Some Thoughts On Market Timing Part-1

This is the first in a series on what timing is, what it isn’t, and some right ways to do it. 

In recent days I have been experimenting with one of our proprietary indicators to expand its use. I named this indicator a “Risk Index” with the idea being when the indicator is high the risk are low and when the indicator is low the risks are high. As you can see in the chart below a higher percentage reading indicates a more favorable market and a lower reading indicates a less favorable market.

US Equity Risk Index

US Equity Risk Index

Our risk index is simply the percentage of out timing models that are bullish or bearish each week. For US equities we run 10 different models that look at trend, valuation, interest rates, inflation, sentiment, breadth, and intermarket relationships. I estimate that 53% of the individual components in the 10 models are equity trend based. There are a few reasons for this but the most important gets at the heart of timing. We use timing tools to help us first lower risk and in a distant second to increase returns. It turns out that trend following indicators while not a “Holy Grail” do a great job at keeping you in the big moves and minimizing your downside.

Our models come from many places. If you are familiar with Nelson Freeburg, Marty Zweig, and Ned Davis you would recognize a few of the models and would be able to see the inspiration in the other models.* Five of the 10 are straight from their material and the other five while homegrown take inspiration from their work. All the models have been backtested and while most of them slightly improve returns they all drastically improve drawdowns which is our primary goal.

So if each of these models is solid in its own right why would we take a consensus approach? There are several reasons but the two that stand out are that you never know when the market is going to change and invalidate a model. Now we can stand a prolonged period of under-performance but we cant handle a catastrophe.  If a model underperforms for a long enough period of time we would take it out if we could see that something had changed. As an example I once created a breadth based system that I was able to backtest and it generated low 20% returns with the worst drawdown being just over -7%. Well I got to use it for about a year before decimalization came and within weeks the results when to hell. I suspected something was off but it took a few more months to confirm it. I still update it and monitor it as it displays a certain segment of market behavior but its risk/reward is no longer favorable.

Of course most of the models in the risk index are based on weekly data and are longer term in nature. Still the risk is very real that something changes and some of them cease to be useful. By taking a consensus approach any downturn based on a degrading model can be minimized.

We are not going to get into the specifics of each model but instead how almost any model, in this case a consensus model, can be used. Don’t worry because in a future post we will go over how to build a simple but effective long term timing model.

So we have a US Equity model that is based on the buy/sell signals of 10 separate timing models. How can we use it? We could backtest it and see what readings give the best risk/reward and trade it that way but what inspired this post was the idea that we would just invest X% of a portfolio depending on the reading. If the model said that 50% of the models were on buy signals we would invest 50% of the portfolio and change it each time the buy signals percentage changed.  If that went well, it did, and sufficiently cut risk, it did, we could then experiment with different levels of leverage.

We did this with the data we had on hand and got the following results. Trading SPY-SP500 ETF, and using the total return series so that includes dividends, we got the following results. Buy and hold did fine on the upside but had a -50.77% drawdown. Timing trailed a bit on the upside but only suffered a -13.67% max drawdown. Finally by using a full 2X leverage we were able to cut buy and hold risk in half and increase returns by 1.89 times. In case you are wondering by using only 1.2X leverage you beat buy and hold by a few bucks but your max drawdown is still under -15%.

Risk Index SPY Returns and Drawdowns

Risk Index SPY Returns and Drawdowns

Looking at a chart of the equity curves for each of the strategies you can see how timing plus leverage killed buy and hold. Of course while max drawdown was far less the intermittent drawdowns were sometimes larger. Take 2011 for example when the market corrected just enough to turn the model down to 10% bullish only to rocket higher. That is the main risk to any system as you can get whipsawed in and out during a longer term trend. Of course anytime you are using leverage you can expect to have higher volatility at times as you are seeking higher returns.

Risk Index Equity Curves

Risk Index Equity Curves

Looking at the individual drawdown charts shows just how risky buy and hold is as the SPy-SP500 ETF was down over -50%. This of course requires a 100% return just to get back to breakeven.

Buy and Hold Drawdowns

Buy and Hold Drawdowns

Looking at the drawdowns for the timing without leverage equity curve you can see that while it has a lot of little drawdowns it has only had three double digit drawdowns since early 2008 with the worst one being -13.67%. It may have lagged in total return but not by much and as such would have been a lot easier to handle. Of course as we discussed one would only need 1.2X leverage to achieve equal returns with buy and hold with less than 1/3 the risk.

Timing Drawdowns

Timing Drawdowns

Finally we have the drawdown chart of the timing strategy but using 2X leverage. As you can see the worst drawdown was half of that of buy and hold. Of course the next two worst drawdowns also hit -20% in contrast to buy and hold which only had one more -20% drawdown. Still the overall risk has been cut in half and the returns almost doubled.

Timing Plus Leverage Drawdowns

Timing Plus Leverage Drawdowns


Why do we only have the risk index back to 4/11/08? We are working on extending it back a few decades but as we were building these we had some data limitations on two of our homegrown models. When we finish building them out we will share the results with our subscribers as well as the blog.  For now however we think that capturing most of the carnage of 2008 along with the correction of 2011 does a decent job of what can be accomplished with a good timing model and a few different ways to use it.

One aspect of this model that we like is that is gives a specific allocation percentage instead of just a buy/sell signal. This will be the purpose of a future post but if you go back and read all the Marty Zweig stuff, and Zweig was a timer if there ever was one, he never said to go all in or all out.

“How should you, the reader of this book, react to the constantly changing circumstances? Basically, I think you should shun the idea of buy-and-hold. I consider it a fallacious strategy. In the coming decade we are likely to see more bear markets and deeper ones. To lower risk, there will be periods when you should peel back your investments, in the stock and bond markets. It’s a matter of degree. You don’t have to go 100% to cash but you should cut back as risk rises and invest as risk recedes. I believe my market-timing methods in this book will help you do just that.”Marty Zweig from “Winning On Wall Street”

If you go read Howard Marks book “The Most Important Thing” you will find variations of the same concept. If you are a traditional value guy/gal your heart just skipped a beat as I said Howard Marks in the same post as “market timing”. The reality is that all active management has the same goal-minimize risk and maximize reward. Marks in his excellent book talks about assessing the range of future outcomes and  discusses risk throughout both his book and other writings. Despite different approaches both Marks and Zweig have the same goal. be aggressive when their indicators-be they book values or how much the ZUPI moved-say to be aggressive and back off when things look risky.

Happy Trading,

Take a $1 trial of The Macro Trader to receive unbiased actionable research


*I can’t write this and not give credit where credit is due. Nelson Freeburg the late publisher of Formula Research was a fantastic guy and his publication as well as correspondence has had a great influence on me. In fact while the idea of combining timing models together was not new, the way in which he did it elevated my thinking to a new level in his January 15, 1998 issue “The Power of a Composite Stock Market Model”. The components of my risk index are very different but if you read that report you can not help but see similarities.  Aside from that report however he put out more interesting and functional models than anyone I know of. If you can get a hold of any, or all, of them you will be better for it.






10 Things You Can Do To Improve Your Trading In 2009

This list is based on conversations we have had with different traders over the course of 2008. Most of the items on the list are timeless trading principles. So, in no particular order, here are 10 things you can do to improve your trading results in 2009.

1. Focus on Risk Management — If you didn’t learn this principle back in the 2000-02 bear market, then it’s hard to feel bad for you now. Once again, the events of the past year have brought risk management to the front of most investors’ minds. This time, make sure it stays at the front. Your risk management process should include a position sizing model and a strict selling discipline. While there may be some exceptions, most successful traders make money by cutting their losers and letting their winners run. We’ve all heard this before . . . because it works.

2. Pay Attention to Process rather than Outcome — As you exercise proper risk management, you should also be focusing on your process. Most successful traders agree that you will have a lot of little losers and a lot of little winners, but that the bulk of your profits will come from a few trades each year. In our weekly newsletter that we send to clients, we see similar results: a lot of small winners and small losers and a few pretty big winners. For example, early in the year we did really well catching the bulk of the move up in gold. In March we caught the breakouts in most currencies against the dollar, and then at the end of October we caught the majority of the breakdown in the Euro. And the past few weeks we have caught the move in corporate bonds. Aside from those trades we had several small winners and losers. In fact over the summer we had a streak of 8 losing trades in a row. By applying risk management to those trades, we made sure that all of the losses were small. And by focusing on the process, we were able to catch some strong winners as well. Remember, in a vacuum, any trade is irrelevant, meaning that one trade does not affect the next trade. You must have a systematic process and apply it over and over. Yes, you will have losing streaks, but over time, process will allow you to generate strong consistent gains and miss fewer trades.

3. Be Consistent — This goes hand-in-hand with Process. It’s critical that you have a consistent, systematic process to look at and track your ideas. How many times have you had an idea, forgotten about it, then looked at a chart a few months later and noticed that you missed a 50% move? If you’re like most traders, that happens fairly regularly. By having a systematic process that you look at consistently and that you apply every day or week or even every month-consistently-you’ll be able to capitalize on your ideas in a timely manner.

4. Accept Imperfection (in other words, leave your ego at the door) — Anyone who says he never has a losing trade is either a liar or doesn’t trade. As traders and investors, we must accept the fact that we are dealing with imperfect knowledge; therefore, we will not have perfect results. If you can’t handle that, you are in the wrong business. Investors who are not able to admit when they are wrong may get lucky for a while, but they will inevitably blow up. Ego might be useful in some fields, but it is absolutely destructive to your trading account. The worst investors are the ones who can’t admit when they are wrong. On the other hand, many of the best traders in the world are only right about half the time, and they’re not shy about admitting their failures. They make money by focusing on risk management and by making sure that they are in good risk-to-reward situations, and they always have a predetermined point at which they will get out if they are wrong. Spend more time following their example and less time pretending you never make mistakes.

5. Search for the Best Risk-to-Reward Ideas – As you may have noticed, we focus a lot on an investment’s potential downside. At times, this will cause us to skip a good trade or be small when we wish we were big, but more often than not, paying attention to risk-to-reward saves us from otherwise large losses. We only take trades where the return significantly outweighs the risk involved. Looking for good risk-to-reward scenarios also enables you to be wrong more often and still make money. For example, if you have $10 and lose $1 four times in a row, then make $10 once, you have only been right once or 20% of the time and yet you are up 60%. By focusing on the relationship between risk and reward, you are better able to make outsized returns.

6. Make Your Research More Efficient — If you are like most traders, you fall into the trap of trading the same things over and over. While sometimes this works, a lot of times you trade that way because you can’t find any other good trading ideas. You can avoid this by finding services that you trust to give you a virtually endless supply of potential trades that fit your criteria. Because we offer a weekly newsletter with trading ideas in several asset classes, you may be saying “aren’t you just trying to get me to buy your product?” Yes, we are, but we are also sincere in wanting to help you find good trades so that you can generate positive and consistent returns. Many people look at newsletters and other research providers as marketing services just trying to take their money, and that’s why when managing services is better to use automatic system for payments like the uk payroll system so you can make sure your money is safe. While there are no doubt some unscrupulous firms out there, there are many firms like ours that do a lot of work to provide you with useful, actionable, and real trading ideas. Some traders balk at paying for research. Our answer to that is that you can make up the cost of our service with one good trade. Think about it for a minute. If you spend $395 a year for a research service and are able to get a few good ideas a year from it, you will recoup the cost several times over. Most active investors should subscribe to 1-5 services that fit their style or that fill gaps in their style.

7. Invest in Some Technology — Technology can take a few different forms. You can spend a lot of money on new computers, software, etc. Or you can invest time to learn how to best use your current tools. Most investors do not need a new system; instead they need to take the time to learn how to use what they have. If you already have a good computer, a charting platform/data provider, and Excel, you can do tons of analysis if you learn how to use them. Go take a spreadsheet class or buy a book. You will find that a lot of trade tracking and model building can be done in a piece of software that you already have. If you are already well versed in the use of spreadsheets but require more analytics, it might be a good idea to finally get that back testing, option analytics, or other software or data provider that you need to do further analysis. Basically, investing in technology means looking at what you are doing that is taking up your time and deciding what you can do to make it more efficient. The less time you need to spend scanning, updating, etc. the more time you can spend researching new ideas, the more time you’ll have to spend with your family-now there’s a great investment.

8. Research, Research, and a Bit More Research — This is fairly self explanatory: Most of the best investors in the world are voracious readers. They read about trading, security analysis, risk management, economics, general business, science, manufacturing, philosophy, math, etc. Essentially they read about everything. You would be surprised how many good trade ideas were born in a book or magazine that had almost no direct relationship to the idea itself. Of course the other benefit is that you also get a lot of ideas that are directly related to a potential trade. Continuing education is one of the best things that you can do to enhance your trading results. Research is just another name for continuing education.

9. Be healthy — Some people may balk at this idea, but the healthier you are the better you are able to focus and think. The better you focus and think, the better you can function. The better functioning you are, the more you can get done and the better you can trade. Aside from better functioning, you will also live a longer and more enjoyable life. Health has countless benefits. Invest in your health.

10. Be a Critical Thinker — Critical thinking is not the same as pessimistic thinking. Critical thinking is a mental process of discernment, analysis, and evaluation. Critical thinking allows you to find out the pros and the cons of an investment. It allows you to be objective and make more of the right decisions and less of the bad ones. Critical thinkers look behind the news, the PR, the spin, the figures. Critical thinkers look for bias, conflicts of interest, puffing, and spin. If all you see is the potential money you can make in an investment, then you need to start thinking critically. Doing otherwise will simply take money away from you and give it to someone else.

We could talk about each of these for hours. We could also make this list 100,000 items long instead of 10, but that would be a waste of your time and ours. Trust us, following these 10 points will help 99% of the investors and traders we know, and they will help you.

Happy Trading and Happy New Year,

The Macro Trader

P.S. If you want to receive our Macro Trading 101 course just put your e-mail in the box below.

Macro Trading vs SP500 1997-October 2008

Macro Trading has several advantages to regular trading or investing. Most people either are long only or they trade one asset class. Instead of focusing on one area of the financial markets, Global Macro Traders focus on the best risk to reward opportunities they can find regardless of asset class or whether it is long or short. By not tying ourselves to one source of returns we can better balance our risk profile with our return objectives. Global Macro allows one the flexibility to not be dependent on any one thing or be held hostage by the downside of a particular asset.

Here we are comparing the returns of the Barclays Global Macro Index against the SP500. As you can see the Macro Index has performed significantly better than the SP500 from 1997 through the end of October 2008.

Global Macro Trading Index

While the Global Macro Index is currently in a drawdown it is far smaller than that of the SP500. The SP500 is down -37.47% while the Global Macro Index is only down -7.14%.

SP500 and Global Macro Index drawdowns

Anyone that is still tied to the notion that all you need to do is buy and hold has lost money over the last 10 years. While we hope that investors are finally coming around to the idea of absolute returns and risk management, we also realize that investors by nature are irrational and that they will continue to repeat the same mistakes.

We here at The Macro Trader try to generate absolute returns because a relative loss is still a loss. If you are interested in learning more please send us an e-mail.

Happy Trading,
The Macro Trader

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

Our Long Global ETF/Closed End Fund Watch List

As we have previously mentioned we run a Global Stock Model that essentially tries to be in the best countries. While we often trade ADR’s and have traded open ended mutual funds for the most part we trade the ETF’s. Occasionally that is not possible so if we can find a Closed End Fund that is correlated to the country index we will use that instead.

We keep a watch list of countries meeting our Stock and Interest Rate criteria and if they reach our entry prices we will buy them. We typically will only enter the top 5 on our list but depending on the geographic location of the countries, the macro-environment, valuation, and several other criteria we will buy other ones instead of or as well as the top 5. For a better idea of what goes into individual country criteria read this post on Singapore EWS.

We will go over our actual entries in greater depth in later posts. But essentially we look to buy in solid up-trends using breakouts and pullbacks. We are also addicted to risk management. If we can’t find a low risk entry we will wait. In our Newsletter we provide specific entries, exits, and stops for all of our positions. We don’t adhere to any profit target method but instead move our stops up as a position moves in our favor. We find this allows us to ride trends past where we “think” they should end while still using good risk management. As noted earlier we will cover a lot of this in later posts and cover it all in our Newsletter.

Back to the subject title here in order of geographic regions is our Long Global ETF/Closed End Fund watch list.

EWU-Great Britain ETF
EWU Great Britain United Kingdom ETF

EWQ- France ETF
EWQ France ETF

EWG-Germany ETF
EWG Germany ETF


EWL-Switzerland ETF
EWL Switzerland ETF

EWN-Netherlands ETF
EWN Netherlands ETF

VGK-Europe ETF

EWC-Canada ETF
EWC Canada ETF

EWH-Hong Kong ETF
EWH Hong Kong ETF

EWM Malaysia ETF

EWS-Singapore ETF
EWS Singapore ETF


RSX-Russia ETF
RSX Russia ETF

TKF-Turkey Closed End Fund
TKF Turkey Closed End Fund CEF

EWZ-Brazil ETF
EWZ Brazil ETF

If you have any questions, comments, ideas, etc. Feel free to contact us here.

Happy Trading,
The Macro Trader

What is Macro Trading?

At we view macro trading as a process of finding the best risk to reward situations on the planet. Instead of being put into a style box we are free to go to where the money is. Many money managers whether they run a mutual fund, hedge fund, are a proprietary trader, or even a retail investor box themselves into a corner by only looking at one or to asset classes and even than only looking at a segment of that.

For instance look at the Mutual Fund industry. Most funds have such a strict mandate that they can’t invest out of the United States and many even have limitations on the capitalization of the stocks they can buy. And then on top of all that most are not allowed to short or use derivatives. While doing all of this may help Morningstar put you in a style box we here at think that it limits yourself to potential opportunities and forces you to allocate your money to less than optimal risk to reward opportunities.

So in conclusion to us macro trading is being able to go anywhere in the world, trade any instrument, using any strategy. The objective of a global macro trader is to find the absolute best risk to reward situations on the globe.

Happy Trading,

The Macro Trader