Membership Program special update

In light of the recent stock market crash, I’d like to update a few things.

Medium-Long Term Model

The Housing Months of Supply data was just released (from FRED). For the fourth month in this economic expansion, Months of Supply has exceed 6.
In other words, a big requirement for this bull market to end has just been fulfilled.
The “Housing Months of Supply” requirement has just been checked off.
The only thing left for the Medium-Long Term Model to turn long term bearish is the yield curve inversion. At this rate, the yield curve will probably invert in Q2 2019.

What if the Medium-Long Term Model is wrong?
What if the Medium-Long Term Model turns bearish after the bull market’s top is in? What if the bear market starts without the yield curve inverting?
For starters, the model has 2 stop loss indicators, neither of which have been triggered. These stop loss indicators will tell you if this is just a correction in a bull market, or if this is really the start of a bear market. You don’t want to be shaken out by just a correction and end up cutting your position at the bottom.
The most likely stop loss to be triggered (if it is triggered) will be based on the Housing Months of Supply. This will be triggered if it exceeds 8.
Currently it is at 7.1

I am not too concerned about this stop loss being triggered right now. Both Tim Duy and Bill McBride think that the decline in housing is only temporary.
In my opinion, Tim Duy & Bill McBride are two of the best economists out there. I have learned a lot from them over the years. They’ve been consistently on the right side of the economy and housing market over the past 15 years.
*Housing is a key leading indicator for the economy.
Moreover, it’s important to remember that a bear market never goes down in a straight line. There is always a massive bounce before “the world ends”. That bounce gives smart traders a chance to get out.
Here’s the start of the 2007 bear market. Notice how there is a big 61.8% retracement bounce.

Here’s the 2000 bull market top. Notice the massive flat top…

… after which the S&P still made a big >50% retracement bounce.

So if you’re caught on the downside, don’t sell into the crash. Wait for the bounce, and then get out.
*This is just a backup plan.

Short Term Trading Model

If the market doesn’t rise significantly tomorrow, the Short Term Trading Model will add an additional 10% long UPRO near tomorrow’s close..
That will be a significant jump in net long %, which means that the Short Term Trading Model will be getting closer to MAX long.

Medium Term Volatility Model

As you can see, the Medium Term Volatility Model is extremely high right now. It’ll probably go higher and exceed 20 in the next 1-2 weeks (volatility remains elevated, even after the stock market has bottomed).

As you probably know, volatility is mean reverting and moves in the opposite direction of the U.S. stock market.

My apologies

I should apologize. A big part of this decline should have been avoidable, and I feel responsible for not having helped you guys do so.
Prior to the current correction, the stock market’s volatility was extremely low. I explained this in September, but I hadn’t modeled it out yet.
I only completed the Medium Term Volatility Model 1.5 weeks ago.

If I had completed this model sooner, it would have saved everyone who’s long right now a lot of money. As you can see, volatility is mean-reverting. When it is extremely low (i.e. in September 2018), volatility tends to spike and the stock market tends to fall.
Volatility is extremely high right now, which is short-medium term bullish.
Once again, please accept my apologies. The Medium-Long Term Model only predicts “big corrections” and bear markets. The current decline certainly isn’t a “big correction”.

What I’m doing

In my personal portfolio, I’m currently 67% long SSO. The other 33% is still cash.
I am not using the other 33% to buy $SSO yet.
The line that defines the next “big correction” is at 2500. That’s a 15% decline. If the S&P falls to that level (i.e. a worst case scenario, if the Medium-Long Term Model is wrong), then I will use the 33% to go long.
Then on the next 50%-61.8% bounce I will close it out, shrinking my position to 50% long SSO.
I think this is an unlikely scenario. But this is my plan, if the worst case scenario does happen.
For reference, this is 2500 for the S&P

Any questions or thoughts? Let me know in the comments below!

6 comments add yours

  1. Troy,
    Thanks for the update. My understanding is 15% is a major correction in your terms. Then, how much decline is considered a bear market

    • Yes, 15%+ decline.
      Bear market has components:
      1. MAGNITUDE: at least -40%
      2. TIME: at least 1 year

  2. Thank you Troy for updating us after this sharp decline.
    In some of your Facebook post, you’ve asked “what is the biggest problem that holds investors and traders back from making money?”
    and I think we can see it during these days. It is managing psychology during these market conditions: we are keeping long while everybody is selling, and we also read / hear investors that we appreciate being bearish. So, do we stay stick to our model, or realize that our model is failing to predict this big correction?
    Troy, you have recently posted a “stop loss” technique of the MLT model,
    and I think it will be important to study/improve it more and applying it on regular basis to the MLT model.

    • Personally, I’m sticking to the model.
      And yes, I do think applying the safer method is a good idea. Gives you peace of mind without sacrificing a lot of gains.

  3. Had there been any cases in the history where your “significant correction” indicators did not detect a correction with a 15%+ decline (but less than 40% decline)?

    • Yes, there was 1.
      It could happen again of course. Nothing is perfect. But trying to avoid every single one inevitably results in missing out on even more rallies than the big corrections that you avoid

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