We track hundreds of different economic, fundamental, technical, sentiment, and cycle indicators.  Some are stand alone and only help us discern particular situations while others are full blown timing models that we use to get in and out of the market.  Some are very complex with ten and even twenty inputs ranging from jobless claims, to put call ratios, to nickel, to the advance decline line.  Essentially anything that we test that helps to give us an edge we use to some degree or other.  As global macro traders we of course have several models for every market that we trade, as well as models that only point us to markets showing abnormal movement.

As of a few days ago we had one of our longer term SP500 timing models trigger a buy signal.  This timing model is very simple and only uses the NYSE Advance Decline line and the SP500 closing price.  This models esge is not huge but it is solid and historically you are risking about 1:1 meaning that the historical return is almost the same as the worst historical drawdown.

In our macrotrader.com/members/signup.php?product_id=1″title=”Macro Trader Newsletter” >newsletter and in our own trading we rarely use a model as an automatic buy or sell signal but we do use them to tell us which dorection to trade.  Right now this extremely simple model is showing that the advance delcine line has finally been able to have a sustained run and break above its long term trend, in this case the 150-day moving average.  Again we don’t, and don’t recommend, trading directly off of these signals as almost every model we track can be improved upon by selecting better entry and exit points but they do helo us tremendously in our trading.

SP500-NYSE Advance Decline Line

As you can guess we are becoming increasingly bullish after being bearish for the better part of two years.  Who knows if this rally will continue as there are a ton, and maybe a trillion tons, of harsh economic realities and hardships, but for now the trend is up and we are starting to lean to the long side.

Happy Trading,

Dave@TheMacroTrader.com

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CNBC has 50 guests a day coming out and saying that this is “THE” bottom, Kass comes out and calls it a “Generational Bottom”, and investors that are flat or short are wondering if they are missing the boat.

In times like these it helps to put things into perspective. One of the ways we do this is to compare our current situation with similar times in history. As you will see in the following charts there is a good chance that you aren’t missing much at all.

This chart is of the current situation.  We have marked each move of 20% or more.  As you can see we have already had three rallies that were up 20% or more in a matter of weeks, or even days. If you had bought the top of the first 20% rally hoping to not “miss out” you would be down over 20%.

SPY-SP500 ETF

As you can guess this is not the first time that this has happened. Every extended bear market in history has had multiple 20% moves that have only sucked in the desperate traders only to burn them with a long fast fall back to new low. If you look at this chart of the 2000-2002 bear market we had four rallies of 20% or more before finally bottoming out and starting the 2002-2007 bull market.

SPY-SP500 2000-2002

Going back farther here is the 1962-82 bear market.  Here we are using the Dow and the 20%+ swings are shown in the bottom pane where a reading of 1 means that there was a rally of 20% or more and a reading of -1 means that it fell by at least 20%.

Dow 1962-72

And finally we have the Great Depression.  Looking at the lower pane we can see that there were several different 20% or greater swings.

Dow Jones 1928-1940

The market loves to fake us out.  Bear markets are always more volatile than bull markets and this one is no different.  While this could be THE BOTTOM we tend to think that it is A BOTTOM and we are currently short.

So you may be asking what would need to happen for us to change our minds?  The simple answer is higher highs and higher lows, also known as an uptrend.  Other bullish signs would be economic indicators that actually improved instead of worsened, improved and sustained breadth, and some actual leadership.  By the way, banks will not be the new leaders.

Happy Trading,

The Macro Trader

Dave@TheMacroTrader.com

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Our equity risk index remained at the same 11.11% reading that we got last week. Essentially our models are bearish and see very little reason for the market to go up. Valuations have improved but that is it. Breadth is horrible, the trend is down, and the economy sucks. The sad thing is that the United States is in better shape then Europe. Yeah there is light at the end of the tunnel but we aren’t close enough to the entrance yet to see any of it.

We offer our proprietary equity, fixed income, and precious metals risk indexes each weekend in our weekly macrotrader.com/members/signup.php?product_id=1″title=”Macro Trader Newsletter” >newsletter. We offer the equity risk index on the site a few days delayed each week.

Happy Trading,
The Macro Trader
Dave@TheMacroTrader.com

P.S.If you are interested in learning more about Macro Trading sign up for our FREE Macro Trading 101 course in the box below.

P.S.S We are excited to be launching our new members area tonight.

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This week we had a slight rise in the risk index.  This was once again due to the fact that Treasury bonds have been so volatile lately which has caused a few of our models to have a bit of a whipsaw.

While the readings have changed a bit, rising from 22.22% to 33.33%, the levels are still fairly bearish.  Remember that the risk index goes from 0-100% with 100% being the most bullish and 0% the most bearish so a reading of 33.33% is still pretty bad.

We could be at a short term bottom or maybe we have already hit “the bottom” but until the market internals improve considerably we won’t be putting on any large trades to the long side.  In fact right now we are focusing a lot more on the short side.

Happy Trading,

The Macro Trader
Dave@TheMacroTrader.com

P.S.If you are interested in learning more about Macro Trading sign up for our FREE Macro Trading 101 course in the box below.

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There is not a lot to say about the index this week.  Last week we dropped hard and this week the reading is the same at 22.22%.  The equity risk index goes from 0-100% so a reading of 22% is pretty bad.  When it is climbing we start to look harder for bullish trades but when it is at these levels we tend to lean towards shorting rallies more then buying them.

Happy Trading,

The Macro Trader
Dave@TheMacroTrader.com

P.S.If you are interested in learning more about Macro Trading sign up for our FREE Macro Trading 101 course in the box below.

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For the week ending 1/9/09 our Equity Risk Index made a 6 month high of 38.89%. Last week crushed it and brought it all the way back to the readings we saw in November of 22.22%. When the market fell apart breadth fell apart and T-Bond relative strength picked up as money left stocks and went into bonds.

So what will get the risk index climbing again? Consistent breadth, a real uptrend, and a decline in Treasuries would be a start. But what should be no surprise to our regular readers, we are not expecting that anytime soon.

Happy Trading,
TheMacroTrader.com
Dave@TheMacroTrader.com

P.S.If you are interested in learning more about Macro Trading sign up for our FREE Macro Trading 101 course in the box below.

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While updating our models this weekend we thought it would be useful to show an example of one of our trading models.  As we have stated previously we use a very systematic process to find trading opportunities.  Half of our research time is spent building technical and valuation models that help guide us into and out of different asset classes.  The other half of our research is spent reading and talking to people looking for ideas.

One market that has been fairly good to us lately has been junk bonds.  We have a few different models that we follow to help tell us when the market is good and when it is bad.  This particular model looks at the price action in junk bonds as well as the yield spread to Treasuries to tell us when conditions are favorable and when they are not.

When we trade junk bonds we typically use the HYG IBOXX High Yield EFT which has good daily trading volume.  In the chart below you can see how our model did versus buy and hold.  While HYG fell by 37.2% from its peak our models worst drawdown was 5.48%, and while HYG is currently down over 24% from its highs the model is just a few percent from its recent high.

As you can see, using models can help you find and manage good investment opportunities. In a year in which most investors lost 30-50% of their wealth we were able to stay slightly positive with very low volatility.

If you are interested in learning more about what global macro trading is and what we look at then you may be interested in subscribing to our weekly newsletter. If you would like to learn more about what global macro is then sign up for our FREE Macro Trading 101 course.

Happy Trading,
The Macro Trader
Dave@TheMacroTrader.com

To sign up for our FREE Macro Trading 101 Course just fill out the form below.

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For the second week in a row our Equity Risk Index ticked higher.  This time one of our breadth signals turned bullish.  While using our risk indexes it is important to look at the level as well as direction.  As you can see in the chart below it has been steadily climbing but is still only at 38.89% bullish.  On a scale of 1 to 100% 38.89% is nothing to get too bullish over.  What a rising risk index does tell us is that we should be looking at the long side more and more.  But it does not mean we should be loading the boat.  Basically as with anything the risk index is a tool and not a crystal ball.

The market has rallied quite in a bit in the last two months and may be at the end of its bear market rally. Short term we have changed from bullish to neutral and would not be surprised to see the market break either way. So what do we do? We have been doing the same thing we always do, simply look for good risk to reward opportunities and size our positions accordingly.

Happy Trading,
The Macro Trader
Dave@TheMacroTrader.com

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The new year has gotten off to a good start so far.  Stocks are up across the board and everything in the corporate bond arena is up strong as investors start leaving Treasuries to find fill their risk appetites.

Our equity risk index is up due to this strength as stocks have been leading the overall bond market the last few weeks.  Another factor that is likely helping this market out is yearly rebalancing of institutional and retail funds.

While this is probably just a bear market rally it likely has a ways to run.  Most bear market rallies stall after they have moved about 20% but we are far more oversold than normal and with it being a new year a lot of the sidelined cash is likely to be put to work.  Of course as always you should be using strict risk management rules on every trade and on your portfolio.

HappyTrading,

The Macro Trader
Editor@TheMacroTrader.com

P.S.-If you want to receive our FREE Macro Trading 101 course just fill out the box below.

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This week we added a new indicator to our Equity and Fixed Income Risk Indexes. Because of this the percent value has changed but the chart looks the same. For stocks we actually dropped from being 31.25% bullish to 27.78% bullish.

The new timing indicator that we added to the model is based on the relative strength between stocks and bonds. In future issues of The Macro Trader newsletter we will be sharing our research findings with our subscribers.

macrotrader.com/wp-content/uploads/2008/12/stock-risk-index.jpg” title=”stock market risk index”>

Some of the bullish factors are that valuations are decent, breadth has been improving, sentiment is fairly bullish, and rates are low. On the bear side we have horrid economic data, declining earnings, and the biggest one is that the long term trend is still down. As the market tries to figure out what it is doing we are managing our risk with position sizing and stops.

Happy Trading,
The Macro Trader

P.S. If you would like to learn more about our risk indexes for US equities, fixed income, and precious metals as well as have access to our research on US Equities, Fixed Income, Precious Metals, Foreign Equities, and Currencies then request a free trial to The Macro Trader. Simply e-mail us at Editor@TheMacroTrader.com and put trial in the subject line.

If you would like to receive our new FREE course “Macro Trading 101″ put your e-mail in the box below.

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