The Gong has Rung!

At "A Dash" we are writing a blog about a book.  Our principal mission is to highlight investment concepts that will help intelligent individual investors who decide to take control of their own portfolios.  We try to show the challenges and possible pitfalls of this decision.

A major theme is that a little knowledge can be dangerous.  In particular, individual investors are inclined to bail out at market bottoms, thinking that what they read in newspapers, magazines, and popular blogs shows them the way to riches.

Sometimes the investor needs some help, and a disciplined system can show how it is done.  This does not mean that one can do it at home, in spite of the many television ads suggesting the opposite.

To this end we have for the last few months provided our own TCA-ETF sector rating with a one-day delay.  We have also commented on Vince Castelli’s "Gong Model" which gives a bottom-calling signal on only rare occasions.  It is not intended as a trading signal, but rather an "all clear" call that uses important technical indicators to highlight prospects for the next few months.

The Gong has Rung!

Two weeks ago we cited a number of approaches to identifying a market bottom.  Vince’s approach was a bit more cautious than many others, and we avoided some of the recent declines.  We indicated that the hammer was pulled back, and that the Gong would soon ring.  On the basis of Friday’s closing data, despite the market decline, the Gong gave a "buy" signal which we shared with our investors.  The signal came despite the decline in the market averages because it keys not on the averages, but on a universe of individual  stocks.  The signal was even stronger after today.

Investors who are interested in this model should not feel like they have missed out because of a one-day move in today’s trading.  The signal is good for several months.  Interested readers who send an email request  can get a free report on past signals and the results.

The Gong Approach

For obvious reasons, we cannot discus the exact methodology used.  Here is the description of the Gong Model from our prospectus:

 

“They don’t ring a bell at the bottom,” goes the old
market expression. Sharp sell offs are
the most difficult times, not just for the average investor, but also for
professional managers and traders. Anyone can look at a chart and observe that a sharp “V” bottom proved to
be a great buying opportunity. The
problem is recognizing this opportunity in an environment of fear and even
panic. For every “brilliant” buyer of a
V bottom, there is a matching seller who is blowing out of his position. If the seller proves to be right, he saves a
lot of money. If he was wrong, then he
panicked.

Even though these situations occur infrequently, the
impact on overall trading profits is significant. It works both ways. Some traders try to use “oversold” indicators
to signal when to buy. The problem with
this approach is that oversold markets can get more oversold — a lot
more! An oversold indicator would have
had you buying on October 16, 1987, the day before the crash.

The flip side of this is the cost of delay. The aftermath of market crashes or
mini-crashes is an extremely volatile time, featuring whipsaw moves and no real
trends. If you wait for a clear-cut
trend to emerge, you may miss an important tradeable rally.

The Gong model does not attempt to call exact
bottoms. One might think of it as an
all-clear signal after a hurricane. The
worst is over. There might still be some
choppy weather ahead, but the risk is now limited and the potential profit is
great.

The Gong model is very good at identifying downward spikes.  It is not perfect, failing when the downward move is choppy and persistent.  That includes trading in recent months, where we had a false signal in December.  We are suspicious of perfect models. This usually means that the developer has not done honest development and testing.  It is easy to come up with a model that perfectly fits past data.  This is not what we have done.

Conclusion

Regular readers of "A Dash" know that we have been bullish on market fundamentals.  We are not perma-bulls, since we avoided the declines of the bubble era.  We are more confident than most market participants on several fronts, including the following:

  • General economic strength, including recession odds;
  • The extend of market pricing for a perceived recession, which we think has been overdone; and
  • The expectation for future earnings.

While our trading positions have reflected current conditions, we are always delighted when the systems we employ achieve convergence with our analysis of the fundamentals.

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33 comments

  • Roger January 28, 2008  

    “Interested readers who send an email request can get a free report on past signals and the results”…
    Thanks for sharing the “gong” and please send me the report.

  • AlB January 28, 2008  

    Thanks. Please send me a copy of the report

  • Bryan Wendon January 29, 2008  

    It’s good to see that even though they don’t ring a bell at the top they do bang a gong at the bottom.
    As the great poet Marc Bolan of TRex might have said:
    “So let’s dance, take a chance, understand me.
    Get it on, bang a gong, get it on, Get it on!”
    I’m going to put a little bit on. Please send me a report.Thank you Jeff for being brave enough to share your research and trades. It’s much appreciated.

  • oblomov January 29, 2008  

    I, too, appreciate your willingness to share your research. Would you please send a copy of the report?

  • adam January 29, 2008  

    thanks for all your hard work. Would love to see a copy of the report

  • Kathy Shaw January 29, 2008  

    I would like to receive a free report on past signals and the results of the Gong model.
    Thanks.

  • John January 30, 2008  

    Jeff,
    Great blog! Could you forward me a copy of
    the report. Many thanks.

  • carl w January 30, 2008  

    Good piece. Can you send me a copy of your report? Thanks in advance.

  • Ken K January 30, 2008  

    Jeff,
    I find your blob to be a refreshing perspective on the markets.
    Thanks for sharing your insight. Please send me a copy of the report,

  • JVD January 31, 2008  

    Thanks – I too would like a copy of the report.

  • Jeff Miller January 31, 2008  

    Everyone who requested a copy of the Gong Report should have it. If yours got lost in space somehow, please let us know and we’ll send another.
    Thanks for your interest and I hope there will be some feedback as well.
    Jeff

  • SI February 1, 2008  

    Thnaks, got it.

  • Gary February 2, 2008  

    I would also love a copy, thanks

  • Roland Ziegler February 3, 2008  

    Would you please send me a copy of your report?
    Thanks in advance
    Roland

  • Brian February 4, 2008  

    Please send your report and info…thanks for the great site!

  • David Scott February 16, 2008  

    I would love to have a copy of your special report. Thanks for your balanced comments and insights
    David

  • sunil February 27, 2008  

    I’m rather late to this, but I would like a copy of this report as well.
    Thanks much!
    Sunil

  • Farley Moran March 5, 2008  

    Please send copy of the Gong Report. Thnx

  • Jordan March 17, 2008  

    Thanks for all the work you do in keeping up this blog!
    Could you send me a copy of the report? Thanks!

  • Josh Stern March 24, 2008  

    I was wondering if anyone had updated comments on the “gong” idea. My view is that the market can be pushed/pulled by both psychology and fundamentals. When I’m in tune with the market, I can recognize days where there are important changes in psychology from negative to positive (and visa versa). I also believe that some, but not all, market selloffs are driven by fundamental developments. The current crisis is one of those where fundamentals have played an important role. When the fundamental aspect is important, that makes calling the market bottom in the absence of macro developments hard to do. Today (MOnday, March 24) seemed the first recent occasion where there was positive psychology and a real nuggets of macro good news (higher than expected volume of home sales).

  • Simon Lau October 16, 2008  

    Please send me a copy too. I’d like to check it out.

  • Anne October 16, 2008  

    Great article. Please forward your research on “Gong Model”. I am very interested to learn more. Thanks very much

  • Simon October 16, 2008  

    Please send the report. Thanks !

  • Dick October 16, 2008  

    Please send the “Gong Report.”
    Thank you.

  • Rick October 16, 2008  

    An interesting article. I look forward to receiveing the report
    Thx

  • george r October 16, 2008  

    I generally find your posts interesting and informative and would appreciate a copy of the report.

  • Shashi October 16, 2008  

    Interesting!!.
    Please send me a copy of the Gong Report.
    Thanks.

  • aped69 October 18, 2008  

    I’d really like to be sent a copy of the Gong Report – thanks alot!

  • Dave White October 21, 2008  

    Please send a copy of the Gong Model. Looking forward to it. thanks!

  • James October 28, 2008  

    Please provide me with an email update.
    Thank You

  • John Evans October 28, 2008  

    I enjoy reading you on RealMoney. Would you please send me the “Gong” report? It sounds interesting. TIA

  • Johana October 28, 2008  

    Please send me your Gong Report.
    Thanks!

  • EuroTrash October 28, 2008  

    Interesting article. Look forward to reading your report.
    Thanks