12-04-2020: "Just the facts, ma'am."

Year-to-Date Strategy Stats as of today:

+ 44.76% : Turner Quant Advantage (TQA)

+ 16.47% : Tactical Growth (TG)

+ 6.22% : Diversified Income (DIS)

+ 28.48% : Leveraged Index (LI)

+ 14.31% : S&P 500


If you are a Dragnet fan of by-gone times, you remember Joe Friday (Jack Webb) saying, "Just the facts ma'am.", in almost every episode when he was interviewing a female witness. Well, I'm going to just cover the facts in this afternoon's blog...


Our portfolios had another great week. The fastest growing portfolio is the Leveraged Index strategy. It is outperforming in this current market because the market is booming higher and the LI model is comprised of 2x index ETFs, so every point higher in the market is about another 2 points higher in the LI model.


But, here is the rub...


Historically speaking, whenever the market gets more than 3.75 em's above the market's 200 DMA, a correction ('usually') ensues shortly thereafter. The word, "usually", is the operative word in the preceding sentence. "Usually" does not mean "always". But, it happens often enough that a reasonable amount of caution should be exercised when considering the best stop loss strategy. As of this writing, the market is 2.75 em's above the market's 200 DMA. 1 em is equal to 9.56%. So, if (and this is a big, big if) we assume that a 9.56 em is 'normal', then the market will have to move up at least another 9.56% to become overbought; and that is assuming the 200 DMA does not continue to climb higher, which of course, it will.


But, here is another rub...


A "normal" em for the market is about 5%; a little less, actually. With all the massive swings in the market over the past 12 months, one em is now running at twice that amount; and that is NOT "normal".


So... let's split the difference and say that a more realistic em ("Expected Move" or "Standard Deviation") is 7%, which is still high from an historical perspective. That would put the current market at 3.41 em's above the 200 DMA. That is only 0.34 em's from being overbought, which is just another 3.25% higher than the market is right now. Based on the last few weeks, the market could easily move up that amount next week, but also keep in mind that the 200 DMA is also rising. It is the delta between the then current position of the market and the then current 200 DMA that determines the OB condition.


What does all of this math really mean?


Well... the COVID-19 vaccine is in the pipeline; that's great for getting our economy back on its feet and the elimination of lock-downs. Congress is 'acting' like it will get some kind of relief bill out the door before Christmas (iffy, in my opinion); that would be another great shot in the arm for the market. It is very conceivable that the market will roar into Christmas. The odds of a correction (perhaps a significant one) will continue to grow if that happens.


So, what's the actionable conclusion? Stay bullish and keep stops tight. That is my plan.

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