Technically Speaking, October 2023

The Bull or Bear debate rages on. And with September 2023’s monthly close punctuating the end of the 3^rd quarter, the S&P 500’s momentum is signaling a historically reliable buy signal which has been profitable in both secular bull and bear markets.

THE CHARTS

Chart 1 below shows the S&P 500’s monthly candles and a 12/48 price oscillator.¹ This momentum indicator divides a 12-month moving average by a 48-month moving average. 12 measures one year and 48 measures the trend of an average business cycle lasting roughly 4 years.² Buy signals occur when the 12/48 Oscillator crosses above its 9-period moving average as pointed out on the chart with upward facing green arrows. Our strategy buys the following month’s open, holds for 12-months as shown with the grey shading, and finally, as pointed out with downward facing red arrows, sells at the open of the 13^th month.

Chart 1 below starts with most of the secular bull market following the end of World-War II through the Go-Go Years of the 60s. The black horizontal line marks the secular bear of the 70s and early 80s. Chart 1 ends just after the ‘87 crash/Black Monday, just a few years into the secular bull which raged until the 2000 Dot-Com Bust.

Chart 2 below picks up where Chart 1 left off. It starts with the remaining decade-plus secular bull following the ‘87 crash. The black horizontal line marks the secular bear of the 2000’s, and the subsequent secular bull market through the Covid Crash and 2022. It is current through last month, labeled with a green arrow and marked Latest Signal, 09/2023. These two charts spotlight all 21 signals since the early 1950s, and the rightmost green arrow on Chart 2 shows us September’s 22^nd signal.

THE DETAILS

Since the early 1950s, this signal has triggered 21 times with September 2023 being the 22^nd. Table 1 below uses upward facing green bars and downward facing red bars to illustrate the total percentage change over the 12-month holding periods for all 21 prior signals. The red circles show the maximum drawdown during those holds. Some observations:

• 19 signals closed higher after 12 months, while only 2 closed lower.
• 13 of the 21 signals, roughly 62%, had a maximum drawdown from entry of less than 5%.
• Signal 21 in 2019 had the largest maximum drawdown of almost 35%, but still closed higher by more than 15% after 12-months.
• The 2 losing signals were numbers 4 of 1965 and 17 of 2007. They both finished with losses between -8.5 to -almost 13% after being down between almost 18 to 21%.

Table 2 below fills in the details listing all 21 prior signals. Some interesting statistics:

• The 12/48 Oscillator is averaging 3 to 4 buy signals a decade.
• The win-rate for all signals is almost 90.5%, with 19 of 21 signals closing higher after 12 months.
• The median gain is almost 10%, while the median drawdown is about -4.25%.
• The largest gain is more than 32%, while the largest loss is roughly -13% which was signal 4 in ‘65.
• The largest drawdown was almost -32.5% after the 2019 signal, number 21, which still managed to close with a gain of more than 16% 12 months later.
• 15 signals triggered during secular bulls and 6 during secular bears.
• Of the two losses, signal 4 occurred during a secular bull and signal 17 during a secular bear.
• 5 of 6 signals, 83%, during secular bears were profitable. Notable gains include 17.27% after signal 7 in 1975 and almost 12.75% after signal 18 in 2009.
• Skew and Excess Kurtosis calculations explain that the distribution of returns is close to a normal distribution, increasing the believability of the statistical significance.

CONCLUSION

In addition to having a remarkable winning record, an interesting attribute of this signal is how effective it is irrespective of the secular trend. This adds to the timeliness of the current signal. Despite having never seen another technician watching a monthly 12/48 price oscillator, there is an identifiable pattern. Perhaps it is the importance of the 12 and 48-month periods, or perhaps it is due to our human inclination to find patterns amongst the randomness. As part of a trading system or market call, secular bull or secular bear, historically following this signal there has been a 90+% chance that price will be higher 12-months from now. If not, September’s signal will become only the 3^rd failed signal of 22 instances spanning the last 65+ years of market history.

REFERENCES

1. Pring, M. J. (2014). In Technical Analysis Explained (Fifth Edition, p. 292-296). McGraw-Hill Education.
2. Ibid, (p. 19).