Our system to time entries and exits in the Equity models gave a new buy signal as of the close yesterday. For this reason, we bought a position in the DIA this morning. The previous buy resulted in a whipsaw as the stop was triggered and a loss was taken. Even though the short-term timing couldn't have been worse (in hindsight), the loss was within the normal parameters of the system. The system has been tested going back to 1987 and whipsaws like this tend to be a rare occurrence. To reap the benefit of the system's long-term strengths, we need to endure the short-term weaknesses. The Dow going above the Oct 2018 highs could clear the way for the long-term trend to finally resume.
Our system to time entries and exits in the Defensive Equity, Equity Growth, and Equity Growth Aggressive models gave a sell signal as of the close on Friday. For this reason, we sold the position in DIA this morning. The system is longer-term and averages two signals per year. The market was trending gradually higher when we got the initial buy in February and the confirming signal in April. It has since reversed that trend and fell enough to trigger the sell stop. This is a rare event for this system. There are indicators that the market is oversold and could bounce anytime; however, down-trending markets can always get more oversold. This system avoids that risk.
The Dow is now 4.5% below the April high and the April 1 buy signal for the actively managed models is still in place. If the market were to continue falling, the system has a stop-loss limit to protect against a decline larger than 5% from the entry. It’s interesting that investor sentiment (AAII survey) has quickly become bearish with such a small percentage decline from market highs. Even though this could lead to lower prices in the short-term, the bearish sentiment increases the likelihood that the market will eventually resume the upward trend.