The "uptrend" TrendFlex Classic and Allegiance signals took it on the chin this week as the S&P 500 sunk 5.7%. VIX and CBOE Put/Call Ratios hit extreme fear levels not seen since the October 2014 Ebola crisis.
As typical with market timing systems, circumstances develop that nullify technical analysis-based systems and highlight one or two technical conditions that forewarned of a trend shift even though the major trend appeared intact. Such circumstances that have surfaced in the prior weeks include declining market breadth while the indices pushed to new highs, as well as modest VIX readings.
In fact, our Classic and Allegiance signals based on a risk premium indicator in Corporate vs. Treasury debt, which were our flagship signals from 2011 through 2014, flashed "Sell" signals as early as 4/6/15. We chose to abandon these indicators given the impending shift in Federal Reserve policy toward a more hawkish stance (these indicators remain a component of the TrendFlex Score calculation). Those "traditional" Classic and Allegiance signals would be up 6.7% and 4.8% today, respectively.
Baseline Analytics will begin to provide the results of these alternative systems plus additional commmentary to pull it all together, on a weekly basis. Additionally, we will continue to provide our "Top 5" timing systems for SPY and other top ETF's to lend further support to market positioning. Commentary will attempt to consider all systems and assess the risk/reward of long or short positions on a comprehensive basis, while tracking the results of each of the four TrendFlex systems.
This week, Allegiance has shifted to Neutral with a score of 2.25. Classic has shifted to Bearish at a score of 2.60. The Traditional indicators remain on Downtrend signals established in April.
The TrendFlex Score increased from 2.17 to 2.56, which is the highest (and most extreme) score recorded since the 2.62 score recorded in May, 2012. Given the extreme reading in the TrendFlex Score, as well as the high readings in VIX and the CBOE Put/Call ratio (see our Baseline Analytics Blog posted midday Friday), we will be looking for a bounce in equities. One likely scenario may be a modest bounce Monday morning, followed by new lows, then a sustained bounce into the close. We are not convinced yet that the market will bounce and recover quickly as it has several time so far this year, although as Investor's Business Daily has pointed out this weekend, many good follow-through days have occurred in August.
The Portfolio Options Table is recognizes the bearish trend, however the high reading in the TrendFlex Score anticipates a short-term bounce in euquities (hence the rather opportunistic "long futures & options" bullet below).
Click here for the cumulative returns and trade history for the Baseline Analytics TrendFlex systems since their initial trades.