In and Out | Understanding the Signal
InvestIt Now Signals Newsletter - Volume 1 Number 4 - What drives this strategy?
Introduction
In the ever-changing world of investments, signals play a critical role in decision-making. As of market close on August 7, 2023, the InvestIt now signal has been "IN" for 207 straight days. So, what's up with the In and Out signal, and how is it behaving in the current market scenario?
The Market Trend: A Significant Uptrend Since October 2022
The market has been in a significant uptrend since October 2022. Inflation has been high, though the rate of change has recently decreased. This situation has led investors to believe that the Federal Reserve is nearing the end of its interest rate-raising cycle—a view that has given the market reason to rejoice and foresee a "soft" landing for the Wall Street forecasted recession.
The In and Out Signals: A Dual-Ratio Approach
The In and Out strategy uses a couple of ratios to forecast the market trend. Both signals have to be below a set threshold to trigger a trade in the portfolio.
InvestIt now uses a Silver to Gold ratio (SLV/GLD) and an industrial to utility ratio (XLI/XLU), both of which are not straight daily close ratios but incorporate look-back windows. Both of these ratios have been above the InvestIt now threshold, keeping the portfolio invested in SPY.
Once the market trend changes and especially if the U.S. enters a recession, these ratios are expected to trigger a sell of SPY and a move into a risk-free-rate treasury bond (SHV) or cash equivalent. While these signals may trigger after some market drawdown, they can help protect the portfolio from major losses.
The graphs below illustrate these signals over the last year, along withthe comparative 1 and 5 year returns to the benchmark SPY.
The Perspective of Mr. Market
The recession has not arrived yet, according to Mr. Market's view. This sentiment continues to shape the market landscape, providing unique insights for investors and traders alike.
The Investment Strategy: Staying In and Getting Back
So far this year, the SPY has a 17.7% return, so In and Out continues to stay in the market. If In and Out goes to cash, you may wonder how and when to get back into SPY. Once BOTH signals are above the threshold for a 10 – 14 day period without going below, a BUY signal is indicated, allowing a move back into SPY.
Conclusion
Investing with the simple yet sophisticated In and Out strategy has proven to be profitable, and following the In and Out signals can continue to make money in the market. As the market inevitably turns, being ready to limit any drawdown is key to preserving gains.
Understanding the In and Out signals is vital for anyone interested in quant trading and portfolio management. These signals, driven by market trends and economic indicators, can guide investment decisions and help navigate the uncertain terrain of the financial markets.