Asbury 6 Positive Heading Into Today’s Session

Conclusion, Investment Implications, Strategy

Table 1 below shows that, as of the close on November 4th, four of the Asbury 6 constituent metrics have moved to positive (green), from negative (red) on October 27th.  This turns the A6 Model itself back to Positive as four or more metrics in one direction, either positive or negative, indicate a tactical bias.

Table 1

Recent sideways choppiness and volatility in the major indexes provides us with an opportunity to answer some frequently asked questions about our Tactical models, the Asbury 6 and the Correction Protection Model (CPM).

Asbury 6 Q & A

Q: The Asbury 6 has been atypically volatile since September.  Why?

A: Signal volatility in our Tactical models indicates Investor Indecision.  Chart 1 below plots the S&P 500 (SPX) daily since May.  The chart shows that the US broad market index collapsed by 11% between Sep 2nd and 24th, then spiked higher by 11% between Sep 24th and Oct 12th, then collapsed lower by 9% from Oct 12th to 30th, and has most recently spiked 8% higher from Oct 30th through Nov 4th.  This is extremely atypical price activity that was triggered by SPX holding above formidable support at 3233 to 3209, which we pointed out and discussed in our Oct 29th Special Report: Know Your Levels In SPX, but below overhead resistance at the 3588 Sep 2nd all-time high — right in the middle of a hotly contested presidential election.  Our Tactical models are responding daily to price movement and market internals, and are not a crystal ball that can see what is going to happen next week. 

Chart 1

Q: Why hasn’t the A6 shifted to Positive sooner?

A: Because the model is set to a 21-day (one business month, our Tactical time period) time frame specifically to avoid these whipsaw signals as much as possible.  Sometimes they just can’t be avoided, however, and the current situation in which SPX has collapsed by 11%, rebounded by 11%, fell by 9%, and then jumped higher by 8% — all within a 2 month period — is one of those situations.

Q: What do we do now?

A: One of the only potential benefits to a choppy, volatile period like the one we’re in right now is that it typically evolves into a chart pattern that we can use to 1) limit risk and 2) help determine future direction.  The blue lines in the chart above define this triangular pattern of investor indecision, which is currently bordered by 3523 (currently 2% above the market) and 3240 (6% below the market).  A sustained move above the upper boundary of the pattern at 3523, amid a Risk On /  Positive status by our Tactical models, would target an additional 10% rise to 3880.  Conversely, a sustained decline below the lower boundary of the pattern at 3240, amid a Risk Off / Negative status by our Tactical models, would target an additional 11% decline to 2882.  Between 3523 and 3240, the market remains in a pattern of investor indecision.

Q: Why use quantitative models?

A: Because they force us to be disciplined in our investment approach, rather than chasing the most recent near term move — like the back and forth ones we have been seeing since September — like a dog chases its tail. 

Another key reason is to keep our drawdowns (losing periods in our portfolios) small and relatively short.  For example, the biggest drawdown in our Correction Protection Model this year has been 4%, between Jun 24th and Jly 6th, when the model moved to Risk Off and the market quickly reversed higher.  On the other side of the coin, between February 24th and April 9th CPM avoided a 14% decline. 

There is no perfect model that will catch every trend, simply because no one can see the future.  But we are convinced that a good disciplined, data-driven approach can allow investors to invest in the stock market, and capture most if not all of its gains over time — with just a fraction of the risk.  And that’s what our Tactical models are designed to do.