Read all about DV’s AggM indicator here. The indicator has been profitable in out-of-sample testing (he first published it in 2009) and is very near to crossing a threshold which would indicate a move to cash.
The Aggregate M indicator is based on the concept that in the long term the market trends, while in the short-term the market is noisy, and has a tendency to mean-revert. Why not combine the two concepts to keep life simple? The Aggregate M is supposed to reflect an adjusted median that is filtered for short term noise. The median is a far more accurate measure of central tendency than a simple average especially with noisy data. Taking a superior measure of trend and filtering out some of the noise by adjusting for short-term mean reversion creates an even better median. The Aggregate M is now both trend and mean-reversion rolled into one.
Tuesday’s close found the AggM dipping briefly below 50. The indicator did manage a slight reversal to close back above the 50 mark on Wednesday.
A very simple of use of the indicator is to be long above 50 and to be in cash beneath 50.
Based on my testing of the indicator, it has outperformed buy-n-hold with compound annual gains of 7.88% and a max drawdown of approximately -20%. The win rate is also high, averaging 67% winners. I tested it using all SPY history but did not include commissions or slippage.
AggM Equity Curve
In my humble opinion, if the AggM does cross, with everything going on in Europe, moving to cash seems to be a reasonable response.
Despite the feeling that we are due for a rally, this indicator’s dropping just isn’t good news.
Two more long term indicators that are close to switching from bullish to bearish:
http://www.mojena.com/
http://dynamichedge.com/2012/04/05/mamo-update/
Mojena is a broad-based econometric and technical model; it can drop a bit more and still be bullish.
The Dynamic Hedge model (the last posting on this is a bit out-of-date) is based on bond/stock momentum, and as of April was still barely positive.
My biggest fear for the past decade has been the US going down the same path as Japan. That would be horrible news for buy and hold investors, pension funds, insurance companies; even CDs would be affected. Maybe record low Treasury rates are telling us something.
Thanks Bozo, I’ll check out those links.
I have often thought that Japan is a good model for our next decade.
Karl Denninger is going long for the rocket shot, be sure this time to apologize to him for being wrong – again.
Wood, i have a q.
i want to learn how to backtest and write excel code. are there any sites that you would recommend as good trainers/tutorials?
Thanks
Good, I really don’t know where to start for excel coding. I have only basic skills with excel. I would suggest starting in something like R if you really want total control or AmiBroker if you want to learn a fairly easy language and perform backtesting. Check out @milktrader via twitter for more info on R.
Wood is right, most posts I see on this type of stuff involve R.
Backtesting and using Excel are really two different things. For learning backtesting, you might try “Mechanical Trading Systems—Pairing Trader Psychology with Technical Analysis”, or a similar technical analysis book, but you can backtest in many forms besides Excel.
I don’t know of any sites that teach Excel from scratch, but that doesn’t mean they don’t exist. I actually suggest something like “Excel for Dummies”, although 50% of the material in any beginners book is irrelevant for trading work. Choose one: Excel 2003, Excel 2007, or Excel 2010, and don’t jump around or you’ll really get confused. They all work OK for this stuff. It will take a few weeks of solid study to learn the basics; after that get any book that uses the words Excel and Finance or Science in the title to learn the advanced stuff you will need to know. Expect to put in several months at this point.
My daughter was using Excel in the 8th grade, so anyone can learn it.
A good quality post, sir