Note: All market analysis content published on ETFOptimize reflects our interpretation of the signals from our proprietary indicators and other measures. However this content should not be used for trading signals – rather, only to assist in your understanding of current market conditions. All ETFOptimize Strategy holdings are determined solely by the proprietary investment algorithms used in our systems, without the influence of discretionary judgment. The ETFOptimize Strategies provide you with an investment system that needs – and should have– no additional outside input, and we recommend that subscribers follow the trades of their systematic model to the letter.
Last Monday, several of our high-performance Premium Strategies switched to aggressive-long ETFs. Those ETF recommendations turned out to be spot-on, particularly in our Adaptive Equity+ (2 ETF) Strategy, with one ETF gaining 6.44% and the other gaining 3.16% in just five trading sessions.
When we examined several of the key factors driving the markets and our ETF-based quantitative strategies, it became clear that a breakout is ahead. Investors: Prepare for liftoff!
After such a long period of the market going nowhere and our models profitably holding defensive positions against the summer's volatility, it felt unfamiliar to be purchasing 2x-leveraged ETFs again. When I say, "After such a long period of going nowhere…" let's pause for a moment to appreciate the extensiveness of the market's lack of progress in recent years.
Chart 1 below shows a weekly graph of the S&P 500 ETF (SPY) for the last two years. During that time, the S&P 500 has provided nothing but frustration to most investors, and for many, the robust, steady bull market that dominated 2017 is becoming a fading memory.
Since the January 26, 2018, weekly-closing high (following the Dec. 2017 corporate tax cut bill, pink line), the S&P 500 has gained just 5.21%. And since the September 20, 2018 high before the 2018 4th-quarter selloff (purple line), stocks have only progressed by about 3.1%. Running these figures shows an Average Annualized Return of only about 2.9% for this period – a thoroughly unimpressive reward for investor's struggle through such a long, volatile span (which included a near-bear market).
Chart 1: Since the January 26, 2018 high, the S&P 500 has gained about 5.21%, and since the September 20 high, it has garnered only 3.1%. Thoroughly tepid.
In judging the performance of the S&P 500 or other indices over the last 20 months, we must consider the fact that following the September 20, 2018 high at 2930.91, the S&P 500 entered into a sharp selloff that consumed the entire fourth quarter, dropping shares to a low on Christmas Eve, 2018 at 2351.10 – a price decline (on a closing basis) of -19.78% over three months.
This was an ugly experience for many investors, but it did not qualify as a 'bear market' (a -20% or greater decline on a closing basis). However, it came within a hair's breadth of becoming one and did not make for a merry Christmas for many investors. With many fearful that the longest bull market in history is near its end, the plummeting markets leading up to Christmas was extremely stressful.
Following 2018's shocking decline to end the year, shares made an abrupt about-face, formed a V-shaped bottom the day after Christmas, and subsequently entered into a robust rally that finally peaked on April 30, 2019 at 2945.83, logging a four-month gain of 25.30% – one of the most substantial quarterly gains in recorded history. However, in the interim six months, we've reverted to a volatile, sideways trend, with stocks appreciating only about 3% since the May 1 high, and recording a total gain of 28.55% since the December 24, 2018 bottom.
Chart 2 below shows that over this same span, the Russell 2000 small-cap index has done even worse, recording losses for both periods mentioned. The index lost -3.6% since the January 26, 2018 high, and dropped almost -11% since the September 20, 2018 high. Our quantitative models have not selected a small-cap ETF in quite some time – with good reason. Moreover, the index' recent series of highs and lows since May have both been declining, which is a bearish pattern.
Chart 2: The small-cap Russell 2000 has lost -3.6% since the January 26, 2018 high, and is off by almost -11% since its September 20, 2018 peak. Still declining and ugly…
Moreover, the promise of the December 2017 tax cuts, which slashed the top rate for American corporations by about 40% – from 35% to 21% – has not lived up to the hype that it would provide a robust boost to stock prices for years to come. So far, the opposite has been true. In addition to -$1 trillion in additional debt piled on future American taxpayers, shareholders don't have much to show for the Tax Cuts and Jobs Act of 2017 – except that tepid and tiny gain.
It seems that – at least so far (nearly two years later) – neither shareholders nor employees have benefited from the tax cut. To where did the windfall from that 40% reduction in taxes go?
An 'Incredibly Fortunate' Year
I tuned in to a local TV newscast recently to get the weather and happened to catch part of the station's business-news segment (as a policy, we avoid market-related news on channels like CNBC or Bloomberg). The business anchorman was raving about the "outstanding" performance of the S&P 500 for 2019! Knowing the facts, my jaw dropped as I sat there and listened, but then I realized that perhaps this was part of the new era in America in which 'alternative facts' are presented as if they are real facts, and people with the ear of the public make up what they wish were real at the moment.
On the other hand, maybe this local newscaster is not informed about the 'tepid' market we discussed above. A glance at the 20.57% YTD return for the S&P 500 might make a person believe we're in an incredible new leg of the bull market!
The 2019 YTD figure of 20.57% for the S&P 500 implies – for those that aren't paying attention – that 2019 has been another incredibly robust year for the bull-market. What happened is that the S&P 500 benefited from a strange twist of fate because 2019 started within a week of the liftoff of the market into one the most potent quarterly bull rallies in history. This doesn't usually happen. We don't normally see such a roller-coaster display of fireworks as we saw during those two quarters.
What the "outstanding" 2019 YTD performance of the S&P 500 implies is that someone who was investing based on the calendar would have gotten very, very lucky this year because they would have received the advantage of a -19.78% correction at the end of 2018 and the resulting 28.55% recovery to start 2019.
In fact, our quantitative investment strategies have performed A LOT better than the S&P 500 – even by this year's lucky YTD basis for the index.
A flat market doesn't mean you can't attain a strong performance!
For the ETFOptimize Strategies, for 2019 our Adaptive Equity+ (2 ETF) Strategy has gained 52.71% (68.02% annualized), and our Optimal Equity/Fixed Income (4 ETF) Combo Strategy has gained 56.87% (74.23% annualized). Our Equity++ (2 ETF) Strategy (which makes up one-half of the Optimal Equity/Fixed Income 4-ETF Strategy) has gained 71.74% (94.04% annualized). You have to admit, that's pretty impressive – especially in a flat market.
So, while the S&P 500's YTD return this year is from sheer luck, as opposed to a raging bull market – if you were using an ETFOptimize quantitative investment strategy with selections determined by sophisticated algorithms, then it's possible your portfolio performance could have trounced the performance of the S&P 500 for 2019.
We have seen no other investment strategy or advisor's performance that comes close to the consistent level of success of these three models. But we're curious: have you? I would like to hear from you if you are aware of any comparable returns.
Chart 2 below shows a graph and accompanying statistics for one of the example strategies above, our Adaptive Equity+ (2 ETF) Strategy for 2019.
Chart 2: For 2019, our Adaptive Equity+ (2 ETF) Strategy has produced a total return of 52.71% (annualized at 68.02%) with a drawdown of just -7.01%. In about 11 months, the Equity+ model has more than doubled the return of the S&P 500.
Here you can see that the model has provided an actual Total Return for 2019 is 52.71%, which is 68.02% Annualized. This figure is 256%-times greater than that lucky S&P 500 index benchmark return at 20.57% for 2019 YTD.
If you're wondering whether this strategy's performance in 2019 is a fluke – then wonder no more! Chart 3 below provides an apples-to-apples comparison beginning on January 26, 2018 – the peak of the market after a parabolic climb in late 2017 through January 2018 (and on the same dates as the S&P 500 shown in Chart 1, above).
Chart 3 below shows that this model nearly doubled an investor's funds in 1.75 years with a Total Return of 94.82%. The S&P 500 provided a return of only 5.21% during the same period, as discussed in the first section above. Our Equity+ quantitative investment strategy provided an incredible outperformance of the S&P 500 by 1820% – ostensibly by eliminating the emotions, biases, and discretionary errors that consistently damage investor's portfolio returns.
The maximum drawdown of the Adaptive Equity+ (2 ETF) Strategy during this period was only -11.99%, resulting in an Annualized Return of 46.32%, which is close to the model's Annualized Return performance since inception in 2007 of about 40%.
Chart 3: Showing the Equity+ Strategy with real-time performance since January 26, 2018, more clearly demonstrates its clear superiority over the performance of the market. This strategy produced a Total Return of 94.82% – nearly doubling an investor's funds in 1.75 years – while the S&P 500 has garnered just 5.21%.
To view more information and the actual performance since inception for this model, please review the Profile Page for the Adaptive Equity+ (2 ETF) Strategy or any of our other Premium Strategy models.
Are the Prospects for Further Gains Good?
It's one thing to point out that our strategies have performed exceptionally well for the past couple of years – in fact, since their inception – but we'll let you review their Profile Pages separately if you are interested in further details. Let's return now to analyzing the market because what you're most interested in is whether you can get those kinds of returns (or even better) going forward from our strategies.
Our Premium Strategy's assessment of the probability for further gains suggests that the short answer to the headline question is: YES.
As mentioned previously, several of our Premium Strategies have selected 2x-leveraged ETFs as their recent ETF-investment selections. These are not broad-market leveraged ETFs such as ProShares Ultra S&P 500 (SSO), but instead are ETFs focused on specific segments of the market that each system has determined will have the highest likelihood of gains.
For our strategies to select leveraged ETFs at this time, it means that several of the crucial, underlying indicators have turned extremely bullish – or that a plethora of indicators have turned solidly bullish. Either way, the Composite Scores have become sufficiently elevated that now leveraged ETFs are appropriate for selection. Then each model's Ranking System chooses the individual leveraged ETFs with the highest rank, i.e., the one or ones most likely to appreciate according to proven selection criteria.
Please keep in mind that this is not an assurance of a bullish breakout coming shortly, or that it's impossible for stocks, ETFs (and particularly leveraged ETFs) to experience losses ahead. We analyze what indicators are telling us at the moment is the most probable outcome. As with any investment, you can lose money at any time – there are no guarantees.
However, by using index-based ETFs, you spread your risk over dozens, hundreds, or even thousands of stocks and eliminate individual company risk. By using quantitative, systematic investment strategies, you remove the potential for emotions or poor discretionary judgments to affect your investments. The result is an increased probability of success, and for our models, 77 of 77 consecutive winning years, collectively.
The remainder of this Quick Look Report will provide a brief review of the charts of several critical indicators, with a short description of what is occurring. If you have any questions, please contact us via Support.
TECHNICAL: Bullish Continuation Pattern
First, let's view a sample of what multiple Technical Indicators are telling us: the SPDR S&P 500 ETF (SPY) has formed an Ascending Triangle, which is a Bullish Continuation Pattern. As the name implies, a Bullish Continuation Pattern suggests the market has been bullish in the past. Now it has formed a pattern that is likely to result in a continuation. The prior trend was up, and that trend should continue.
Since the S&P 500 has spent about 75% of the time above its 200-day Moving Average over the last 20 years, it's much easier to make money on uptrends/bullish patterns than downtrends/bearish patterns, so a bullish continuation pattern is the first item of favorability.
Chart 4 below shows the SPDR S&P 500 ETF (SPY) in an Ascending Triangle. This pattern has relatively equal-level highs across the top marking a resistance level and overhead supply (dotted red line), with successively higher lows marking demand increasing at higher prices across the bottom (dotted green line shows October lows higher than August lows). Also, prices are above the 200-day Moving Average (solid red line), and it is rising, which is bullish.
Chart 4: The SPDR
S&P 500 ETF (SPY) has formed an Ascending Triangle, which is a Bullish Continuation Pattern. We should see a significant bullish breakout this week.
Note the yellow highlight on the far upper-right identifies SPY as breaking out to a new All-Time High (ATH) on Friday. This break above resistance confirms the Bullish Continuation Pattern because it is a victory for demand. This pattern predicts a rise to 321 on SPY or a 6.64% gain before a consolidation or pullback takes place. Our 2X leveraged ETFs should profit by 12%-15% and perhaps more from this move this week.
FUNDAMENTAL: Progressive-Blend S&P 500 Earnings Trend
The SPEPSCNY Trend Indicator provides a signal for the trend of a combination of Trailing 12 Months (TTM), Current Year, and Next Year S&P 500 Earnings Per Share (EPS). Since stock prices are largely driven by earnings trends in the intermediate and long-term, this indicator identifies times when earnings are growing and conditions are bullish – or times of weakness in corporate earnings power and the potential for lower stock prices.
For greater accuracy, this indicator combines three different earnings series for the S&P 500, with actual, prior year's earnings combined with current year and next year earnings estimates. These three indicators are progressively blended with more weight added to estimates as each quarter progresses.
Currently, S&P 500 Progressive-Blend EPS trend remains bullish, and the risk of an earnings-related downturn is low.
Chart 5: The SPEPSCNY Trend Indicator is a measure of the trend and resilience of corporate earnings power. Currently, the indicator is bullish, and related risk remains low.
BREADTH: NYSE Advance-Decline Line
The NYSE Advance-Decline Line is a well-recognized breadth indicator based on Net Advances, which is the number of advancing stocks less the number of declining stocks. Net Advances is positive when advances exceed declines, and negative when declines exceed advances.
The AD Line is commonly plotted along with an index and is compared to the performance of the index. The AD Line can confirm a significant move by the market, and bearish divergences in the AD Line signal a change in participation that could foreshadow a reversal. The A/D Line is providing insight into the internals of the market and helps determine whether a significant move is legitimate or not.
We are currently at the 90th anniversary of the 1929 market crash, which officially started on October 24 ("Black Thursday") that year, when the market lost -11% of its value at the opening bell on heavy trading. This loss was followed by "Black Monday" on October 28 when the Dow recorded a record loss of -12%. Over the following years, the Great Depression was kicked off as stocks lost about -90% of their value before bottoming in 1932.
Tom McClellan, the creator of the McClellan Oscillator, recently compared the AD Line during the 1929 crash and the 1987 crash to today, and we thought it would be eye-opening to share these charts with our subscribers.
Compare: 1929 Advance-Decline Line
Here is how the NYSE's Advance-Decline Line (blue) appeared during the period surrounding the 1929 market crash (data courtesy of Leonard Ayers and James Hughes via Tom McClellan) compared to the Dow:
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Chart 6a: NYSE AD Line (blue) compared to Dow (black) n 1926-1930. Click to enlarge.
Compare: 1987 Advance-Decline Line
And here is what the A-D Line (blue) looked like around the 1987 crash. Notice the big divergence downward of the AD Line while stocks were making new highs. With breadth declining this severely as the market accelerated higher on the back of fewer and fewer stocks, a sharp correction was inevitable. This was the fastest correction in history, with stocks losing -25% in one day.
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Chart 6b: NYSE AD Line (blue) compared to S&P 500 (black) in 1987. Click to enlarge.

Compare: 2018-2019 Advance-Decline Line
Now here is what the NYSE A-D Line (black) looks like currently compared to the Dow (blue). Notice its much stronger appearance than the previous two episodes. Today, the AD Line
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Chart 6b: NYSE AD Line (black) compared to Dow (blue) today. In this chart, the Advance-Decline Line has a bullish, upward trajectory, and bullish confirmation of the market's moves. The last series of highs for the Dow (far right, blue line) shows a series of slightly lower highs. However, the AD Line is in divergence with higher highs. In this case, the AD Line is signalling a breakout. Click to enlarge.

SUMMARY
There are a significant number of the proprietary and nonproprietary indicators, which we use in the ETFOptimize Premium Strategies, that are providing a bullish signal at this time. The likelihood is high that we will see a significant breakout this week following the six-month sideways consolidation that investors have endured.
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