One of the key indicators developed and tracked by Baseline Analytics is the TrendFlex Score. This indicator has influenced the trading and investment strategies of our subscribers since its founding in 2011.
The TrendFlex Score was developed following an extensive analysis of select technical, fundamental and economic indicators correlated with performance to the S&P 500.
The following key components calculate the TrendFlex Score:
- Technical Index Reviews (S&P 500, Dow, Nasdaq)
- Internal Market Strength (i.e. Price and Earnings Momentum)
- Market Psychology
- Economic Sector Relative Earnings Strength
- Credit spreads (Government vs. Corporate)
- Intermarket Relationships (bonds, commodities, stocks) and relative risk premiums
- Style (small cap, large cap, value and growth)
These indicators have been weighted based on back-tested results. The resulting TrendFlex Score tends to range between 1.30 and 2.60. High scores coincide with bearish market trends. Low scores, conversely, associate themselves with bullish trends.
The signal for a trend change is denoted by the TrendFlex Score crossing above or below its three-week moving average. In the chart below, the TrendFlex Score is plotted as an oscillator around the "0" line, denoting when the score crosses above or below its three-week moving average.
Note in the chart above how the TrendFlex Score bars fall below the "0" line in uptrends, and the converse in downtrends. Baseline Analytics utilizes these signals to establish short-term bullish or bearish positions in equities. As a simple hedging strategy, a long portfolio can be hedged with a short position in the S&P 500 e-mini futures, when the TrendFlex Score (bar) falls below its three-week moving average ("0" signal line).
The weekly updates provided by Baseline Analytics depict the TrendFlex Score in the following chart, which shows the absolute value of the TrendFlex Score plotted with the S&P 500::
Note that in the October 2015 rally, the TrendFlex Score crossed below its three-week moving average (the "signal" line).
As you can see, TrendFlex Scores in the 1.30 area tend to precede selloffs in the S&P 500, while scores generally higher than 2.0 tend to precede rallies in the S&P 500.
Note the recent peaks in the TrendFlex Scores settling over 2.0 in August, and the rally that followed. The TrendFlex Score is calculated on a weekly basis, following Friday's market close, and reported in the weekly Baseline Analytics update prior to the market open the following Monday (most updates are completed on Sundays). The TrendFlex Score may be updated more frequently as market conditions warrant.
Investors utilize the TrendFlex Score as a gauge to assess a risk to a change in the short-term market trend, and as a condition to initiate a hedge to a long (or short) market portfolio. For example, many of our subscribers retain a long-term horizon, with occasional speculative positions, including long and short options and futures.
Visit our Premium Services overview page for more information and performance results on the Baseline Analytics TrendFlex Score and signals.
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