Risk Avoidance

Risk is Not a One-Dimensional Problem

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StormGuard-Armor

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Narrative: False Alarm: The pending month-end StormGuard-Armor trigger has been canceled by a strong short-term market rebound indicating that the risk of a serious market decline appears to have passed, at least for now. NOTE: StormGuard-Armor, like a smoke alarm, is not perfectly clairvoyant but helps improve your long-term batting average.

StormGuard-Armor Indicator

StormGuard-Armor achieves superior performance indicating the onset of bear markets by incorporating three sources of data to provide three distinct views of the market that we call Market Trend, Institutional Momentum and Value Sentiment. Twelve separate measures of these three views are logically combined to produce the fundamental StormGuard-Armor value. Four additional measures of volatility and oversold conditions help hasten exits for Black Swan events and help hasten re-entry following oversold events.

SGA Market Trend Indicator

The Market Trend Indicator was determined from the application of Matched Filter Theory that examines daily returns of the broad market (S&P500) and determines when to exit (and re-enter) the market to optimize overall investment performance. This first component of StormGuard-Armor behaves similarly but better than the classic Death Cross Indicator (which is based on the 50-day/200-day simple moving average crossover of the S&P500).

SGA Institutional Momentum Indicator

The SGA Institutional Market Momentum Indicator is similar in design to the Market Trend Indicator but further incorporates daily volume information. Note that a “Wall Street momentum trader“ generally defines momentum as (volume)x(price change) just as a physicist defines it as (mass)x(velocity). However, ordinary trend followers typically ignore volume and use “trend” and “momentum” interchangeably.

SGA Value Sentiment Indicator

The SGA Value Sentiment Indicator is similar in design to the Market Momentum Indicator but further incorporates new highs and lows statistics. This Indicator acts as a “poker tell" that indicates a change in behavior of value traders that are concerned with where a stock’s price is relative to its previous highs and lows over the past 52 weeks. When the percent of new highs declines relative to new lows, it may be a sign that value sentiment traders have paused in favor of seeking safety.

SGA Delta Oversold Indicator

The SGA Delta Oversold Indicator is similar to the published Delta Market Sentiment Indicator which tracks the price performance of about 3,600 stocks relative to a medium-term moving average. StormGuard-Armor incorporates it as an oversold indicator that will trigger mean reversion behavior in the momentum algorithm after a particularly sharp decline and also incorporates it as an indicator for early re-entry if the recovery is sufficiently strong.

SwanGuard Black Swan Indicator

A “black swan” event is rare, unpredictable, and beyond the realm of normal expectations. The market’s fall from its high on Feb 19, 2020, to bear market territory was the fastest on record. Fortunately, its unusual characteristics in volatility, downside volume, and a flight of capital to treasuries make early detection possible. The indicator is both a logical and linear combination of these measures. It is integrated into StormGuard-Armor and can trigger an early exit at any time during the month.

Sea-Change Volatility Indicator

The Sea-Change Volatility Indicator measures the combined rate of change of 12 diverse funds relative to the S&P500 to indicate the pace and extent of rotation between recent trend leaders and former trend laggards. The funds include primary sectors, disruptive subsectors, and traditional style-funds. Values over 15% indicate rapid and broad rotation. Momentum strategies take about two months to confirm and execute a change in leadership. A trade will be profitable only if its momentum continues for one or more additional months.

Risk is not a one-dimensional problem cured by a single dose of diversification. Risk has many faces. Market crashes have been triggered by wars, pandemics, bubbles, liquidity issues, rising interest rates, excess leverage, debt, fraud, demographic shifts, and others. StormGuard-Armor measures and analyses 16 market indicators that act like poker-tells and together provide a more dependable method to Know When to Get Out of Dodge.

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Risk Avoidance

Risk is Not a One-Dimensional Problem