ETFOptimize Insights

Data-driven Analysis of the Critical Market Indicators

ETFOptimize Insights
Note: Our Research and Analysis articles cannot cover all offsetting aspects of each of our quantitative strategies, nor can they provide the spectrum of aggressive/conservative differences between each model. We track more than 50 different Clients should always follow their model's published systematic decisions to the letter. Doing otherwise negates all the advantages of a systematic, ETFOptimize Premium Strategy, and your results will not track your Premium Strategy's performance. Copyright © 1998–2022, Optimized Investments, Inc., dba Contact us for reprint permission.



Declines Set to Continue 



Last week we saw the S&P 500 consolidate at a key trendline after a powerful bear-market bounce the prior week.

The market's pattern, holding across all asset classes and sectors except energy, has consistently been for lower-highs and lower-lows since the start of 2022. It's a downtrending market, with further to go — perhaps significantly further if the economy drops into a recession, which appears highly likely at this point. The Yield Curve inverted in early April, and every time an inversion has occurred since the 1880s, it was followed by a recession. (The Yield Curve is a straightforward measure of the difference between short versus long Treasury Bond yields,. When it inverts, it means the market is voting with dollars against the probability of future economic growth.)

Chart 1 below shows the same ugly, bearish technical picture we showed in last week's Quick Look for Premium Strategy subscribers, but after a week of prices consolidating sideways below multiple, coinciding Resistance Levels, we think prices are set up for additional declines. As predicted, the S&P 500 had reached its upper channel line last weekend, which was also Resistance from broken Support at 415-420 earlier in the year.

I've highlighted this Resistance level in Chart 1 below with a declining Trend Channel (the middle, dashed-red line) and a Support-turning-Resistance level (green turning red in early May) that coincide.


An Ugly Technical Picture
Chart 1: Resistance at 415-420 held last week, and we could see stocks plummet back to the lower channel in the coming weeks.


Please note that I would typically not show a daily chart (which contains too much noise), but in this case, a daily chart communicates the salient points more thoroughly than a weekly chart.


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How Can We Be So Sure of Declining Prices Ahead?

After last week's bearish market message, we received a Support Ticket from a subscriber (Doug from Utah) saying, "Could you please explain to me how the author can be so sure the bottom is yet to come? Prediction is the antithesis of any rules-based or trend-following strategy. Could you help me with authors 100% certainty the bottom isn't in place?"

How can I be so SURE that the bottom isn't in place? Well, long years of experience, my friend... long years of experience, and getting my (financial) butt kicked during the first decade of those years. All of that experience has been poured into the algorithms, ranking systems, formulas, custom-series parameters, buy and sell rules, and many other details of our systematic investment models to make them so effective.

When investors follow the wrong indicators – or, more likely, no indicators – they can lose their shirt, and after that happens a few times, many throw up their hands and quit because their intuitions or "common sense" failed them. The general principles of picking winners and losers in other aspects of life often don't apply in the investment world, which is what makes it so difficult.

Other investors, based on their character type, become more pertinacious and dogged after losing money. After getting my financial teeth kicked in a few times, I was in that latter group, more determined than ever to succeed in an extremely challenging, counter-intuitive profession. I figured that if it was easy, everyone could do it and we would be living in a far different world than the one into which we were born.

Investing is an activity similar to golf. No one has ever or will ever master golf, and investing is the same sort of pursuit. There is no perfect golf game (until someone hits 18 holes-in-one) or perfect investment record (unless someone attains 100% winners over several decades), and both are games of probability (for stocks) and averages (or par for golf).

However, with obstinate persistence and ample experience (a.k.a., practice), we can become a Jack Nicklaus/Tiger Woods/Phil Mickelson (in golf) or a Warren Buffett/Jim Simons/Ray Dalio in investing) if we are sufficiently motivated. The secret I discovered for producing consistently positive results was to embrace quantitative investment strategies. Quant strategies remove the influence of emotions and subconscious biases and ignore the avalanche of opinions posited by influential TV personalities (think CNBC and other cable 'news' shows).

Opinions play a dominant role in the investment world – likely because of evolution's programming that makes us unable to resist a good story and the unwillingness to put in the energy and effort necessary to master a pursuit. Most guys would rather grab a beer, "Netflix and chill" than put in the hours to master investing (or any other pursuit) when they aren't required to do it by their job.


Quantitative Investing Gaining Momentum

Algorithmic investment approaches are steadily gaining popularity – and it's based on their phenomenal effectiveness – and ease of use after the initial development period. Quantitative investment strategies allow you to succeed at investing – AND – still do Netflix and chill with with that special loved one. The ETFOptimize Premium Strategies take the burden off of you by doing all the hard work behind the scenes, for the last 30 years, providing a turnkey system on which you can rely for consistent profits. Moreover, our rules-based systems are always the basis for the presentations made on this site, although sometimes that's not made obvious. (I thank Doug from Utah for pointing out that distiction.)

Also, I don't feel that I made an over-the-top prediction last week. My bearish call was a real-time assessment based on current technical conditions and our current quantitative indicators. Those factors can indicate the likelihood of a specific market regime for 1-2 weeks ahead and sometimes a bit more. Currently, ninety-nine percent of our proprietary indicator composites suggest that the dominant trend remains downward (see Chart 1 above showing consecutive lower-highs and lower-lows in a overall decending channel).

Also, I don't feel that I made an over-the-top prediction last week. Rather than a prediction, it was a real-time assessment based on current technical conditions and our other current quantitative indicators. Those factors can indicate the likelihood of a specific market regime for 1-2 weeks ahead and sometimes a bit more. Those indicators suggest that the dominant trend remains downward (see Chart 1 above showing consecutive lower-highs and lower-lows in a decending channel). Our advanced algorithms identified this downtrend in late January and there are no indications it's ending.

Yes, stocks could break through the multi-pronged overhead resistance, and a new bull market could begin, but very few legitimate arguments currently support a scenario that would overcome the significant downward momentum.

As a rule of thumb, until we see a higher low followed by a higher high, there is no possible chance that the bear market will end. That's why I said last week that we were (are) still in a bear market: the week before last, the S&P 500 bounced from a lower low during oversold conditions following seven weeks of consecutive declines. The weekend before I said that conditions were at a critical inflection point, with this assessment established by dozens of our quantitative indicators, which today almost all remain on bearish Sell Signals (I'll provide a few examples in a moment).

After the previous week's bear-market bounce from a lower low, followed by last week's consolidation at overhead resistance around 415-420 (anticipated last weekend), there is a high probability that stocks will resume declining this week and likely for the next few weeks, if not longer.

2x-Leveraged Inverse ETFs

Please note that on Monday, two of our independent models (S&P 500 Bull-Bear and Equity+) will purchase 2x-leveraged inverse ETFs – purchases triggered by each model's systematic indicators. Since our Ultimate Combo Strategy combines all the individual selections from our Premium Strategies, it also gets these aggressive new holdings. Because of its diversification and synergy from combining six different models, the Ultimate Combo Strategy is our most popular model.

Likely, we won't hold this week's leveraged-inverse ETFs very long because of their inherent risk. The reason is that the volatility from bear-market rallies can be surprisingly intense and damaging to inverse positions, with leverage increasing that risk over extended periods.

However, given our analysis that we just experienced a bear-market rally and top over the last two weeks, it's unlikely we'll immediately see another one until after another period of extended market declines. These new inverse ETFs appear to be excellent selections, successfully identifying an exceptional opportunity for robust profits following a bear-market rally reaching an obvious high. I'm impressed that our algorithms perceived the opportunity so accurately.


Fed Policy Just Getting Started

We have not seen markets indicate that a bullish bottom and upturn will occur anytime soon. There is intense political pressure on the Federal Reserve to cool the current 40-year high inflation level, which the Fed will do by raising the Fed Funds Rate to an estimated 3-5%, intentionally slowing the economy. The Fed has increased the FFR to only 0.75% after it started warning about the need for tightening in October 2021 – a full seven months ago.

Moreover, the Fed has not yet started to decrease the $9 Trillion Balance Sheet created by its experimental Quantitative Easing program that began in 2008. Chairman Powell has stated that the Balance Sheet reduction – called "QT" or "Quantitative Tightening" – is set to begin on June 15 at about $95 billion per month.

In the future, events may occur to turn things around (such as the end of the Russia-Ukraine war, supply chains returning to pre-pandemic levels, and inflation significantly declining). However, with inflation still at a 40-year high and little apparent progress for the war or supply chains, there appears to be a long way to go. May's inflation rate (CPI) will be released this Friday (June 10).

The Fed is increasing interest rates to reduce the Wealth Effect and intentionally slow the economy as a means to reduce inflation. It is reversing the supportive "put" it has placed on stocks for the last 14 years, and will intentionally push market prices down to slow spending. When people feel less wealthy, they spend less – a reversal of the Wealth Effect it has pursued for 14 years. The market expects a 50-basis-point increase in June, July, and September. We may even see another 50-point increase in August, although there is no scheduled meeting that month, and possibly in November and December, depending on what happens with inflation.

Monetary tightening is probably the wrong approach to tackle the current price pressures, with supply problems (which the Fed cannot affect) being the most potent current influence. Yet, the Fed is only getting started with its tightening policy that will continue to put downward pressure on stocks and bonds.

Demand WAS hot from over-stimulus from the Fed's massive, $9 Trillion liquidity infusions into markets over the last 14 years, combined with Congress' $5 Trillion Covid stimulation to businesses and the public in 2020-2021. However, that seemingly free-money-based demand is cooling, with car sales now at recessionary levels, housing sales severely slumping, retail sales dropping precipitously, and S&P 500 analysts rapidly reducing forecast earnings.

Regarding the last factor, analysts extrapolate recent bullish conditions to far-future estimates, then quietly lower their consistently over-optimistic forecasts as the reporting date draws nearer. Analysts steadily lower estimates enough that about 75% of companies will produce an upside surprise when their quarterly report is released.

Market analysts invariably move like lemmings, all operating under the same unwritten rules that have been around since the first stockbroker opened its doors. I know this is true from experience because I was an Equity Analyst for Merrill Lynch and Drexel Burnham Lambert during prehistoric times when I used to ride my Brontosaurus to my employer's offices each morning.

Nevertheless, even with each declining data series listed above, a credible alternative argument is that employment remains robust.

Chart 2 below shows the Bureau of Labor Statistics reported on Friday that the US added 390,000 new jobs in May (better than the expected 328,000), with an Unemployment Rate remaining at 3.6%. On the negative side, average hourly earnings increased 0.3% from April. The year-over-year increase in wages of 5.2% was in line with expectations.


Chart 2: The economy added 390,000 jobs in May, keeping the Unemployment Rate at 3.6%.



ETFOptimize Quantitative Indicators

We haven't featured our algorithmically based indicators very often in our articles over the last year. However, Doug-from-Utah's comment above has brought to my attention that perhaps I should do more featuring of critical indicators to demonstrate our model's systematic drivers.

The problem is that each of our current six Premium Strategies uses a different Indicator Composite to determine their exposure to market risk, then a related composite to determine their ETF selection. Each model's uncorrelated Indicator Composite consists of 10-15 individual indicators (see a list of our Indicators here). We use a "weight-of-the-evidence" approach to assess conditions from many angles, providing a superior investment approach that enables ETFOptimize's exceptional performance.

When we shared our Indicator Composites in the past, we were compelled to describe how they work, which can get overly exansive in a single article because of the complexity of each Composite's inherent components. I've been accused of publishing overly detailed articles, so I've been making an effort to produce content with more brevity, which is why I've recently eschewed including the results of our complex Indicator Composites.

In the future, we will provide a section of the site devoted to describing the components and objectives of each Indicator Composite. When we post the chart of an indicator in our Quick Look or ETFOptimize Insights articles, we can link to the applicable description in this new section (as soon as it is completed). That way, the articles will be shorter but will also offer detailed explanations for those interested.

The three most critical factors going forward will be 1) the actions of the Fed, 2) the actions of the Fed, and 3) the actions of the Fed. Remember that the old trope of "Don't fight the Fed!" is applicable on both the upside and the downside — never more so than today and for the foreseeable future. An analysis of the Fed's influence on investment markets will be part of our next article, but below, we share several other of our other rules-based Indicators, with a (hopefully) brief description:

$TS COMBO 15 SIGNAL - Technical

The chart displayed below is our "$TS Combo 15 Signal," one of the most robust indicators from our Technical Signals (TS) group, combining the signals from 15 different moving averages. Notice that when this composite indicator is on a signal of one (1), it tells us to hold long exposure to the market, and when it is on zero (0), it suggests that we should avoid exposure to the market. The current signal is zero (0), recommending "Risk-Off" – i.e., defensive positions.


Chart 3: Our TS Combo 15 Signal, which combines 15 different moving averages, is on a Risk-Off signal.


$BI03 5-Day Net New Highs Raw (Breadth)

Chart 4 below shows a critical indicator from our Breadth Indicator (BI) group. With breadth often the most accurate of leading indicators, our BI03 indicator is a 5-day average of Net New Highs – i.e., New Highs minus New Lows. Chart 4 below shows the raw data series, while Chart 5 offers the digital signals from this series.


Chart 4: Our $BI03 Indicator is a vital part of our Breadth Series, measuring the 5-day average of Net New Highs.



$BI03 5-Day Net New Highs Signal (Breadth)

Chart 5 below shows the digital Risk-On, Risk-Off signals of 5-day Net New Highs derived from the raw series above.


Chart 5: Our $BI03 Indicator produces accurate exposure signals from the 5-day average of Net New Highs.


While it may appear to have too many whipsaw signals, those whipsaws are eliminated when combined with other indicators in our proprietary indicator composites. Also, remember that this is a 22-year chart, and zooming in to shorter timeframes presents a far less busy graphic, with most years haiving only 1-2 signals.



Chart 6 below shows the S&P 500 ETF (blue) in the top window and Credit Risk measures in the lower panes. In the bottom window, you'll see the interest rates for Corporate AAA (yellow) and Corporate BBB (blue) bonds since 2000. The lower-rated BBB bonds pay a higher interest rate than the high-quality AAA Bonds as compensation for the increased risk of default.

Corporate AAA Bonds (yellow) are the highest-grade/lowest-risk, investable, fixed-income securities available, while Corporate BBB Bonds (blue) are the highest-risk investable-bond securities, as rated by Standard and Poors. There are lower-rated bonds (CCC) we could compare, but CCC's are considered to be "junk bonds," and most importantly, we find that the AAA-BBB comparison provides the most accurate signals for identifying the effect of increased credit risk on the stock market.

When the difference between these two bond series gets wider, it accurately represents increased credit risk, economic turbulence, and the likelihood of higher stock-market risk and greater losses from equities. The second pane from the bottom (in green) shows the difference between the interest rates of these two series of bonds (AAA and BBB).

The window below the blue S&P 500 ETF (SPY) chart at the top shows the digital signals (in red) derived from the crucial Corporate AAA-BBB credit-risk comparison in the green window. Sorry, we cannot disclose the signal algorithms in this article.


Chart 6: Our $MI03 BBB-AAA Indicator provides highly accurate signals of increased credit risk and stock-market risk (at zero).


The charts above are just a few of the more than 50 data series used in the ETFOptimize algorithmic Premium Strategies. You can see a list of data series we use on this page. Note that this list does not yet include the new indicators we are adding over the coming few weeks.


System Improvements and New Premium Strategy Models

Last week, we promised the start of our series of articles on the improvements we're making this month, but on close examination, we found some errors in the data of our most critical new indicator. We are sorting out that issue with the data provider, and the series is coming together now.

During the coming weeks, we will publish the first of a series of articles detailing the improvements to ourindicator systems and will announce several new Premium Strategy models that will become live on July 1, just like all our existing models. Our Premium Strategies are currently holding their own in this bearish environment for equities and bonds. Each is outperforming the market, and sometimes, that's about the most we can hope for during a significant downturn. 

We have updated each of our Premium Strategy pages this week with charts showing that, Year-to-Date, all of our models have outperformed their benchmarks, which is the S&P 500 ETF (SPY) for most of our models, the NASDAQ 100 ETF (QQQ) for our Nasdaq-PP Strategy, and a 70%-30% Equity/Bond (SPY/BND) combination for our 4-ETF Equity/Bond Premium Strategy. Each Premium Strategy we offer has outperformed these well-established market benchmarks in 2022.

Yet, we are not satisfied with that YTD outperformance – room for improvement for the current conditions, and have worked around the clock to identify and test those improvements. We'll tell you all about them in the coming article set. This week we'll introduce a new section of the site devoted to informing you about these innovative developments and answering your questions.

One of the most significant problems investors face today is that bonds are declining along with stocks, eliminating a durable, defensive approach used by three of our Premium Strategies, forcing them to hold a cash-proxy ETF (BIL) instead of a long-term bond ETF which would have usually gained ground this year as equities declined.

Bonds haven't been in a bear market since the 1970s, so it was an unanticipated development. However, we have successfully addressed this issue in the revisions and additions we'll begin announcing in a few days.

We're excited to send you the following email upon posting our first article in this series of content that provides details on improving our systems and introducing new models.

Optimized Investments, Inc. /


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For SUCCESS with a Rules-Based, Data-Driven Investment Model,
FOLLOW YOUR STRATEGY'S GUIDANCE 100% – Don't SECOND GUESS your Scientifically Tested Model!

Investor’s all-too-human emotions and subconscious biases relentlessly sabotage their investment results. Trying to follow the news or any other discretionary, judgment-based approach will only exacerbate these underlying challenges, invariably causing investors – whether amateur or professional – to buy after a stock has been rising (high) and sell near the bottom (low), capitulating to avoid losing more. Buying high and selling low attains the opposite result of a classic successful investment approach.

A carefully crafted, systematic investment strategy will eliminate these issues — BUT — you must follow your strategy's recommendations without second guessing them! Execute your strategy's trade recommendations TO THE LETTER if you wish to succeed and match your model's historical and prospective results.

That doesn't mean every trade will be a winner, and the selections will often be counter-intuitive – or they might go against the current generally accepted "wisdom" of the market. However, the probability that you'll succeed reach your long-term financial goals is far greater if you use a scientifically tested, rules-based strategy.

The ETFOptimize Premium Strategy lineup doesn't collectively (across six models) have a record of more than 100 consecutive years of profitability without a good reason:

Rules-based, data-driven investing works!

However, it only works... if you work it as designed!


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