“Why are the Correction Protection Model (CPM) and Asbury 6 (A6) giving conflicting signals?”
A Model vs. An Indicator: How To Use Them Together.
Over the past week or so we have been getting some subscriber questions about the recent divergence between the Correction Protection Model (CPM) and the Asbury 6 (A6). CPM has been on a Risk On (bullish) status since November 2nd while the S&P 500 (SPX) has coincidentally risen by 12.7%. Meanwhile, the A6 shifted to Negative (four or more red or bearish constituent metrics) as of the close on Jan 12th while SPX has risen by 1.5%.
“Why are they diverging right now?”
The simple answer is that one is a model (CPM) and the other is an indicator (A6).
CPM generates clear, actionable Risk On /Risk Off signals that, on average, trade about once (round trip) per quarter. In addition, there are money management components built into CPM that keep the model in a trend as long as possible to keep trading activity as low as possible, which often comes at the expense of slightly larger drawdowns than the Asbury 6 may produce.
The A6 is a very sensitive daily gauge of the market’s internal health. It was created to be an accurate daily indication of what the real under-the-hood condition of the market is because, due to computerized/algorithmic trading which dominates daily volume, it’s virtually impossible to determine the condition of the market any more by simply watching the S&P 500.
“Why does this divergence mean for my portfolio?
Metaphorically, the A6 right now is similar to when you are starting to get symptoms of illness. Your throat is getting sore, and you’re getting tired earlier in the day.
But you’re still able to go to work and maintain your daily schedule. That’s the CPM right now.
From here, two things can happen: your symptoms can go away after a few days, and you move on with your life. The market’s equivalent to this would be that the A6 turns back to green and CPM remains Risk On.
The other option is that your symptoms persist, and get even worse, and you end up taking some sick days or even going to the doctor. The market’s equivalent to this would be that CPM shifts to Risk Off and the S&P 500 begins a decline. Right now the market is stuck right in the middle of these two things.
“How should I be investing amid these conditions?”
The answer to that is largely up to the individual investor because everyone has a different risk tolerance, investor time horizon, etc. But what we would suggest considering is to retain the overall November 2nd bullish positioning in the market per both CPM and the A6, but while also not adding any additional equity risk – even though several major US indexes are making new all-time highs — until this atypical situation resolves itself.
Disclosure/Disclaimer: The information on this website is provided solely for informational purposes and is not intended to be an offer to sell securities or a solicitation of an offer to buy securities. The strategies employed in managing this and other model portfolios may involve algorithmic techniques such as trend analysis, relative strength, moving averages, various momentum, and related strategies. There is no assurance that these strategies and techniques will yield positive outcomes or prevent losses. Past performance, as indicated from historical back-testing, is hypothetical in nature, does not involve actual client portfolios, does not consider cash flows and market events, and is not predictive of future performance. The model is managed by contemporaneously recording hypothetical trades. Such trades are not live trades and are not influenced by emotional or subjective reactions to extraneous market, economic, political, and related factors. The performance for such model(s) is derived from utilizing various technical trading strategies and techniques. Technical trading models are mathematically driven based on historical data and trends of domestic and foreign market trading activity, including various industry and sector trading statistics within such markets. Technical trading models utilize mathematical algorithms to attempt to identify when markets are likely to increase or decrease and identify appropriate entry and exit points. The primary risk of technical trading models is that historical trends and past performance cannot predict future trends, and there is no assurance that the mathematical algorithms employed are designed properly, new data is accurately incorporated, or the software can accurately predict future market, industry, and sector performance. Asbury Research LLC does not and cannot provide any assurance that an investment in the model portfolios will yield profitable outcomes. The risk of loss trading in financial assets can be substantial, and different types of investment vehicles, including ETFs, involve varying degrees of risk. Therefore, you should carefully consider whether such trading is suitable for you in light of your financial condition. An investor’s personal goals, risk tolerance, income needs, portfolio size, asset allocation and securities preferences, income tax, and estate planning strategy should be reviewed and taken into consideration before committing to a specific investment program. Please consult with your financial advisor to discuss the appropriateness of any strategy prior to investing. All investments involve risk. Principal is subject to loss, and actual returns may be negative. Returns are not guaranteed in any way and may vary widely from year to year.