This is a backtest of a bottom detector based on ideas others have posted here. NHNL is used to identify extremely bad days that might indicate a price bottom has been reached with better days ahead. There are different bottom detectors and different portfolio implementations. This is just one. The average gain was 4% over 2 months, but there are few signals (one every three years) and so the increase in CAGR was only about 1%. (An extra 1% over long periods can compound significantly.) The win rate was high (27 out of 33 signals had positive return), but jumping in when the market is fearful raises the possibility of a large loss (a 32% loss in 2008 was narrowly avoided). (I used Excel for calculations, and so don’t have all the fancy gtr1 risk metrics.)
A portfolio using the Bear Catcher [NHNLDiff] is all Cash when [NHNLDiff]=0. Adding a bottom detector moves the portfolio into the market for some of the time it otherwise would be in Cash. A bottom detector signal triggers a buy, which is held until [NHNLDiff]=1. Trading rules:
- The only investments are gSPY and Cash.
- 100% gSPY when NHNLDiff is 1.
- 100% Cash when NHNLDiff is 0, until the bottom detector signals.
- 100% gSPY after a bottom detector signal.
- Hold until NHNLDiff is 1.
This bottom detector signal looks for a bad day (NHNLny<-25) followed by a better day (NHNLny>=-25 and a price increase). Bottom detector signals when:
- Previous day [NHNLny] < -25.
- [NHNLny] >= -25.
and 3. gSPY Price > previous day’s Price.
[NHNLny] is 52 week NH minus NL of NYSE stocks (excluding ETFs and IPOs) percentage. http://gtr1.net/2013/?~NHNLny:h1::excd.a:et1:styp.a:et10!11!..
Since 1929, there were 47 bottom detector signals, with the most recent being Friday May 13th. Of these, 34 triggered buys (13 had an earlier bottom signal). (The earlier bottom signal always was at a higher price, and so waiting would have had higher returns.) Average gain following a bottom signal buy (until NHNLDiff=1) was 3.7% over 40 market days. This would have increased CAGR from 12.3% to 13.5%.
Date gSPY [NHNLny] [NHNLDiff]
20220512 9775 -29 0
20220513 10011 -7 0 bottom detector signal
20220516 buy
CAGR
10.0% gSPY
12.3% gSPY using NHNL timing
13.5% gSPY using NHNL timing and a bottom detector
Date gSPY [NHNLDiff] Action Gain bars
19291104 2.02 0 Buy
19300124 1.97 1 hold -2.7% 56
19301113 1.52 0 Buy
19310126 1.52 1 hold 0.6% 49
19310605 1.26 0 Buy
19310625 1.41 1 hold 11.5% 14
19320603 0.47 0 Buy
19320725 0.54 1 hold 13.4% 35
19340731 0.94 0 Buy
19340814 0.99 1 hold 4.5% 10
19370929 1.66 0 Buy
19380111 1.47 1 hold -11.5% 73
19380405 1.16 0 Buy
19380413 1.24 1 hold 6.4% 6
19400517 1.34 0 Buy
19400620 1.35 1 hold 0.5% 23
19411212 1.32 0 Buy
19420108 1.36 1 hold 2.7% 17
19461014 2.89 0 Buy
19461210 3.05 1 hold 5.7% 40
19470417 2.85 0 Buy
19470617 3.02 1 hold 5.8% 42
19490616 3.14 0 Buy
19490701 3.24 1 hold 3.1% 11
19530917 6.97 0 Buy
19531015 7.24 1 hold 3.9% 19
19571015 14.89 0 Buy
19571203 14.90 1 hold 0.0% 33
19620628 23.21 0 Buy
19620711 24.63 1 hold 6.1% 8
19660825 37.94 0 Buy
19661115 40.10 1 hold 5.7% 56
19690801 49.71 0 Buy
19691016 51.61 1 hold 3.8% 53
19700519 41.48 0 Buy
19700827 45.01 1 hold 8.5% 71
19730524 64.84 0 Buy
19730719 64.63 1 hold -0.3% 38
19731129 60.03 0 Buy
19740118 59.09 1 hold -1.6% 34
19740909 44.36 0 Buy
19750110 46.91 1 hold 5.8% 86
19800401 84.29 0 Buy
19800501 87.24 1 hold 3.5% 21
19871029 284.08 0 Buy
19880125 295.33 1 hold 4.0% 59
19900828 412.77 0 Buy
19910124 436.64 1 hold 5.8% 103
19981013 1577.92 0 Buy
19981102 1766.10 1 hold 11.9% 14
20021014 1411.54 0 Buy
20021101 1512.59 1 hold 7.2% 14
20080111 2594.03 0 Buy
20080813 2418.21 1 hold -6.8% 148
20081125 1627.79 0 Buy
20090402 1605.70 1 hold -1.4% 87
20110927 2365.20 0 Buy
20111024 2528.16 1 hold 6.9% 19
20150828 4349.89 0 Buy
20151009 4417.59 1 hold 1.6% 29
20160122 4206.92 0 Buy
20160303 4411.83 1 hold 4.9% 28
20181228 5828.72 0 Buy
20190109 6067.35 1 hold 4.1% 7
20200326 6330.96 0 Buy
20200417 6930.60 1 hold 9.5% 15
avg 3.7% 40
min -11% 6
max 13% 148
This system struggled in 2008, with a 7% loss between January and August, and an additional 1% loss between November and the following April. There was a bottom signal near the March 2009 market low, but this was ignored because the previous November bottom signal was still in effect.
A 32% loss was avoided only because NHNLDiff happened to go positive for a few days in August. Some sort of exit rule when the bottom signal is not working (prices are falling) might help, but is hard to justify because only 6 of the 33 signals had negative return (-3% in 1930, -11% in 1938, -0.3% in 1973, -2% in 1974, -7% in 2008, and -1% in 2009). I have not tested exit rules yet.
Date gSPY [NHNLDiff] Action reason Gain
20071018 2832 0 Sell NHNL=0
20080111 2594 0 Buy btm det -8%
20080813 2418 1 hold NHNL=1 -7%
20080819 2383 0 Sell NHNL=0
20081125 1628 0 Buy btm det -32%
20090402 1606 1 hold NHNL=1 -1%
https://gtr1.net/2013/?~gSPY_NHNL_20130929_rgearyiii:h1::pre…
Notes on tuning. The returns are significantly lower (but still positive) if the bottom detector doesn’t look for a price increase. The returns are slightly higher if buys are done the day of the bottom detector signal (for example on the recent Friday May 13th). Different limits were tested, with the range from -22 to -28 all with Total Return Multiplier about 3 (from 1929 to 2020).
[NHNLny] Total Return
limit Multiplier
-35 1.94
-30 2.67
-29 2.79
-28 2.90
**-27 3.24**
**-26 3.20**
**-25 3.22**
**-24 3.09**
**-23 3.10**
-22 2.86
-21 2.67
-20 1.95
-15 0.99
-10 0.92