A lot of talk around the market today is the enviable recession, or the bear market is just around the corner. Yet a few years ago I found a chart that ties in some fundamental analysis to technical analysis that stands as a counter to these claims. When analyzed the results are surprising, and also outlines a potentially viable trend following trading strategy that can predict broad market cycle moves.
This post I continue, that we started earlier from this post, to refine the long-term trend trading system that uses the EPS of the $SPX to define buy an exit points from 1998 to today. I also look for some additional correlation across other asset classes such as $GOLD, $30Y bonds, and real and nominal GDP. The main purpose of this strategy is to help determine broad market trends and trend changes, but also show how you can also refine your own trading strategies.
When testing strategies we have to be careful from sampling bias. So instead of using the start point of 1998 as our original data point for the trend following strategy SPXEPS, I will look at the available data from stockcharts.com dating back to 1990. The results confirm most of the strategy already, but also highlight some new trades for the short side of SPX and buying gold during sell signals.
Most of the IFA strategy was flushed out in this post. Recently though some trades like KRE, SMH, and IYR have tested their top long call as the market has continued to rally, which can be expected. When we buy that call typically IVR is high, and the strikes widen, and now that one side has been tested, I want to look at trade management as potentially one side of the trade is collected virtually all of its value. When one side of the trade has lost 85% of its value, I want to close out the untested side, and then remain short a vertical spread if enough time is left in the trade.