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S&P 500 High Low Logic Risk-Off Model

Dean Christians
2021-04-09
Let's review the S&P 500 High Low Logic Index Risk-Off Model.

In my note on Thursday, I shared my modified version of the NYSE High Low Logic Index. As a reminder, the indicator created by Norman Fosback seeks to identify market environments with inconsistent participation as measured by a high number of 52-week highs and lows. The S&P 500 version is also a component of the TCTM Risk Warning Model. I use two versions of the High Low Logic Index in the RWM to isolate two vastly different high-quality groups. Like the NYSE version, I utilize a spike in the percentage of new lows as a trigger once the indicator is above the warning level. However, the S&P 500 version uses the original concept exponential moving average length of 50 days versus the 40 day  moving average for the NYSE version.

Please note, we continue to work on the TCTM programming for the website. For now, I will continue to update subscribers on any new developments.

Components

1.) Percentage of S&P 500 252-Day Highs

2.) Percentage of S&P 500 252-Day Lows

NYSE High Low Logic Index Risk-Off Model

The S&P 500 High Low Logic Index Model seeks to identify instances in history when the High Low Logic Index exceeds a user-defined threshold, and new lows start to expand. The model will issue an alert based upon the following conditions.

Signal Criteria

Condition1 = High Low Logic Index >= 1.8%.

Condition2 = Percentage of S&P 500 252-Day Lows >=4.5%.

Condition3 = S&P 500 Index <= 5.0% from 252-Day High

Condition4 = High Low Logic Index resets below 1.4%. i.e., the reset screens out duplicate signals.

If Condition 1-4, signal risk-off.

Let's take a look at some charts and the historical signal performance.

Current Day Chart 

Please note, I calculate performance statistics in the chart as a short signal, whereas annualized returns result from buying the S&P 500.

2015-16 Oil/Commodity Crash

2007-08 Financial Crisis

1998 LTCM and Internet Bubble

1973-74 Bretton Woods/Nixon Shock/Oil Shock

1966 Bear Market

1957-58 Bear Market

1929-32 Bear Market

Signal Performance


Historical TCTM Risk Warning Model Table

The following table provides a historical signal perspective for components within the TCTM Risk Warning Model. A "yes" in a model column indicates that a signal triggered either before or after a significant correction or bear market peak. 

Conclusion: The S&P 500 High Low Logic Index remains low as the lesser of highs and lows drags along the bottom. As the table below shows, annualized returns for instances below the long-term average of 0.7% look solid compared to the returns when the indicator is above the warning level of 1.8%. 

Returns since 1928


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Risk Disclosure: Futures and forex trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardizing ones’ financial security or life style. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Past performance is not necessarily indicative of future results.

Hypothetical Performance Disclosure: Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown; in fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk of actual trading. for example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all which can adversely affect trading results.

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