that he would check for the stock signal immediately and then sell if it was a sell signal. He would end up selling in early March.

But I am not sure of the exact process.

User avatar
tadamsmar
Posts: 8777
Joined: Mon May 07, 2007 12:33 pm

Re: My trend following strategy and experience

Post by tadamsmar » Thu Feb 27, 2020 2:19 pm

BlueEars wrote:
Thu Feb 27, 2020 12:14 pm
tadamsmar wrote:
Thu Feb 27, 2020 11:56 am
Looks the the OP's trend follow strategy is close to giving a sell signal in early March

Unemployment has to tick up 0.1 points. The consensus prediction is no change, but some sources are predicting an uptick.

It looks like the VBMFX is above the SP500 in intra-day trading in percentage terms vs the July 31, 2019 prices. I think that is a pretty good proxy for the stock-based sell signal. But it is not exact and the actual trigger is based on whatever stock index funds the OP's fiduciaries have to offer.

But if I am way off on this assessment, please let me know. I am still a student of this trend follow strategy.
If unemployment ticks up this that would be a negative. However, one still has to wait until the end of March to see the final SP500 trend numbers. The signal would only come at the end of a month.
This is from the OP (original post of this thread) dated January 17, 2019:
This month is the first time that the first part of my system has called for me to move out of stocks. The UER is .01% higher than it's 12 month moving average (I'm sticking with my strategy to the letter), and all stock indexes I can invest in were below their 7 month moving average as of the beginning of this month. I've moved completely out of stocks and into a combination of short-term Treasuries, total bond market, and TIAA real estate (those who know much about this fund know why), depending on what I have access to in each account.
It looks like he got the unemployment-based sell signal in early January and that he immediately checked the stock-based signal and sold out in early January. He did not wait till the end of January.

Busdrvr
Posts: 162
Joined: Fri Jan 29, 2016 11:56 am

Re: My trend following strategy and experience

Post by Busdrvr » Thu Feb 27, 2020 3:12 pm

SPY is below the 150 day MA at this time

Busdrvr
Posts: 162
Joined: Fri Jan 29, 2016 11:56 am

Re: My trend following strategy and experience

Post by Busdrvr » Fri Feb 28, 2020 5:47 pm

I realize this is not Willthrills jam, but other timing strategies based on price have shifted gears since last time they checked.

https://www.advisorperspectives.com/dsh ... end-update

What does the UER say? We will soon find out.

skeptic42
Posts: 83
Joined: Mon Feb 11, 2019 5:27 pm

Re: My trend following strategy and experience

Post by skeptic42 » Sat Feb 29, 2020 5:06 am

Lee_WSP wrote:
Wed Feb 26, 2020 11:10 am
HomerJ wrote:
Wed Feb 26, 2020 10:56 am
Lee_WSP wrote:
Wed Feb 26, 2020 10:30 am
We're just rehashing old arguments again.

Trend following has had as good or better max drawdown as B&H the same assets, but has the potential to outperform & underperform the same.

Comparing a trend following strategy to a 60/40 portfolio is a very bad comparison.

There, I've basically summed it all up.
I agree with most of what you say. But trend following has a hidden risk. If the crashes in the future are different from the crashes in the past, the trend-following system (based on the past) may not work.

A possible crash based on a pandemic virus brought this to mind.

Not just talking small whipsaws, expected false positives (because no system can be perfect), but actual failure of the trend-following system. That is a risk trend-followers do not take into account.

Every investing "system" ever invented back-tested well at one point. And most of them failed going forward.
The potential max drawdown is the same regardless of the system. The realized losses aren't.
No, the max drawdown of trend-following can be larger than buy and hold, if the market moves in a bad way. That is a risk which gets ignored by trend-followers, because it never happened in the past.

finite_difference
Posts: 1660
Joined: Thu Jul 09, 2015 7:00 pm

Re: My trend following strategy and experience

Post by finite_difference » Sat Feb 29, 2020 9:01 am

Does UER change if people are still employed but are quarantined or under lockdown and cannot go to work? A prolonged period of time under those conditions would eventually lead to layoffs but there may be some lag.
The most precious gift we can offer anyone is our attention. - Thich Nhat Hanh

User avatar
Forester
Posts: 918
Joined: Sat Jan 19, 2019 2:50 pm
Location: UK

Re: My trend following strategy and experience

Post by Forester » Sat Feb 29, 2020 9:10 am

skeptic42 wrote:
Sat Feb 29, 2020 5:06 am
Lee_WSP wrote:
Wed Feb 26, 2020 11:10 am
HomerJ wrote:
Wed Feb 26, 2020 10:56 am
Lee_WSP wrote:
Wed Feb 26, 2020 10:30 am
We're just rehashing old arguments again.

Trend following has had as good or better max drawdown as B&H the same assets, but has the potential to outperform & underperform the same.

Comparing a trend following strategy to a 60/40 portfolio is a very bad comparison.

There, I've basically summed it all up.
I agree with most of what you say. But trend following has a hidden risk. If the crashes in the future are different from the crashes in the past, the trend-following system (based on the past) may not work.

A possible crash based on a pandemic virus brought this to mind.

Not just talking small whipsaws, expected false positives (because no system can be perfect), but actual failure of the trend-following system. That is a risk trend-followers do not take into account.

Every investing "system" ever invented back-tested well at one point. And most of them failed going forward.
The potential max drawdown is the same regardless of the system. The realized losses aren't.
No, the max drawdown of trend-following can be larger than buy and hold, if the market moves in a bad way. That is a risk which gets ignored by trend-followers, because it never happened in the past.
Probably a good idea to mix trend with buy & hold. 30% equity trend, 30% long equity, 20% gold, 20% quality bonds. Kind of throwing everything against the wall... sometimes there are trends, sometimes mean reversion & chop.

Lee_WSP
Posts: 2182
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: My trend following strategy and experience

Post by Lee_WSP » Sat Feb 29, 2020 11:53 am

skeptic42 wrote:
Sat Feb 29, 2020 5:06 am
Lee_WSP wrote:
Wed Feb 26, 2020 11:10 am
HomerJ wrote:
Wed Feb 26, 2020 10:56 am
Lee_WSP wrote:
Wed Feb 26, 2020 10:30 am
We're just rehashing old arguments again.

Trend following has had as good or better max drawdown as B&H the same assets, but has the potential to outperform & underperform the same.

Comparing a trend following strategy to a 60/40 portfolio is a very bad comparison.

There, I've basically summed it all up.
I agree with most of what you say. But trend following has a hidden risk. If the crashes in the future are different from the crashes in the past, the trend-following system (based on the past) may not work.

A possible crash based on a pandemic virus brought this to mind.

Not just talking small whipsaws, expected false positives (because no system can be perfect), but actual failure of the trend-following system. That is a risk trend-followers do not take into account.

Every investing "system" ever invented back-tested well at one point. And most of them failed going forward.
The potential max drawdown is the same regardless of the system. The realized losses aren't.
No, the max drawdown of trend-following can be larger than buy and hold, if the market moves in a bad way. That is a risk which gets ignored by trend-followers, because it never happened in the past.
It would take a lot of whipsaws for that to happen. By definition a bear market requires a 20% drop. The 10mma is well above 20%. Now, it does require a bear market to work, but history tells us a bear will eventually happen.

User avatar
Steve Reading
Posts: 1678
Joined: Fri Nov 16, 2018 10:20 pm

Re: My trend following strategy and experience

Post by Steve Reading » Sun Mar 01, 2020 11:15 am

willthrill81 wrote:
Thu Jan 17, 2019 7:16 pm
I don't follow the two signals you require to switch out of stocks but I do believe you would do it at the start of the month yes? Will you be switching out for the month of March or staying in stocks for now? Just curious.

Lee_WSP
Posts: 2182
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: My trend following strategy and experience

Post by Lee_WSP » Sun Mar 01, 2020 11:30 am

305pelusa wrote:
Sun Mar 01, 2020 11:15 am
willthrill81 wrote:
Thu Jan 17, 2019 7:16 pm
I don't follow the two signals you require to switch out of stocks but I do believe you would do it at the start of the month yes? Will you be switching out for the month of March or staying in stocks for now? Just curious.
The unrate needs to tick down even slightly.

Busdrvr
Posts: 162
Joined: Fri Jan 29, 2016 11:56 am

Re: My trend following strategy and experience

Post by Busdrvr » Sun Mar 01, 2020 11:42 am

I’ll go out on a limb and guess that the OP will have already made a drastic change to his AA due to the current market action.
I’ m sure he will correct me if my guess is incorrect. Not that I would be critical of such a decision since I made such a change on Thursday myself. I’m currently on a beach and falling asleep each night with ease. I checked and my 401k loss puts me back to Xmas. Dshort showed all asset classes switched to cash and I will be shocked if the UER does not trigger; if not now then in a month. In a week another 2.5k from pay will be inserted. I have not modified my new contribution AA, but will check action daily to see if it’s needed.

User avatar
nps
Posts: 936
Joined: Thu Dec 04, 2014 10:18 am

Re: My trend following strategy and experience

Post by nps » Sun Mar 01, 2020 12:14 pm

Busdrvr wrote:
Sun Mar 01, 2020 11:42 am
I’ll go out on a limb and guess that the OP will have already made a drastic change to his AA due to the current market action.
Why would you guess that? His ability to maintain his system was called into question repeatedly on this thread but he did say he was committed:
willthrill81 wrote:
Fri Jan 18, 2019 10:57 am
It wasn't an easy decision to cross over into trend following, but I'm well aware of the limitations of the data used to build the method I use. I'm very confident that I'll be able to stick with it.

User avatar
Topic Author
willthrill81
Posts: 17375
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: My trend following strategy and experience

Post by willthrill81 » Sun Mar 01, 2020 4:46 pm

305pelusa wrote:
Sun Mar 01, 2020 11:15 am
willthrill81 wrote:
Thu Jan 17, 2019 7:16 pm
I don't follow the two signals you require to switch out of stocks but I do believe you would do it at the start of the month yes? Will you be switching out for the month of March or staying in stocks for now? Just curious.
My strategy would not allow me to move out of stocks unless (1) bonds' relative performance has been higher than that of stocks for the preceding 7 months, which they have, and (2) the unemployment rate is above its 12 month moving average, which it isn't yet but might be when those numbers are released on March 6th, this Friday.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

User avatar
Steve Reading
Posts: 1678
Joined: Fri Nov 16, 2018 10:20 pm

Re: My trend following strategy and experience

Post by Steve Reading » Sun Mar 01, 2020 6:17 pm

willthrill81 wrote:
Sun Mar 01, 2020 4:46 pm
305pelusa wrote:
Sun Mar 01, 2020 11:15 am
willthrill81 wrote:
Thu Jan 17, 2019 7:16 pm
I don't follow the two signals you require to switch out of stocks but I do believe you would do it at the start of the month yes? Will you be switching out for the month of March or staying in stocks for now? Just curious.
My strategy would not allow me to move out of stocks unless (1) bonds' relative performance has been higher than that of stocks for the preceding 7 months, which they have, and (2) the unemployment rate is above its 12 month moving average, which it isn't yet but might be when those numbers are released on March 6th, this Friday.
Oh for some reason I had this impression the first indicator was stocks moving below their 7 month average (I.e. nothing to do with bonds). Either way, I knew this condition would be met, I just didn’t know the status on the unemployment rate condition. So one more week to know, gotcha :)

User avatar
BlueEars
Posts: 3838
Joined: Sat Mar 10, 2007 12:15 am
Location: West Coast

Re: My trend following strategy and experience

Post by BlueEars » Sun Mar 01, 2020 6:29 pm

305pelusa wrote:
Sun Mar 01, 2020 6:17 pm
willthrill81 wrote:
Sun Mar 01, 2020 4:46 pm
305pelusa wrote:
Sun Mar 01, 2020 11:15 am
willthrill81 wrote:
Thu Jan 17, 2019 7:16 pm
I don't follow the two signals you require to switch out of stocks but I do believe you would do it at the start of the month yes? Will you be switching out for the month of March or staying in stocks for now? Just curious.
My strategy would not allow me to move out of stocks unless (1) bonds' relative performance has been higher than that of stocks for the preceding 7 months, which they have, and (2) the unemployment rate is above its 12 month moving average, which it isn't yet but might be when those numbers are released on March 6th, this Friday.
Oh for some reason I had this impression the first indicator was stocks moving below their 7 month average (I.e. nothing to do with bonds). Either way, I knew this condition would be met, I just didn’t know the status on the unemployment rate condition. So one more week to know, gotcha :)
From what I understand, Will would use the unemployment data point but apply it at the end of March. At that point the data for the stocks and bonds would be compared to make a final trade decision.

User avatar
Topic Author
willthrill81
Posts: 17375
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: My trend following strategy and experience

Post by willthrill81 » Sun Mar 01, 2020 6:44 pm

BlueEars wrote:
Sun Mar 01, 2020 6:29 pm
305pelusa wrote:
Sun Mar 01, 2020 6:17 pm
willthrill81 wrote:
Sun Mar 01, 2020 4:46 pm
305pelusa wrote:
Sun Mar 01, 2020 11:15 am
willthrill81 wrote:
Thu Jan 17, 2019 7:16 pm
I don't follow the two signals you require to switch out of stocks but I do believe you would do it at the start of the month yes? Will you be switching out for the month of March or staying in stocks for now? Just curious.
My strategy would not allow me to move out of stocks unless (1) bonds' relative performance has been higher than that of stocks for the preceding 7 months, which they have, and (2) the unemployment rate is above its 12 month moving average, which it isn't yet but might be when those numbers are released on March 6th, this Friday.
Oh for some reason I had this impression the first indicator was stocks moving below their 7 month average (I.e. nothing to do with bonds). Either way, I knew this condition would be met, I just didn’t know the status on the unemployment rate condition. So one more week to know, gotcha :)
From what I understand, Will would use the unemployment data point but apply it at the end of March. At that point the data for the stocks and bonds would be compared to make a final trade decision.
No, I would not wait until the end of the month. If bonds' relative performance is above stocks and the UER is above its 12 MMA, I would move out of stocks immediately.
Last edited by willthrill81 on Sun Mar 01, 2020 10:10 pm, edited 1 time in total.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Hydromod
Posts: 379
Joined: Tue Mar 26, 2019 10:21 pm

Re: My trend following strategy and experience

Post by Hydromod » Sun Mar 01, 2020 7:14 pm

With the benefit of an additional data point, I’m thinking that perhaps the condition of near-zero gradient on the moving average of the UER would be a good signal to drop back the risk budget assigned to equities to a neutral level from a risk-on level. Now that market responses are accelerating and all.

That’s for the adaptive risk parity folks.

Not quite actionable for the all or nothing crowd.

User avatar
lock.that.stock
Posts: 136
Joined: Sun Apr 28, 2019 2:01 pm

Re: My trend following strategy and experience

Post by lock.that.stock » Sun Mar 01, 2020 9:43 pm

willthrill81 wrote:
Sun Mar 01, 2020 6:44 pm
BlueEars wrote:
Sun Mar 01, 2020 6:29 pm
305pelusa wrote:
Sun Mar 01, 2020 6:17 pm
willthrill81 wrote:
Sun Mar 01, 2020 4:46 pm
305pelusa wrote:
Sun Mar 01, 2020 11:15 am


I don't follow the two signals you require to switch out of stocks but I do believe you would do it at the start of the month yes? Will you be switching out for the month of March or staying in stocks for now? Just curious.
My strategy would not allow me to move out of stocks unless (1) bonds' relative performance has been higher than that of stocks for the preceding 7 months, which they have, and (2) the unemployment rate is above its 12 month moving average, which it isn't yet but might be when those numbers are released on March 6th, this Friday.
Oh for some reason I had this impression the first indicator was stocks moving below their 7 month average (I.e. nothing to do with bonds). Either way, I knew this condition would be met, I just didn’t know the status on the unemployment rate condition. So one more week to know, gotcha :)
From what I understand, Will would use the unemployment data point but apply it at the end of March. At that point the data for the stocks and bonds would be compared to make a final trade decision.
No, I would not wait until the end of the month. If bonds' relative performance is above stocks and the UER is below its 12 MMA, I would move out of stocks immediately.
Did you mean to say “if the UER is above 12 MMA?

User avatar
Topic Author
willthrill81
Posts: 17375
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: My trend following strategy and experience

Post by willthrill81 » Sun Mar 01, 2020 10:10 pm

lock.that.stock wrote:
Sun Mar 01, 2020 9:43 pm
willthrill81 wrote:
Sun Mar 01, 2020 6:44 pm
BlueEars wrote:
Sun Mar 01, 2020 6:29 pm
305pelusa wrote:
Sun Mar 01, 2020 6:17 pm
willthrill81 wrote:
Sun Mar 01, 2020 4:46 pm


My strategy would not allow me to move out of stocks unless (1) bonds' relative performance has been higher than that of stocks for the preceding 7 months, which they have, and (2) the unemployment rate is above its 12 month moving average, which it isn't yet but might be when those numbers are released on March 6th, this Friday.
Oh for some reason I had this impression the first indicator was stocks moving below their 7 month average (I.e. nothing to do with bonds). Either way, I knew this condition would be met, I just didn’t know the status on the unemployment rate condition. So one more week to know, gotcha :)
From what I understand, Will would use the unemployment data point but apply it at the end of March. At that point the data for the stocks and bonds would be compared to make a final trade decision.
No, I would not wait until the end of the month. If bonds' relative performance is above stocks and the UER is below its 12 MMA, I would move out of stocks immediately.
Did you mean to say “if the UER is above 12 MMA?
Yes, thanks. I corrected that.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

User avatar
BlueEars
Posts: 3838
Joined: Sat Mar 10, 2007 12:15 am
Location: West Coast

Re: My trend following strategy and experience

Post by BlueEars » Sun Mar 01, 2020 11:02 pm

willthrill81 wrote:
Sun Mar 01, 2020 10:10 pm
lock.that.stock wrote:
Sun Mar 01, 2020 9:43 pm
willthrill81 wrote:
Sun Mar 01, 2020 6:44 pm
BlueEars wrote:
Sun Mar 01, 2020 6:29 pm
305pelusa wrote:
Sun Mar 01, 2020 6:17 pm


Oh for some reason I had this impression the first indicator was stocks moving below their 7 month average (I.e. nothing to do with bonds). Either way, I knew this condition would be met, I just didn’t know the status on the unemployment rate condition. So one more week to know, gotcha :)
From what I understand, Will would use the unemployment data point but apply it at the end of March. At that point the data for the stocks and bonds would be compared to make a final trade decision.
No, I would not wait until the end of the month. If bonds' relative performance is above stocks and the UER is below its 12 MMA, I would move out of stocks immediately.
Did you mean to say “if the UER is above 12 MMA?
Yes, thanks. I corrected that.
OK my mistake, so you would make the trade before the end of the month. Now I'm wondering how you simulated this. Did you have both daily and monthly data to make this trade decision? Have you checked how waiting for a monthly end point would perform versus selling before the month end? It might seem like a quibble but if stocks reverse course and go up then you would have avoided a trade. Does historical data exist that points to the best way to handle this? One would want to know if the BLS data was always announced on the first Friday of a month.

I don't know how much credence to give this but there is an interesting article in Reuters about a possible coordinated rate cut coming: https://www.reuters.com/article/us-chin ... SKBN20O2CY My own choice is to avoid trades if at all possible in favor of catching only major downturns.

User avatar
Topic Author
willthrill81
Posts: 17375
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: My trend following strategy and experience

Post by willthrill81 » Sun Mar 01, 2020 11:04 pm

BlueEars wrote:
Sun Mar 01, 2020 11:02 pm
willthrill81 wrote:
Sun Mar 01, 2020 10:10 pm
lock.that.stock wrote:
Sun Mar 01, 2020 9:43 pm
willthrill81 wrote:
Sun Mar 01, 2020 6:44 pm
BlueEars wrote:
Sun Mar 01, 2020 6:29 pm


From what I understand, Will would use the unemployment data point but apply it at the end of March. At that point the data for the stocks and bonds would be compared to make a final trade decision.
No, I would not wait until the end of the month. If bonds' relative performance is above stocks and the UER is below its 12 MMA, I would move out of stocks immediately.
Did you mean to say “if the UER is above 12 MMA?
Yes, thanks. I corrected that.
OK my mistake, so you would make the trade before the end of the month. Now I'm wondering how you simulated this. Did you have both daily and monthly data to make this trade decision? Have you checked how waiting for a monthly end point would perform versus selling before the month end? It might seem like a quibble but if stocks reverse course and go up then you would have avoided a trade. Does historical data exist that points to the best way to handle this? One would want to know if the BLS data was always announced on the first Friday of a month.

I don't know how much credence to give this but there is an interesting article in Reuters about a possible coordinated rate cut coming: https://www.reuters.com/article/us-chin ... SKBN20O2CY My own choice is to avoid trades if at all possible in favor of catching only major downturns.
No, I didn't test the difference created in the timing, but over the long-term, I'm not convinced that it's critical. I believe that you are more interested in precise and extensive backtesting than I am.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

User avatar
lock.that.stock
Posts: 136
Joined: Sun Apr 28, 2019 2:01 pm

Re: My trend following strategy and experience

Post by lock.that.stock » Sun Mar 01, 2020 11:37 pm

You’re using the US UER as your macro indicator to enter/exit stocks, which is fair. As an alternate thought - Did you consider the worldwide (or China) UER as a more robust indicator (individually or in conjunction with US UER)?

Not sure about the availability or reliability of the China UER, but under the current circumstances perhaps the China UER would warn you at least a month in advance of US UER of looming “tough times”, so you can minimize stock exposure a little sooner and protect your gains?

CT-Scott
Posts: 428
Joined: Sun Feb 22, 2015 3:01 pm

Re: My trend following strategy and experience

Post by CT-Scott » Mon Mar 02, 2020 9:29 am

Sorry, I have not read this entire thread (yet), but can you tell me what your current positions are and when your last move was? I'm not seeing it in the last several pages. It might not be a bad idea to update your OP to include a dated list of your moves in/out.

User avatar
tadamsmar
Posts: 8777
Joined: Mon May 07, 2007 12:33 pm

Re: My trend following strategy and experience

Post by tadamsmar » Mon Mar 02, 2020 3:34 pm

CT-Scott wrote:
Mon Mar 02, 2020 9:29 am
Sorry, I have not read this entire thread (yet), but can you tell me what your current positions are and when your last move was? I'm not seeing it in the last several pages. It might not be a bad idea to update your OP to include a dated list of your moves in/out.
Here is a fairly recent update:

viewtopic.php?f=10&t=270035&start=1000#p4924250

I think there will be info/link in the bottom of the original post of the tread when he provides an update.

User avatar
Topic Author
willthrill81
Posts: 17375
Joined: Thu Jan 26, 2017 3:17 pm
Location: USA

Re: My trend following strategy and experience

Post by willthrill81 » Mon Mar 02, 2020 3:47 pm

lock.that.stock wrote:
Sun Mar 01, 2020 11:37 pm
You’re using the US UER as your macro indicator to enter/exit stocks, which is fair. As an alternate thought - Did you consider the worldwide (or China) UER as a more robust indicator (individually or in conjunction with US UER)?
The historic data, reviewed in the link in the OP, indicates that the U.S. UER has had a bigger impact on other nations' stocks than their own UER.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

beehivehave
Posts: 466
Joined: Thu Aug 08, 2019 1:21 pm

Re: My trend following strategy and experience

Post by beehivehave » Mon Mar 02, 2020 3:50 pm

I expect that if the strategy succeeded or appeared to succeed, there would be updates.
I expect that if the strategy clearly failed, there would be no updates and the thread would die.
Since the thread is still alive, it appears you may have lucked out. Congrats!

CT-Scott
Posts: 428
Joined: Sun Feb 22, 2015 3:01 pm

Re: My trend following strategy and experience

Post by CT-Scott » Mon Mar 02, 2020 4:06 pm

tadamsmar wrote:
Mon Mar 02, 2020 3:34 pm
CT-Scott wrote:
Mon Mar 02, 2020 9:29 am
Sorry, I have not read this entire thread (yet), but can you tell me what your current positions are and when your last move was? I'm not seeing it in the last several pages. It might not be a bad idea to update your OP to include a dated list of your moves in/out.
Here is a fairly recent update:

viewtopic.php?f=10&t=270035&start=1000#p4924250

I think there will be info/link in the bottom of the original post of the tread when he provides an update.
Since that's his last update, my presumption would be that he's still allocated that way (stock-heavy), so I guess his indicators didn't cause him to move out of stocks. I also saw mention of him doing his evaluations at month-end, which seems like a pretty big gap in the strategy.

Locked