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.