Quick Look Report


A Compendium of the Most Critical Considerations for Investors This Week


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Note: Readers should not attempt to use the writer's interpretations of ETFOptimize proprietary indicators as trading signals. These articles provide educational content to help the reader understand current market conditions and our indicator's response to those conditions. We hope these articles prompt original thought that helps our users grasp how the various components of the ETFOptimize Strategies are integrated with others and enhance the performance of one another to make a complete, synergistic investment model. The ETFOptimize system provides you with a comprehensive investment strategy that needs no additional outside input, and we recommend that subscribers follow the trades of their quantitative model to the letter.

Volatility Adds to a Landslide
of Bearish Indicators

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• Last week was the most volatile week markets have experienced since the Covid Crash.

• Nevertheless, each of the NINE ETFs we are holding in our ULTIMATE Strategy (a combination of all six of our current quant models) are either flat (two new purchases) or substantially higher.

• Our Market-Risk Indicators are gathering steam (higher risk readings) as stocks decline, indicating that the downturn is likely to continue.

• Expect more volatility as the Fed's tightening process gets underway this week (the Fed is meeting on Tuesday and Wednesday).

• The outsized drawdowns in our models over the last two years are an illusion!

• As the market sinks lower, our models are shooting higher. We're selling half
the shares of one ETF that gained more than 18% in a few weeks.

Volatility Adds to a Landslide of Bearish Indicators

One consistent characteristic of market declines with which investors must deal is heightened volatility. Volatility is an excellent indicator of increased market-related danger, and we have several versions (which assess different volatility measures) that we use in our risk-assessment composites. We plan to review a couple of these indicators in the Research-and-Analysis content (an "ETFOptimize Insights" report) that we'll post on Tuesday or Wednesday.

The bottom line is that the Average Absolute Volatility of the S&P 500 ETF (SPY) is at the highest level since the wild market action during the Covid-Crash year of 2020. Making today's volatility seem even more extreme, from late 2020 to late last year (December 2021, only three months ago), the S&P 500 ETF (SPY) recorded more than a year without a one-day price change of more than 1% in either direction – higher or lower.

Chart 1 below shows our Absolute Volatility Indicator (AVI), with the 22-day (about one month) average single-day Rate-of-Change (ROC). The AVI for the S&P 500 ETF (SPY) has risen since since mid-February, now standing at 1.35% and still climbing.

In the bottom pane, you can see six times in the last two months when SPY swung more than +2% or -2% during a single day. Large swings in absolute volatility – i.e., extreme moves either higher or lower – are a characteristic of market downtrends, adding more fuel to all the other bearish indicators on our quantitative radar.


Chart 1: Our Absolute Volatility Indicator (AVI) measures increased swings in S&P 500 prices – either higher or lower.

Fair Warning

I know that some "perma-bulls" reading this article have been viewing the market cheerleaders on CNBC or reading optimistic, bullish-only website articles on the internet. Many are easily convinced that “oversold conditions” will lead to an epic bounce, and a renewal of the bull market. However, I have a few words of advice based on 40 years of experience as an investment professional (including experience with eight bear markets): Don't Go There!

While nothing in the market is guaranteed, virtually every one of our 50+ risk-assessment indicators and the indicator composites built from them, using measures of Market Breadth, Sentiment, Technical Indicators, Bottom-Up Stock Fundamentals, and Top-Down Macroeconomics, are sending a nearly identical message: the market decline should continue. These indicators are picking up steam downward, potentially signaling an acceleration of the stock-price downturn ahead.


Considering that the market regularly delivers hair-pulling conundrums, seemingly designed to produce maximum frustration and break investor's brains, it's likely we'll see a short-term rally soon...


A rally may reverse several of our market indicators, but it's unlikely that could occur in just one week. Our composite risk assessment systems will need to see follow-through, particularly from Breadth Indicators, for a bullish signal. Our mind is open to this possibility, and our models will follow those signals if risk decreases substantially.

Stocks will invariably have reactionary bounces higher, giving bulls a glimmer of hope, and there will probably be two, three, or four-consecutive-day rallies in the coming weeks and months. Bear-market rallies have historically featured the sharpest, most extreme, short-term stock gains. Still, those quick moves higher often occur just long enough to entice bullish investors back into their long positions, setting them up to be punched in the mouth.

Considering that the market regularly delivers hair-pulling conundrums, seemingly designed to produce maximum frustration and break investors’ brains, we’ll likely see a short-term rally soon.”

We are also likely to see several of our commodity ETFs – some of which have experienced parabolic gains in the last 2-3 weeks – come back to earth this week. Several have moved to a range more than two Standard Deviations from their mean, and they can't stay there. They will quickly return to within that the 2-SD range, if not dropping further, either back to the mean – or to the opposite side of the range, to the -2 Standard Deviation threshold.

A Huge Error Investors Make: You’re mistaken if you believe that you can get out of the market at a moment’s notice if there’s a selloff – just by using an intra-day stop-loss order. Remember that ETFOptimize uses daily, closing-price, stop-loss thesholds, and you'll receive a notice before the open the next trading day if an ETF you hold should be sold. Please don't put your broker's stop loss on those ETFs yourself (click this link to learn why)!

Question: Why would anyone bid on your plummeting ETF shares during a market selloff? Answer: They won't, and you'll watch prices fall below your stop-loss price and continue falling because only a few market makers are willing to step up and buy a handful of shares as prices are dropping. That's what they are required to do, but if you think that a market maker will choose your order to fill over all the others waiting... well, I've got some swampland in Florida I would like to discuss with you.

Share prices consistently bypass intraday trailing-stop orders, gapping down during selloffs. Prices gap down because there are no bidders at the levels that seemed such a bargain just a few weeks ago. Just because you put on a trailing-stop order at -5% below the prior high doesn’t mean you’ll get a fill at that price. In a crisis, shares will gap down by -10%, -20% or even more at the market’s open, and you’ll only get your Stop-Loss Sell Order filled when the rare bidder comes along who has their eye on the equity’s price a year or two ahead.

Read this article to learn more about why you shouldn't use your broker's Stop Loss Orders.


Absolute Volatility Indicator

Investors should also keep in mind that traps will be laid for them by the market. As shown by our Absolute Volatility Indicator above, S&P 500 prices can quickly spike more than one or two percent – sometimes higher – in a single session. For example, during September-October 2008 (highlighted in yellow), the S&P 500 ETF experienced one-day gains of +15% at the height of the Financial Crisis. The next day it dropped back to zero and then into negative territory by -10%. That’s a change of -25% day-to-day, as the index of America’s largest companies (the S&P 500 ETF – SPY) continued downward toward a total loss of -56% by March 2009.


Chart 2: During the Financial Crisis, specifically October 2008, the S&P 500 moved -25% from day to day.


While dropping -25% on a closing basis is a massive change from one day to the next, during late-September to early-October 2008, SPY moved across even larger spans during intraday rallies and afternoon crashes. I remember watching the market move enormous amounts – many tens of billions of dollars (both higher and lower) – in a matter of minutes. That’s a situation where you should stay in cash.

When market participants capitulate during a selloff, and the managers of multi-billion investment funds demand that their shares be sold – bids can dry up in both directions – and some investors who try to speculate during such an environment pay for it with the devastation of their portfolios as prices gap down. You can lose -25%, -30%, or more, even when your stop-loss is set to sell on a tight -5% decline!

Take Bear Markets Seriously

Sharp selloffs have caused far too many young investors to throw in the towel when they learn they can't stomach the extreme volatility and short-term losses that accompany managing their own funds. Meanwhile, every year millions of America's newly minted professional-class (architects, marketing managers, engineers, physician's assistants, and thousands of other highly paid professional careers) enter the investment markets. Many will sign on the dotted line for the privilege of handing their hard-won retirement savings over to a Mutual Fund Manager chosen by their employer.

Most of these "arm's-length investors" are individuals who usually aren't the least bit interested in learning how to invest (to my chagrin, my adult daughter falls into this group). What they don't realize is that 97% of Mutual Fund managers have a long-term performance record no better than the average return for individual investors. The long-term Annual Return for individual investors is around 2.0% to 2.6% per year – less than the long-term rate of inflation, and certainly a negative real return today, with inflation currently at 7.9% (February 2022).

The ETFOptimize rules-based, quantitative strategies helped investors of all kinds avoid the worst periods of heightened risk, eliminating the most substantial selloffs (such as the -56% Financial Crisis drawdown shown in Chart 2 above). Those severe selloffs cause a dozen different problems, not least of which includes that you may have lost more than half your savings (requiring a 127% gain to return to break-even).

Some new investors are shocked to discover that they have significant emotional weaknesses when they face significant losses during selloffs. "Tough guys" who thought they could handle anything are often reduced to whimpering, shell-shocked souls in the face of a dramatic loss of their savings.

Some small percentage of our users are likely part of the group that got their investing start only recently, during the mass sign-up of 20 million new savers who opened their first brokerage account during the Covid shutdowns in 2020-2021 – investors who have never experienced a market selloff – until now.

Realistically, there hasn't been a bear market since March of 2009 – with the bull market's 13th anniversary just last week (on March 9)! That's a long time without a bear market, particularly when you consider that the average span between bear-market selloffs historically is only 4.5 years. We don't count the blisteringly fast selloff-and-recovery in March 2020 as a bear market, but instead as a correction.

Realistically, duration should be included in a more accurate definition of a bear market, rather than a simple decline of more than -20% from the prior high. The Covid Crash in March 2020 is the most obvious example of a significant correction greater than -20% which clearly was not a bear market. ETFOptimize proposes a definition

Based on that revision of the definition of a bear market, what was the cause of the relentless 13-year bull market that continues today? Well, the obvious reason is the Federal Reserve's Quantitative Easing program, which got underway in correlation

Drawdowns in Our Premium Strategy Charts are "an Illusion." — Say what???

In this section, we're going to examine – what appears to be – but ISN'T – significantly higher recent drawdowns in some of our Premium Strategies. We've received several comments recently from subscribers who wonder (in the words of one), "What has happened to your strategies since 2020 – have they fallen apart?"

Well, no, they haven't fallen apart (actually, they have significantly outperformed the market this year – more on this in a moment). Upon further inquiry, the subscriber informed me that he was most concerned about the extreme volatility being experienced by his Premium Strategy, the Adaptive Equity+ (2 ETF) Strategy.

I'll grant you that the Adaptive Equity+ (2 ETF) Strategy and another of our models may look like they are experiencing extreme volatility that's dragging down performance. And while it may be true at an insignificant level, the seemingly enormous drawdowns you see in that model's charts are largely an illusion created by the power of compound interest, which Albert Einstein quipped was "the most powerful force in the universe."

Please allow me to explain why I say this model's drawdowns are "an illusion."

Chart 3 below shows the performance of our Adaptive Equity+ Strategy from its inception on July 1, 2007, to the present. Highlighted in yellow, we can see three significant declines and recoveries on the right side of the top window since the Covid Pandemic began in February-March 2020. However, the strategy continued setting higher-highs and higher-lows through all three of those drawdowns.

The bottom window is not involved in our portfolios, but I wanted to show it so users can see that there is no manipulation going on, particularly leverage being applied, which would exacerbate the recent performance (and intensify the drawdowns).

It shows how much cash is invested or how much leverage is being used, and we can see that the strategy has been 100% invested since it was launched and it doesn’t use leverage. The vertical lines on the right side of the bottom window are likely related to mid-week stop-loss sales, of which we have had a few since the Covid Pandemic began.


Chart 3: This chart shows Absolute Performance in the top window, and Percentage Drawdowns in the second window.


The second (or middle) window shows the Adaptive Equity+ Strategy's drawdowns measured in a different way than the top window: A drawdown is defined as the percent an equity or portfolio has declined from its previous highs, which is what's shown in the middle window. So why do the last three drawdowns since 2020 look so different in the top window as the barely detectable declines over the previous 13 years? We know they are all about the same severity (around -20%) based on percentage measurements.

It's because of the amounts of money involved! Notice that before the first of the three drawdowns during the Covid Pandemic (early- 2020), the previous decline was all the way back in early 2016 – four years prior and six years ago. The total return in early 2016 had only reached about 1,000% (based on the chart), or a portfolio value of about $1 Million. A -20% decline of a $1 Million portfolio would equal a loss of $200,000.

Today the Equity+ Strategy stands at about $6 Million, or six times the amount it had achieved in 2016. a -20% drawdown today would mean a loss of about $1.2 million.

The middle window in Chart 3 above accurately depicts the Adaptive Equity+ (2 ETF) Strategy's percentage drawdowns from the perspective of percentage from high – rather than the absolute decline amounts displayed in the top window. The reason we said the top window in our charts are an "illusion" is because our model's success comes from the steady, exponential growth of compound interest – the same driver of exponential returns as any other investment.

Crucial Point: We can see from the middle window above that the three drawdowns over the last two years are no better or worse than any other drawdown since the Strategy's inception in 2007! They are almost identical to the previous drawdowns since inception in mid-2007.



Because of the significant increase in risk this year (from inflation, Fed rate hikes, potential economic slowing, and Russia), all our models are outperforming the S&P 500 for the YTD (2022). The ETFOptimize Strategies identify increased risk and take the most profitable alternative.



Each of our models were launched with seed capital of $100,000, and in the case of the Adaptive Equity+ (2 ETF) Strategy, its balance has grown to $6,048,898 – a gain of 5,933% over the last 15 years. This return compares favorably with the benchmark, i.e., the S&P 500 ETF (SPY), which has a total return over the same period of just 273%. Our Equity+ Strategy has gained 21.72-times the performance of the S&P 500 ETF (SPY) since its inception to present.

Our success formula for investing is based on the systematic identification of risk using quantitative assessment algorithms. When risk to the market becomes elevated, our Premium Strategies automatically reduce their exposure to long-equity ETFs.

Chart 4 below shows the Equity+ (2 ETF) Strategy, the model will then either buy defensive positions or hold a cash-proxy ETF (BIL). The ETFs we own in our Premium Strategies consistently seek to reduce exposure to risk, regardless of the current economic situation.


Adaptive Equity+ (2 ETF) Strategy
Adaptive Equity+ (2 ETF) StrategyChart 4: Our Adaptive Equity-Plus (2 ETF) Strategy (in red) has soundly beaten the S&P 500 this year (2022).



Chart 5 shows our ULTIMATE 6-Model (5-10 ETF) Combo Strategy, which combines all six of the ETFOptimize Premium Strategies into one diversified model with between five and ten uncorrelated ETF holdings. This model (red line below) is also beating the market (S&P 500, blue line) this year, but it's doing so in the face of multiple strategies holding cash or a cash proxy ETF (BIL).


ULTIMATE Strategy - Year-to-Date
ULTIMATE Strategy - Year-to-Date

Chart 5: The ULTIMATE 6-Model Combo Strategy (red line) is also beating the S&P 500 (blue line) this year, with much less volatity.




For SUCCESS with a Rules-Based Investment Model: FOLLOW YOUR STRATEGY'S GUIDANCE 100% – Don't SECOND GUESS your Strategy!

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 mental challenges, invariably causing investors – whether amateur or professional – to buy after a stock has been rising and near its high – then selling near the bottom, capitulating to avoid losing more. Buying high and selling low is polar opposite of a successful investment approach, yet it's what millions of individual investors do every week.

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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