The goal is to use cash as part of your overall portfolio, adjusting equity holding size during the year based on Macro valuations.
The model isn't a crystal ball. Trade signals are based on Probabilities and Statistical methods, producing different trades with differing probability of success. Overall, model is right 2 out of 3 trades.
The model is not a HFT or intraday scalping algorithm, only changing the position about 2-3x a month, on average. The model is a pure directional bet on whether the SP500 will rise or fall, which during bull or bear markets, is able to profit from not only the major trend but also sell into the minor counter-trends. The result is a system designed to beat the SP index by profiting when the market loses during pullbacks.
One could create a hedged strategy where Shorting SP is utilized, which makes profits possible during a market decline. This hedge fund approach is best combined with another long-only portfolio. This Long/Short 100% version of the model is employed by the firm's commodity pool.
Another option is to supplement the long-only strategy, using the model to change equity weighting allocations, making better timed buys and sells. Scaling between 0% long to 200% long at MAX BULL. Selling means taking profits, not shorting the market.
The graph shows 1999-2012 backtesting results of the Long-Only 200% model theory as compared to passive index investing in the SP500.
What is a model?
A simple example of a market model is comparing today's price to the historical average of price over, for example, the 50 past days. The rule would be to BUY when today's price is above the past average, and SELL if below. This rule could be easily backtested and other rules could be applied to produce win/loss ratio and profit/loss delta. Other rules could be applied and tested, but not so many that the rules only work for the test data. Known as curve-fitting, too many of today’s rules are created to fit just one set of past data, which will not work for new data. In simple terms, the rules were so stringent that they could only work once.
The next method for a model is to forward test, which measures the results against actual forecasts. The goal is to gather real-time trades, capture their results, and compare against the benchmark backtest. Since 2013, the results were consistent with the historical testing, falling within test parameters including win/loss ratio, average drawdown, average ROR, as measured in 3 mo, 6 mo, 9 mo, and 12 mo periods. The forward test is key in determining if the backtest was uniquely unrepeatable or whether the methods applied will continue to work.
By 2012, Michael’s confidence in his own MarketModel led him to establish a futures account and commit to trading the model signals, testing different position sizes and sharing trades on Twitter. Michael's trading diary moved to private subscription service in 2013-2014 via protected Twitter, where the nightly model signals were posted, along with trading results. More recently, daily and weekly model values are delivered via membership site at http://www.macrospx.com
The model uses SP500 futures instead of the SPX cash because of the use of leverage provided by futures. Use of leverage is typically associated with high risk, however in our case, we are simply choosing to not to tie up $1M is cash buying and selling shares of the SPX. Leverage allows for the scaling from underweight SP500 to up to 1x leveraged (100% long or short).
The model's use of futures allows for scaling into very large account balances. For example, a $1B account could invest alongside the model within the SP futures market easily within the average volume and open interest of today's market. The investment decisions are almost entirely systematic, based on the model's signals.
Wealth Managers and Investment Professionals are expected to have proprietary research that gives their client investments an edge over passive indexing.
Most already have Technical Analysis and Sentiment indicators, but few have the complete view that is provided by Macro analysis.
Get daily close and weekly research from Mike Valletutti and his models on his professional blog at http://www.macrospx.com