Cyclical Bull - Bear Indicator Status

The Bull/Bear Market Indicator is used to estimate cyclical above average (bull) or below average (bear) return periods. Three separate components are evaluated in a logic based sequence to calculate the indicator score. Each model (and therefore allocation) has unique bear market strategies determined by their model or allocation style. 

Component #1:  Price Trend

This component is a variation of the 50-day double exponential moving average. This component is used to gauge the general market direction.

Component #2:  Momentum

This component is a variation of the 50-day double exponential moving average momentum calculation. Momentum is typically calculated as the price change over a period of time multiplied by volume.

Component #3:  Sentiment

A variation of the 15-day double exponential moving average of ratio adjusted new highs and new lows. Attempting to determine what percentage of companies are driving current trends.

The Challenge of Tactical Models - Managing Whipsaws

The Bull-Bear Indicator is not a market predictor, but rather a market forecaster.  It is extremely difficult, if not impossible, to predict future price levels of market indices.  The components used to determine a bull or bear market position are used to forecast the probability of rising or falling markets.  Much like meteorological variables are used to determine the probability of precipitation, market trends, momentum, volume, and sentiment are used to create a probability of market conditions. 

Sometimes, the conditions that appear to forecast bull or bear markets turn out to be incorrect.  When this happens, it is often called a whipsaw.  In order to limit the impact of whipsaws, two overrides are used to reduce the impact of whipsaws. 

Override #1:  Eliminating False Bear Market Signals

To help alleviate false bear market signals caused by quick declines, short-term pattern recognition indicators are used to override traditional calculations if there is a 90% recovery of the quick decline within 6 weeks.

Override #2:  Market Correction Identification

If the market triggers a bear indicator, and during that time has a 5% recovery with no higher high, the model/allocation will trigger a bull signal until; 1. the indicator turns positive, 2. the markets drops below the recent bottom, or 3. Eight weeks passes.