- The process measures the underlying strength of the S&P 500 Index by evaluating the trend across 22 sectors that make up the Index and plots the results daily. See the NDR CMG U.S. Large Cap Long/Flat Index line (center of chart).
- In simple terms, a bullish market environment will take many, if not most, stocks and sectors higher. The reverse is true in bear market environments.
- When the NDR CMG U.S. Large Cap Long/Flat Index line is trending higher, the Index is fully invested in the S&P 500 Index. To be in a defined uptrend, the Index simply needs to be higher than it was 42 days ago.
- If the level of the Momentum Index line is lower than it was 42 days ago, then the index process “steps out” or “reduces market exposure” from 100% to 80% to 40% to 0% market exposure depending on the overall level of the NDR CMG U.S. Large Cap Long/Flat Index line.
- Think of it as a systematic way to de-risk (raise cash) or re-risk (invest in large cap stocks).
- Therefore, if the trend across the 22 sectors, as plotted above by the NDR CMG U.S. Large Cap Long/Flat Index line, is higher than it was 42 days ago, the signal is a buy signal.
- If the trend is lower than it was 42 days ago, the signal is a sell signal. Simple and straight forward. We track this in the bottom section of the chart labeled “Composite Direction.” If it is higher than the red horizontal line, then the trend is positive. If lower, the trend is negative.
- Next, if the index line is above 70 (an environment where most stocks/sectors are doing well… broad-based positive sector participation), then the signal is always a buy signal (i.e., remain 100% invested). We give a strong equity market trend environment the benefit of the doubt.
- If the NDR CMG U.S. Large Cap Long/Flat Index line is between 60 and 70 and the trend is lower than it was 42 days ago, then the process steps from 100% invested to 80% invested.
- If the NDR CMG U.S. Large Cap Long/Flat Index line is between 50 and 60 and the trend is lower than it was 42 days ago, then the process steps from 80% invested to 40% invested.
- If the NDR CMG U.S. Large Cap Long/Flat Index line is below 50 and the trend is lower than it was 42 days ago, then the process steps from 40% invested to 0% invested.
- Most of the really bad stuff tends to happen when the majority of stocks are in decline; therefore, the model moves to 100% cash if the Index line is below 50 and the trend is down.
- In all cases, if the NDR CMG U.S. Large Cap Long/Flat Index line is higher than it was 42 days ago, the process moves back to a 100% invested position.
The investment objective is to be invested when the overall health of the market, as measured across 22 sectors, is strong and rising and to reduce exposure to the market when the trend is weakening and declining.
Returns, shown at the bottom section of the chart, are hypothetical. Noted are comparisons to the S&P 500 Index (Total Return) in terms of GPA% (gross percent per annum), Sharpe ratio and max drawdown. The model did 30% better over times and max drawdown was -19.7% vs. -55.3% for buying and holding the S&P 500 Index.
Overall, the process is a disciplined, systematic process designed to reduce risk (raise cash) and systematically increase risk (fully invest).