Technically Speaking: You Carry An Umbrella In Case It Rains

 

Likewise, the secondary, or confirming indicator, is also suggesting “caution” with respect to chasing the market currently. But, as I stated above, these very short-term indicators are like “yellow lights at a busy intersection.” As investors we have a choice, “slow down” or “step on the gas.

 

But which action do you take? The recent rally certainly “feels” like you should “shove your foot in the carburetor”and “hang on for the ride.”

This is why we use confirming indicators. Like any good process, we want to have one signal “confirmed” by others which increase the probability of getting more accurate signals over time.

(Note: I said “probability” of “more accurate” signals over time. There are no “perfect” indicators or processes that work 100% of the time. It is the discipline of adhering to a process dogmatically over time, even when it seems broken, which has the highest probability of success.)

Even on a “weekly” basis, there can be a lot of signals, and as stated above, “false” signals are not uncommon. Currently, as the purple highlight shows, despite the recent rally, the signal suggests a higher level of caution currently.

 

But could it just be a “false signal?” Maybe. The signal in 2011 and 2012 were certainly false signals due to the interventions of massive rounds from “QE” from the Fed. However, given the Fed is only potentially pausing the reduction of, and not injecting, liquidity, the current “signal” is likely worth giving more weight to.

 

Stepping back to a monthly basis, we can “confirm” the daily, and weekly, signals further. Again, as with all signals, you can get some false indications, but those were small prices to pay for the “savings” when the signals were right as during 2018.

 

Currently, the ONLY signal which is NOT confirming the other five is the long-term month indicator which continues to confirm the current “bull market” trend from the 2009 lows remains intact.

 

This last indicator is why our portfolios remain primarily allocated to equity risk currently (although the first 5-signals have us running at reduced levels of equity risk, higher cash levels, and fixed income at targets.)

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