The Mallet Swings Forward
Regular readers of "A Dash" know about our Gong Model, invented by our system guru, Vince Castelli, and whimsically named by the OldProf. Vince has a brilliant and innovative concept. He takes many of the factors that people look for in finding a market bottom. He investigated which of these really made sense.
We believe that he is the only modeler to have a two-stage process. He has identified certain factors that provide a setup for a solid investment market bottom. Then we wait for a signal that the situation has improved. We have been surprised at the patience of the Gong, avoiding much of the recent volatility. It missed the bottom call last week, but it is not designed to catch the bottom tick.
The Current Situation
Many bottom-callers have used simple bi-variate models developed through back testing — sentiment, oversold measures, the VIX, or some combination. These models always look great on past data, but do not have a real track record.
To take one example, we read last week the analysis of the investment strategist for a major Street firm. This strategist suggested that the S&P 500 would advance 6% over the next year. This week the market has moved much higher. We wonder if this analyst now expects a decline of 5% over the next year. That would be consistent with the initial opinion.
It just goes to show how silly much of the current advice has become. With the wild daily swings, no one is interested in a 6% gain for the year. The question is much deeper.
Are there serious potential gains from equity investing?
Vince has done something much more realistic. It is not magic. It does not purport to catch the bottom tick of the market. The Gong Model is an honest effort to discover an "all clear" signal for the average investor, with a time horizon of six months. We have a report on past performance, available for any who inquire to this address, with the appropriate substitutions: falin at newarc dot com. Feray will send our report of past signals.
Unlike other bottom-callers, we are realistic about the potential. Those who read the report will note that we did not follow the Gong on one occasion, which proved to be the worst signal. We use our models with human input and discretion, noting other factors when appropriate.
How to Play the Gong
While we do not offer investment advice to readers (please read our disclosures), we regularly indicate our short-term market opinion. We have registered this on the Ticker Sense blogger sentiment poll.
For our clients following the TCA-ETF model, who have been safely out of the market for six weeks: We will scale into some overall market positions because we know the sector model will be slower. At some point, the TCA-ETF system will find the best sectors and we will realign to those holdings. Meanwhile, it is time to get more market exposure.
For our clients who have been in long-only investments, we will shift positions to stocks that offer special potential for a rebound. These include stocks that declined unrealistically through forced selling. Many hedge funds held illiquid investments, were forced to cut down on borrowing, and sold what they could. Many stocks made irrational moves because the names were liquid holdings that could be sold for redemptions. We are shifting to positions that have even greater rebound potential, when market perceptions change.
It is also a good time for those in long-only funds to think about allocating more assets to those positions.
We are planning a series of articles analyzing both bearish and bullish perspectives. We believe that there is time to act, since there is plenty of negative sentiment. The skepticism will not end tomorrow.
It is a time for careful planning and stock selection.