We have ignition

We maintain many quantitative timing models for our subscribers,to allow them to trade swings in the market. We also have "Buy on the dip" models we maintain for our longer-term investor subscribers and smaller funds, to allow them to manage the risk of JSE entry. These are far less frenetic than the trading systems and sometimes give bull-market signals only once every 150 days. A few days back, one of the models awoke from a 6 month slumber to give an entry signal as shown in the signal chart below:

This is a system we invented specifically for regular funds deployment as it has various risk ratios from 90% confidence signals to 70% confidence signals and generates about 1 signal per month on average. The signals it generates depends on the "swings" of the yellow index from low thresholds through to higher thresholds as shown in the above chart.We call this the "slingshot effect". The 90% confidence signals are shown as orange vertical bars and as you can see they are much less frequent than the lower confidence signals.

The yellow index is our own JSE breadth metric that measures on a daily basis, the percentage of JSE shares and ETF's making new short-term highs or breakouts. Corrections are characterized by this index slumping to low-watermark levels (with the lower dotted line demarcating extreme selling pressure). But if within 10 days the index "slingshots" up to certain higher values (the upper dotted line represents rush-buying), you have superb trough-reversal markers to help you manage the risk of funds deployment. There have only been sixteen (16) "90% confidence" signals in the last 7 years, as depicted below:

It is not perfect (it got caught in the Jul 2008 bull-trap, as did most quant systems) but it is damn close. It may not detect all "great-troughs" (that is why we run multiple systems to catch them all) but the actuarial table below for various holding periods shows stunning performance for a 20-day holding period. Acting on these signals by just investing in an instrument that tracks the TOP40 (such as SATRIX40 or ALSI Futures)and holding for 20 days delivers 93% success (7% of trades were losses) and an eye-watering gain-to-loss ratio in excess of 100-to-1 (100 points gained for every point lost).The expected gain for such an operation would be 5.1%

As always, systems are just that - systems - and they can be imperfect and whilst a 7 year track record of 16 signals may yield a historical 93% success rate, that is no guarantee signal number 17 wont be a dud! For this reason normal position sizing and risk management rules would apply to these trades/entries regardless of the historical performance.

If you are interested in more systems like the above for timing the markets, from investment systems to more rapid trading ones that also give exit signals on the above entries, then book and come and see us at the Sharenet National Seminars. You can also read more about us and our systems at the Sharenet PowerStocks Landing page

Be safe out there...
Dwaine van Vuuren
Founder & CTO, PowerStocks Equities Research
www.powerstocks.co.za

Fri, 04 Feb 2011

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