Simple detector 'Minor Bottom'

Investing Strategies Mechanical Investing
#1

The Simple Detector signaled a ‘Minor Bottom’ on Monday 2nd May.

It was an interesting day in that while the market indexes were positive, breadth appeared terrible enough that the detector signaled. And while definitely not certain, market behavior appears similar to early-mid 2008 with a series of lower short-term highs and a series of dips each poor enough to trigger short-term bottoms. Behavior that appears consistent enough with the ‘smart money’ positioning itself for further market turmoil that it’s perhaps a good time to maintain a ‘defensive’ mindset while remaining open minded to new data.

A quick recap of the ‘simple detector’ rules …

[%NYSE new highs] - [%NYSE new lows] < -16.67% = Minor Bottom
[%NYSE new highs] - [%NYSE new lows] < -33.33% = Major Bottom

… where -16.67% is basically 1/6 more NYSE new lows that highs for a Minor Bottom & -33.33% is of course a 1/3 more new lows than highs (as obtained from the WSJ Market Data resource). In practice this means a Major Bottom is signaled when a little more than 1/3 of the NYSE are achieving new lows.

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#2

Behavior that appears consistent enough with the ‘smart money’ positioning itself for further market turmoil

May I ask what are you reading that tells you what the “smart money” is doing and how do I identify the “smart money people”? Not being snarky at all here.

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#3

May I ask what are you reading that tells you what the “smart money” is doing and how do I identify the “smart money people”? Not being snarky at all here.
Great question and nice push back in what’s an off-the-cuff comment. I wouldn’t read too much into that statement as there’s not a lot there in terms of the ‘smart money’ piece. Having said that here’s what I’m more or less basing this on (a lot of which is non-specific & background)…

  • It’s been clear for a long while that overall the stock market is has been pretty highly priced relative to historical norms. Jim / mungofitch has a lot of posts on this over the last year (as an example) although he’s only one of many commentators sharing the data.
  • There’s been a lot of commentary that ‘recession may be coming’ and at the very least higher inflation - even if temporary - is here and so interest rates are expected to rise.
  • There’s a lot of data / academic studies / commentary that rising interest rates (and recessions) result lower stock market valuations at least in the early days.
  • In terms of what I feel is potentially ‘smarter money’ there’s a lot of commentary from Gundlach, Dalio etc. that expected future stock market returns from this current valuation level are not particularly promising (and they’ve been saying that for a while). mungofitch’s various posts are well reasoned on this point also. Assuming that those sorts of commentators are expressing what they believe I expect they are acting on this belief (and there’s some evidence based off SEC reports that they are).
  • Breadth in the market has been (very) poor in 2022 - this is based off my own data. My highly valued more speculative positions have suffered & the it appears that something similar has happened across the various MI screens.
  • There’s a simplistic model - that I believe has some merit - that the ‘smart money’ positions itself in advance for potential market corrections and this is expressed in the failure of the market to move higher as that ‘smart’ demand move from buying to selling in general.
  • There’s also another simplistic model that as the market advance cools the less ‘committed’ participants lose interest and so buying volume moves down & selling increases. Note this would result in the same outcome as the ‘smart money’ thing and of course both items could be correct simultaneously.

So there’s not a lot there and you offer a great push back! And it could be completely wrong! It’s also not of the same standard as mungo / borisnand’s work! So I’d love it if there was further discussion on these ideas so I can ‘course correct’ or these particular models can be adjusted / refuted.

In terms of identifying ‘smart money’ I can only offer that some of those mentioned above have posted here and publicly (say via interviews reported on in places like yahoo! finance) a lot of those ideas / commentary over a long time period. So - for me - it’s a consistency, appears data-based & logically consistent test. Sorry I can’t offer much more and as a general rule that’s a great way to view my posting - of limited value generally.

Thanks!

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#4

Thanks for the insight. I just wanted to make sure there wasn’t actual published statement somewhere that I’ve been letting get by me. It’s mostly your analysis of “the general thread of things”. The “buzz”. The “vibe”. Whatever you want to call it. I do the same thing but as it’s a soft science (science. HA!) I like getting additional input.

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#5

My short term bottom detector also triggered yesterday May 2.
It has degrees of certainty…this was not a super strong signal.
For example, not nearly as strong as its signal 2022-02-24.
So at this point it’s more like a whining dog, not a barking dog.

My usual comments on this signal:
It’s usually pretty good for positive average returns 1-4 weeks out.
It often triggers multiple days in a row.
It’s not nearly as reliable as my relatively rare “major bottom” detector signal.

Jim

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#6

My short term bottom detector also triggered yesterday May 2…

Early indications are no signal today, May 3.
Unless the market really closes on its butt.

Jim

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#7

Hey Jim,

Curious what your indicators say about today when all said and done.
Not saying that it should trigger the major bottom signal, but feels like a healthy dose of capitulation at the moment, which I think is needed before we can start moving sideways and/or up again.

Probably need more than one of these days though.

Dreamer

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#8

How can you tell if days like today and yesterday mean “capitulation” or just more volatility and downside ahead. Seems to me (complete amateur) you’d want to see things steady out and not try to catch a grenade while it’s still in the air.

Short term “bottom”? (Which I don’t consider a “bottom” at all) Maybe. But if it’s a small package it probably just contains a small thing.

#9

How can you tell if days like today and yesterday mean “capitulation” or just more volatility and downside ahead. Seems to me (complete amateur) you’d want to see things steady out and not try to catch a grenade while it’s still in the air.

I like reading the board and getting different takes, but my approach is far from mechanical.
Some like to buy strength and after support is established, yada yada.

I like jumping on the big dips, if nothing has changed in my 2-3 year outlook for that company.
It is all about CAGR for me, and the lower the cost basis, the better I do.

I try to factor in macro and technical factors when/if I can.
Either the world is changing forever, or this is 2001/2008/Dec 2018/Fall 2019/March 2020/May 2021 and things get back on track eventually. We were overdue, imo, for multiple compression. Many stocks are better now. Some still have a ways to go.

Dreamer

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#10

Curious what your indicators say about today when all said and done.

The variation that triggered Monday May 2 also triggered Wednesday May 4 and looks like it will almost certainly do so again today May 5 based on intraday figures.
All three signals about the same strength, not its highest scream.

A slightly different model did not trigger Monday, but did so yesterday and almost certainly to do so again today.
Again, not its highest strength.
Average S&P 500 CAGR in subsequent month after this class of signal about 28%.
(no deduplication of multiple signal days in a row)

Both of those are short term models.
The longer and stronger signals are silent. Getting closer though.
It triggers when a certain slowly changing oscillator gets to about its 99th percentile.
It’s up to about percentile 96.5 today, up from 75th percentile April 20.

Jim

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#11

Hi Jim,

I estimate that your 99-Day bear market signal will trigger in two weeks unless the markets recover 16% plus over that time. Does your bottom detector trigger independently of the 99-day signal? In other words, the 99 day-day signal is an indicator of secular bear and bull trends, but the bottom detector might trigger in either a bear or bull market? What, if any, is the relationship between the 99-day signal and the major bottom detector?

PP

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#12

Does your bottom detector trigger independently of the 99-day signal?

Yes, totally independent signals because they look at different time frames.

Remember that the 99 day rule is just a particular tuning of the general observation:
The longer it has been since a fresh recent high, statistically the lower the forward return in the next couple/few months.
It’s a gradual roll-off, not a bright line thing.

An old post with some figures.
https://discussion.fool.com/a-new-sampp-high-so-the-99-day-indic…
That table is worth pondering.
Those are 6-month forward average returns, a little bit longer time frame than is generally used for timing signals.
But still, you can see the gradual roll-off with the time since high.
So there is no specific cutoff that is magical. It’s a “broad sweep of history” view of the markets: short delay good, longer delay bad.
It’s attempting to answer the question: “Is there some evidence that you are still in an ongoing bull market?”
Longer time frames are bad, so you have to pick a useful cutoff. The 99 day level was my chosen compromise.
A person who’s bullish by nature might pick three months. A very conservative investor might pick six months.

This helps explain why you can have a bottom detector when things are bullish in that view, or when they’re not.
The bottom detector is a much more short term “pick a particularly good day to buy” thing.

My short term bottom indicator is a reasonably good omen for 1-4 weeks.
That might happen in a bull or in a bear.

By contrast:
The major bottom indicator, if I’m being braggardly, is much more solid: when that happens, just go buy something, dang it.
Last signal dates were this cluster:
2020-03-17 (borderline)
2020-03-18 (borderline)
2020-03-19 (borderline)
2020-03-23
Average S&P close on those four days: 2426, average one year no-div nominal index return: 34%.

Last signal before that was this cluster:
2018-12-20 (borderline)
2018-12-21
2018-12-24
2018-12-26
Average S&P close on those four days: 2393, average one year no-div nominal index return: 63.5%.

So, the 99 day signal is the climate. Is it still summer?
The short term bottom detector is today’s weather forecast. Is it likely to be sunny in the next week? (up to a month)

The major bottom detector is: is today likely to have been about the coldest day we’ll see in the next 6-18 months?

Jim

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#13

How’s your major bottom predictor? You know, the one that I ignored in March of 2020…

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#14

How’s your major bottom predictor? You know, the one that I ignored in March of 2020…

Getting close to a signal.

Being an inveterate overtuner, I have a multiplicity of models.
The traditional major bottom detector hasn’t triggered yet, but it getting quite close.
A couple of spectacularly horrible days would do it.
But, for no reason at all, I think we won’t see that yet.

But my rarest and most strict short term bottom detector has triggered, both yesterday and today.
(the extreme end of the short-term-bottom model’s outputs, so it’s edging towards behaving like the major bottom signal)
It has signalled on only 164 days since 1966, and most of those are clusters, so it’s pretty rare.
Last few signals:
Two this week.
One in March 2020, one year forward 67%.
Three days at Christmas 2018, one year forward averaged 35%.
And oddly, a collection of 10 days in October 2018. One year average forward return only about 9%.

All of the short term bottom detector variants are giving their strongest signals yesterday and today.
They generally portend a higher market level 1-4 weeks out.
On average, returns are slightly higher than average even 3-6-9-12 months out from those signal days.

Jim

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#15

All of the short term bottom detector variants are giving their strongest signals yesterday and today. They generally portend a higher market level 1-4 weeks out.

So all kinds of indicators are bearish and your bottom detector is bullish.

Can you or others please explain to a confused amateur how to interpret and bring this together?

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#16

So all kinds of indicators are bearish and your bottom detector is bullish.

Can you or others please explain to a confused amateur how to interpret and bring this together?

I am fully qualified to speak as an amateur. The Bearishness is (could be/supposed to be) the longer trend. But look at any historical chart of the market and you’ll see that even during times of major downturns 1929, 1973, 2000, 2008, there are these little “bounce-backs.” They come off the minor bottoms. Usually caused by maybe some unexpected good news/business reports/politician/Fed official flapping his gums saying soothing things, and who doesn’t like to hear good news or believe in wishful thinking? Or, the market, even in bearish form, might just be over-sold for the moment which causes the bounce.

Just like during major Bull sometimes it stumbles a bit and corrects 5-10% then off to the races again.

Too many moving parts for me to chase down and think I can make any money off of it. I only care about MAJOR tops and MAJOR bottoms.

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#17

Many signals turn bearish based on prices going down.
A major bottom in prices is preceded by prices going down.
Therefore, many signals will be Bearish at a major bottom in prices.
The technical term is a reversal.

“some confirmation is in order, since (a) bottom detector signals are not perfect, and (b) the risk of being wrong is huge, since it’s often during a cascading market crash.”
https://discussion.fool.com/when-to-buy-after-a-major-bottom-295…

“the stock market has reached an oversold level based on short-term momentum and investor sentiment measures are at extreme bearish levels. These indicators normally signal a reversal back up at some point.”
https://discussion.fool.com/but-it-looks-like-today-thursday-dec…

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#18

Given that it’s a short-term bottom detector, why do you look at the one year returns? How about the one month returns?

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#19

Or two weeks?

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#20

One in March 2020, one year forward 67%.
Three days at Christmas 2018, one year forward averaged 35%.

Looking at a chart, the S&P500 was at ~2500 and ~2600 on those occasions, now it’s ~4100, that seems like a bad thing, especially if there’s a possibility we’re heading into a period of higher inflation and higher interest rates?

SA