Sunday, May 1, 2016

All Done

My timing model that is, not necessarily the stock market.  The final form took a little twist from what I expected last week when I decided to use the correlation approach to construct a weighted average of the sixteen indicators with the highest correlation to expected returns as a graphical Indicator Scoreboard with a range of +16 to -16 based on correlation weightings.  I replaced the low correlation VIX P/C and SKEW with the SPX short/long ETF pairs to end up with the following: Equity P/C, ETF P/C, SPX P/C, CPCRev P/C, Smart Beta P/C, BPSPX/CPCE, VXV/VIX, VXX $Wt Vol, SPXA50R/150, TRIN/BPSPX, SDS/SSO, SPXU/UPRO, NYMO, NYAD+NYUD.  I posted a preview at TCs site here Wed before the open that turned out to be prescient since it showed a sell level similar to the Feb and Nov 2015 tops.  The current chart with 5, 10 and 20 day EMAs is shown below.

The results were a little different than I expected in that the mean is -3, but this is recalculated over the period of the graph to show outliers at +/- 1 StdDev as Buy/Sell signals with weaker signals in between.   So the actual mean is not important and seems to be a result of long periods of low bearish sentiment offset by short periods of extremely high bearish sentiment. 

Rather than looking for longer term indicators, I decided to set up a short term composite using indicators with the highest short term correlations discussed last week and have come with this for now.

The setup looks very similar to Nov of 2015 with a rapid rise in bearish sentiment over the last few days. Continued volatility over the next few days could very well set up a buy spike for May option exp before a larger decline.

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