In the January 1997 STOCKS & COMMODITIES, I presented a stock market timing system that uses the daily advancing-declining issues, the Dow Jones Industrial Average (DJIA) and the daily new highs and new lows on the New York Stock Exchange (NYSE) as its bases for generating signals. That model developed a relative strength indicator (ADRrs) that compared a Dow Jones strength (DJstr) indicator to an advance-decline issues strength (ADRstr) indicator. ADRrs was simply defined as ADRstr minus DJstr.
However, this relative strength formulation had a problem that I refer to as a lockout condition. Both the ADRstr and the DJstr move between the values of 50 and +50. The problem occurs when the DJstr moves before the ADRstr instead of after. In a sustained upmove or downmove, the DJstr locks at its extreme of +50 or 50 first and then the ADRstr catches up and locks at its extreme of +50 or 50, producing an ADRrs locked at zero. Since ADRrs must be equal to or greater than +4 to issue a buy signal or 40 to issue a sell signal, the lockout prevents the model from issuing a timely signal when the DJstr moves strongly before the ADRstr. Although I minimized the lockout problem in subsequent work, we'll take another approach and develop a new market model using the advancing and declining issues and volume, new highs and new lows.
Figure 6 presents the performance summary of the ADRrs system for the same period. From Figure 5, we can see that for the out-of-sample segment from January 1, 1996, to May 19, 1996, the turbo system did quite well; it remained long throughout this strong bull market. The system caught the 1997 10% dip quite well and almost caught the small 1996 8% dip.
The turbo system did not have the large drawdowns that the ADRrs model had. The ADRrs model sustained a 23% drawdown in the 1981-82 market, while the turbo model sustained only a 7% drawdown. The turbo model doesn't have a lockout problem, so it will participate in every move. In addition, a number of the buy and sell signals in the 1978-82 out-of-sample segment had picture-perfect, outstanding performance on data that the model has never seen before. In the 1982-86 out of sample data, the model did a good job staying long with the major bull market. This system lost around 6% in the 1983-84 decline. However, since this was a very whippy 15% decline, I feel the system did quite well in this type of market.
Dennis Meyers has a doctorate in applied mathematics in engineering. He is a member of the Chicago Board Options Exchange (CBOE), a private trader and president of Meyers Analytics. His firm specializes in consulting for financial institutions and developing publicly available analytical software for traders. Meyers can be reached by E-mail at meyersx@MeyersAnalytics.com, via his Web site (https://www.meyersanalytics.com) or by fax at 312 280-1685.