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Old Skeet's Market Barometer ... Explained

edited April 16 in Off-Topic
Old Skeet's Market Barometer

From time to time I am asked what makes up your market barometer? And, how do you use it?

The barometer follows the S&P 500 Index and is driven by three major data feeds. They are 1) an earnings feed that is comprised of both TTM and forward estimates, 2) a breath feed, and 3) a technical score feed. In addition to the three main barometer feeds there are a few other data influences that are often times used. They include (but are not limited to) the yield of both the US2YrT and US10YrT along with short interest for the Index as well as its dividend yield.

These data readings are entered into a spreadsheet and when scored produce the barometer reading. The barometer reading drives an equity weighting matrix which produces a suggest weighting for equities within my portfolio. A barometer reading of 150 is in the middle of fair vale and scales upward to undervalued, oversold and extremely oversold when a reading of 168 or higher is reached. Moving in the other direction scales to overvalued, overbought, and extremely overbought when a reading of 132 or below is reached. A higher barometer reading indicates there is more investment value in the Index over a lower reading.

The barometer is not driven by the Index's market valuation number. I simply use the barometer as an aid to help me determine when good investment value is to be found (or to prevail) within the Index itself. Thus far through 2019 the barometer has produced readings ranging from a high of 183 indicating that the markets were extremely oversold as we opened the year down to a low reading of 128 indicating that the markets are extremely overbought as of April 12, 2019 market close. During this period of time the Index has moved from a valuation of 2507 to 2907 resulting in about a 16% (400 point) gain.

Being a long term retail investor, that generally does not trade in and out of my mutual fund positions, I use the barometer as a guide as to when to engage (or trim) equity position(s) within my portfolio. I have been using this system for a good number of years and patterned it after one my late father used many, many, years ago. His was even simpler than mine as he did not have access to the many data sources that we now have available as retail investors. His system, back in its day, was also an effective tool that helped him determine when to add to (or trim) his stock positions. He was an engineer by profession; but, an asset allocator as an investor. His investment moto was "When the Yields Get Thin, Trim."

My system is, probably, not up to the standards found today that are in place and used by big money; but, I still find it effective. It will not call market tops (or market bottoms) but it does a good job at helping me determine the better times to put new money to work within my portfolio ... and, when I should, perhaps, trim. I call this activity throttling my equity allocation.

In short review, I generally add to my equity positions during times when high barometer readings are present; and, I trim equity positions during periods of time when low barometer readings are present.

With what I'm now seeing with current barometer readings ... I'm thinking it will be (for me) ... Sell Stocks by the End of May and Come Back after Labor Day! I've now started to trim some of my equity positions (even if stocks continue to go higher) as I am currently overweight equities by +5%. I'm thinking I need to be at my neutral weighting come summer. And, besides it is better to sell into strength than weakness.

So, for me ... it's now harvest time ... book some gains ... and, as pops use to say, "the yields are thin."

Comments

  • edited April 15
    Thanks @Ol’Skeet,

    I find it interesting that your equity position is already 5% overweight early into the year. I’m bumping your post before it disappears in the avalanche of new ones because I know several regulars find your commentaries valuable.

    Back in time I’d trim or add based on my own (less scientific) readings. Today I’m in a static (boring) stance - so haven’t made any moves in near a year - except some distributions. Nothing’s changed much. Equities (held thru balanced funds) just slightly underweight - but well within parameters. Nat Resources and hard assets slightly overweight - but again - well within parameters.

    Lots to chew on in your outlook for May. Others may desire to comment further.
  • MJG
    edited April 15
    Hi Old Skeet,

    Thanks for giving us a brief outline of your market barometer. It’s one of many potential market timing mechanisms. Many such mechanisms are in general use. Here is a Link that provides several alternate formulations:

    https://www.portfoliovisualizer.com/test-market-timing-model#analysisResults

    I have no idea how effective these formulations are. How effective has your method been historically? How does it compare to just an easy buy-and-hold S&P 500 portfolio?

    I don’t have any rigid policy in making my investment decisions. Perhaps that’s a serious shortfall that’s costly? But, who knows? Lots of questions with no answers!

    Added Later: The test period is a significant factor when assessing any market strategy. The timing is crucial.

    Best Regards
  • A quick glance @MJG I think shows none of these timing methods are fruitful, but maybe I'm not using the tool or understanding the results correctly. Or, maybe that's your point(?)
  • Hi MikeM,

    Market timing is a very challenging game with far more losers than winners. I suppose some winners exist, but I also suppose that these rare winners become losers over an extended timeframe.

    I am definitely not a market timer. I can probably best be characterized as a long term buy and holder. Here is a Link that you might find interesting:

    https://www.cashcowcouple.com/market-timing-always-losing-game/

    This is just one of scores of articles that tell the same story. As always, there are a few exceptions. Good luck on identifying these rare gems ahead of their successes. The standard story is that these rare gems seem to lose their talent about the time you decide that they are the exceptions. Besting the market is a hard, ephemeral investing game. Doing the Index portfolio strategy is a reasonable approximation that comes close if costs are minimized.

    Best Wishes
  • edited April 16
    Hi guys,

    Thanks for making comment.

    I'm thinking that one of the things that might have been missed in reading my prior comments is that I was reducing equities by 5% is that I can tactically overweight equities (from time to time) within my portfolio by up to +5% when felt warranted. And, although I now run a 20/40/40 asset allocation since the 4th quarter of last year I left myself equity heavy during my last rebalance and reconfiguration process as a tactical overweight. I'm doing no more than now removing the tactical overweight. And, since I do not have a special investment position in place I've now got to trim from some core equity holdings.

    Generally, I rebalance within + (or -) 2% of the neutral positions for my income, growth & income and growth areas of my portfolio leaving cash to float. And, at times, I can tactically overweight equities by up to +5% when felt warranted.

    For me the question is not how much the additional overweight in equities would (over time) increase portfolio performance? The real question to be answered is how much more was earned by being overweight equities over staying in cash with the five percent tactical money for the past quarter?

    Using the S&P 500 Index vs. my money market funds which averaged a little better than one half of one percent while my equities averaged better than fifteen percent. So, go figure ... Where was it best to be this past quarter with tactical money? In cash or equities during this time frame? Equities, by far.

    Again, I am simply closing out the tactical equity overweight because I'm thinking equities are starting to go soft.

    Sorry if I confused you in that I might have been completely selling out my equity positions. This is just not so.

    Skeet

    For those that would like to reference the latest Barometer Report the below link will take you to it.

    https://www.mutualfundobserver.com/discuss/discussion/48963/old-skeet-s-market-barometer-report-thinking-for-april-2019-april-12th-update#latest
  • edited April 16
    Old_Skeet said:

    “... one of the things that might have been missed in reading my prior comments is ... that I can tactically overweight equities (from time to time) within my portfolio by up to +5% ... Since the 4th quarter of last year I left myself equity heavy during my last rebalance and reconfiguration process as a tactical overweight.”

    @Old_Skeet, Thank’s for explaining how you came to be so overweight one area. Also, it’s nice to see that other board members have found your post of interest and have made constructive comment.
  • edited April 17
    Hi @hank: Taking your comment a little further ... Let's do some math.

    Take a $100,000.00 hypothetical portfolio with an asset allocation of 20%, cash, 40% income and 40% equity with a threshold rebalance of +(or-) 2% with cash allowed to float. In addition, I can tactically overweight equities by up to 5%.

    Now, let's take some hypothetical and approximate starting balances say cash area at 18K, income area at 38k and equity area at 42k with the following gains, percent wise, for cash area @0.6%, income area @6% and the equity area @16%. For me, this computes to cash area having a value of somewhere around $18,110, the income area having a value of somewhere around $40,280, and the equity area having a value of somewhere around $51,050. This now results in an asset allocation of about 16.5% cash, 36.8% income and 46.6% equity. So, it is now time for an equity rebalance, at least to it's threshold. Please remember, I can tactically overweight equities by up to +5%. The starting balances were approximate and when rounded do not equal 100k.

    Now, I'm not on these exact numbers (percent wise) as I have done a little buying in the income area of my portfolio with some of the portfolio's income generation; but, I am somewhere pretty close to these percentages. Plus, I withdrew some money to pay Federal and State Income Taxes that were owed.

    This math exercise shows just how strong the equity performance has been in relation to the other areas of the hypothetical portfolio since the first of the year. And, with this strong stock performance, this has effected a good number of portfolio asset allocations (mine included). Then there were the withdrawals that need to be factored in as well.

    With the strong performance from stocks has left me equity heavy and in need of a rebalance.

    And, besides, I am reminded of one of my late father's sayings ... "When the yields get thin, its time to trim." The current yield for the S&P 500 Index etf SPY is about 1.8% and for the US10YrT a little less than 2.6% while my money market funds are doing a little better than the average at about 2.25%. From a yield perspective this makes cash attractive.

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