IBD Presentation

A Review of Recent IBD Market Outlook
Looking at the Performance of IBD’s Market Pulse
Current Outlook
• At last meeting, Vas noted a discussion about the IBD Outlook
started in the SIPSIG group by member Kevin Campbell
• Looking at IBD’s Outlook over the past six months, Kevin
noted that it didn’t perform particularly well as a market
timing tool.
• His comment: “Result: Invested for 113 days over the 6
month period for a loss of 1.3%. Not a very good testament
for the IBD timing approach.”
• And so he asked for follow-up comments
• I decided to expand on his analysis by accumulating the data
back to 5/1/2008
• I’ve added a file in the Meetup with these results
The Data
• IBD Outlook has used differing wording over time so I have
interpreted all IBD signals as one of: "Market in Correction,"
"Uptrend Under Pressure," or "Confirmed Uptrend."
• Since the Current Outlook is published the prior evening, I am
continuing Kevin’s convention of showing the Current Outlook
as applicable for the next day.
• E.g., the IBD posted the Big Picture based on Thursday 1/26
results that same evening. The Outlook signal is then
available for trading at the open of Friday 1/27.
Using the Signals
• Kevin used the signals to purchase the SPY, and investing in
the SH (inverse SP500) for short signals.
• For simplicity (for my software), I used only the SPY.
• Buy and Sell Rules:
– Buy the SPY on the open of a "Confirmed Uptrend," Sell when signal
downgrades to "Uptrend Under Pressure" or "Market in Correction.“
– Short the SPY on the open of "Market in Correction" and Cover when
signals improve to either "Uptrend Under Pressure" or "Market in
The Results
• For the period of 5/1/2008 to 12/31/2011, there were 59
signals (37 long trades and 22 short trades).
Based Upon $100,000 initial investment
Pct Winners
Maximum Drawdown
Buy and Hold
B&H Maximum Drawdown
• For 2011, signals worked only 33% of the time with a return of
Some Explanatory Notes About the Following Charts
• The posted PowerPoint slides include bitmap pictures that can
be expanded for a closer look.
• IBD signals are shown on the charts color-coded with lavender
shaded areas representing “Market in Correction,” and the
pink areas as “Uptrend Under Pressure.”
• Buy and Sell signals are shown respectively by solid green and
red arrows, with Short and Cover signals as hollow green and
red arrows.
• System equity curves are shown as blue or green, while the
red is system drawdown (not on same scale).
Looking at the Charts, When Does the IBD Outlook Work Well?
(long-only chart)
And When Did Losses Occur ?
(Focusing on 2010 and 2011, Long-Only)
Entries Generally Good, But Not Perfect
Weak Entries,
in Retrospect
Some well-timed
Note the Importance of Following Market Correction Signals!
Protect Your Profits
Some Observations
• The Outlook appears to work best in trending markets; for
shorts, when the Outlook goes to Market in Correction.
• Performance slips in choppy and sideways markets.
• In a few instances during 2011, reentry to the market has
been late, missing parts of strong moves.
• Note that one of IBD’s strongest strengths are the Market in
• A delay of even a day or two for several instances would have
resulted in greatly increased losses.
• So, are there ways to help us improve the perceived
So, we’re looking for Improvements in Market Timing Tools
• First, market timing may be a misnomer. The term “Market
Timing” seems to imply some forecasting ability and that
appears very difficult to do accurately.
• The market often changes mode such as from trending to
trading range, low volatility to high volatility, bull to bear etc.
• Our goal is to better adapt to the changing conditions since it
appears that these new regimes persist for some time.
• Therefore, staying in sync with the market can help protect
your capital.
Let’s Look at Two Other Systems to Compare to the IBD Outlook
• A triple moving average system and, a stochastic oscillator
• Neither is particularly good (IMO), but they behave differently
in different market modes.
• That is, don’t trade these without a much closer look.
• But note the differences and similarities to IBD signals
A Sample Moving Average System
• This sample system is one of nine market timing systems noted at
http://dkreport.blogspot.com/2007/07/timing-indicators.html .
The MAs tend to be faster than many trend systems.
• Among MA systems, you can find hundreds of variations, using
many types and lengths of MAs – but all have some similarities.
• A quick look at the results of this example system
– Buy when EMA(5) > EMA(20) and EMA(10) > EMA(20)
– Sell when EMA(5) < EMA(20) and EMA(10) < EMA(20)
• The system earned a small profit from 5/1/2008 to 12/31/2011, but
had only 39% winners. This system is not really tradable by itself.
• MA systems, in general, work well for trend-following. But, since
markets trend only a fraction of the time - this limits their
5-10-20 MA System Results
Similar Strengths
to IBD
And weaknesses
Many Entries and Exits Worse then IBD Even with the “Fast”
Moving Averages
Just Some Context
• The Au.Tra.Sy blog – Automated Trading System located at
http://www.automated-trading-system.com/trend-followingwizards-december/ prepares a composite index for major
trend following funds.
• For 2011 – these trend following firms lost -7.5% , on average,
for the year.
Oscillator Systems Generally Work Better in Trading Range
• Many examples of oscillators, such as stochastics, RSI, ROC,
• An example stochastic system (also, not tradable)
– Buy when oversold (30 level), and fast stochastic (K) crosses slow
Stochastic (D)
– Sell when stochastics cross again
– Short when overbought (80 level) and slow stochastic (D) crosses fast
Stochastic (K)
– Cover when stochastics cross again
• Lost money in period of 5/1/2008 to 12/31/2011 even with a
55% winning percentage.
• Largest losses when oversold/overbought conditions persist
– That is, when markets go into a strong trend
Oscillator Systems work Poorly in Trends, but Do Well at Turns
Arrows show stochastic crosses
Knowing When to Use an Oscillator May Help the More Aggressive to
Look for Potential Price Pattern Entries
Also, watch
weakness in
oscillator peaks
Note oscillator signal in
conjunction with
Wyckoff spring
How Well Does the IBD Market Outlook Compare to some other
Market Timing Tools?
• Hundreds of examples, but I’m not aware of a
“Holy Grail.” We’re just trying to find a small
• The market mode directly affects system
– E.g. Comparing a trending vs. oscillator system
• Market breadth can also be a useful addition to
market analysis.
– One example: The McClellan Oscillator
• Volatility trends can provide context in
interpreting these other tools.
Some Useful Quotes About Market Timing Systems
• The following quoted from:
• “1. There is no such thing as a perfect timing indicator. Period.
2. All timing systems have statistically significant margins for error.
3. To improve their efficacy, timing systems should be used in
combination with other metrics.
4. Even the best timing indicators give false signals.
5. One of the biggest problems is lag: the signal may be correct, but it
happens either early or late.”
Market Breadth Indicators Add a Composite Perspective
• Breadth indicators are a composite indicator of index
• Provides another view of market extremes (overbought and
• An example is the McClellan Oscillator ($NYMO at
Stockcharts.com and T2106 for Worden products)
– Several versions and calculations- set your own benchmark for an
• NOT particularly useful when not at an extreme
• Like other signals, has to be read in context
The McClellan Oscillator Highlights Extreme Overbought and
Oversold Conditions
Less clear what to
do, but breadth
provides a note of
A simple trendline helps
understand these breadth signals
Hinting at a
What’s Happening Now?
Be cautious, but watch for
trendline break
Another Tool: Volatility Trend and Extremes Can be a Warning
• Don’t look just at VIX levels – but the current level compared to the
• A strong danger signal is when the VIX goes 20% above its 100 day
moving average, and, continues to increase. A cross of the 10MA
over the 100MA is a signal to look closer. (Gives some false signals)
• However, the VIX may stay elevated for some time – so the trend is
the most important forward looking signal, not the level
• ATR(3) bands are similar, but sometimes a few days slow. More
useful for individual stocks
• VERY useful in interpreting overbought and oversold conditions
– If volatility is trending up – expect weakness in prices
– If volatility is trending down – expect some continued strength
Watch for VIX Trendline Breaks, but Also Note a Cross of the
10MA and 100MA as a First Warning
While the Market Experienced a Number of Corrections During this
Period, Note that Some of the Intermediate Vix Trends Were Still
Also, note that recently
the VIX has been very
Note How Overbought Conditions React Differently When
Volatility is in a Downtrend Compared to an Uptrend
Active Trader Magazine (March 2012 issue) Shows How the VIX
Occasionally Gives Clear Buy and Sell Signals
7/22/2011, IBD went to Uptrend Under Pressure on 7/26 and
Correction on 7/28
Price Diverging
from VIX – a Sell
Signal. Note MA
crossover as well
IBD back to Uptrend on
Price diverging from
VIX – a Buy Signal
However, VIX Is Often Inconsistent as an Indicator by Itself
• Needs to reviewed in context with other indicators.
• Intermediate signals seem to work better than short-term
• The trend is perhaps more important than the level. High
levels can persist for quite some time.
• A spike, then a continued increase, is a time to step aside.
• ALWAYS pay attention to spikes in the VIX. They sometimes
provide a little extra warning of real trouble. Its better to look
at a few false signals than to miss the big one.
An Unusual System with Promise. A VIX Timing System with a
High Volatility Filter
• Adapted from http://dkreport.blogspot.com/2007/07/timingindicators.html
• Buy the S&P 500 when:
– (a) the 11-Day SP500 EMA is below the 11-Day SP500 SMA
– (b) the 11-Day VIX EMA is above the 11-Day VIX SMA.
• Exit the position when either of the two conditions above are NOT met.
• Add a longer-term filter NOT to buy when current VIX is 20% above its 100
day MA (Slightly different than 10MA/100MA on chart)
• Mildly profitable with 65% winners and okay system statistics
• I have uploaded an Excel worksheet with calculations and backtest results
• System seems to perform weakly in sharp downdrafts, but well as upturns
• Do not trade this without your own careful review
Performs Reasonably in Many Markets, But Reacts Poorly to
Volatility Spikes
A Free Timing Resource – Wishing Wealth Blog
• A highly recommended resource is the Wishing Wealth blog
produced by Dr. Eric Wish.
• I would characterize this as a trend following system,
reviewing a number of factors and breadth signals to assess
the stage of the market.
• Don’t have historical test data, but appears to be a more
slower reacting trend system than what we’ve looked at
• Can be found at http://wishingwealthblog.com/
• RSS feed available from “About” tab and he also produces a
daily e-mail.
Another Free Resource is a Trend System from Les Masonson
• Author of Buy – Don’t Hold
• Sign up for RSS feed at http://www.buydonthold.com/ for signals
• The book’s original system has been revised down to four indicators
(now called version 2)
Indicator #2 NASDAQ Composite Index with 100-dma Crossover
Indicator #5 NASDAQ Composite Index with MACD Crossover
Indicator #6 AAII Weekly Investor Sentiment Survey Bullish Percentage
Indicator #8 NASD Summation Index 5-Day EMA Crossover with MACD
• -6.2% return for 2011. More intermediate term signals so
somewhat more vulnerable to drawdown
Systems need to adapt to market conditions.
All systems fail at some time.
So, you need to look at multiple systems and indicators to develop your own
consensus opinion.
IBD Market Outlook provides some excellent signals for corrections, but
weaker in trading range market
I would recommend the 5-10-20 MA system as a trend reference vs IBD.
Also, be sure to follow your favorite oscillator and watch it carefully in
corrections or under pressure markets. (Know when to use it)
Add breadth and volatility measures to your analysis.
Try to look at any tools in the context of the mode of the market.
These tools will help add a market frame of reference to your price action
I would be very interested in hearing about any market timing systems you
think are worthwhile