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Author: mungofitch Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 253843  
Subject: Re: YEY/EG SP500 EMA Switch Torpedoed Date: 7/16/2008 11:14 AM
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I wonder if here might be a more conservative way to go about this
which is more robust.

There is little doubt that bull and bear markets exist, and that different
screens are optimal in each case. So, here is an approach:

Pick a set of bull and bear market crossover dates from a chart.
This can be done with perfect hindsight, by hand---doesn't matter.
Though, ideally, it would be with a touch of lag, since no one knows
it's a bear until it starts if you're using technical indicators.
Build a blend of screens that do well overall, but do particularly well
in bull markets, and do the same for bear markets. A nice diverse
blend in each case---a few stocks from quite a few different screens.
Don't worry about overtuning, just get two blends, one of which is
full of bull market winners, and one full of bear market best-you-can-do.

Then, pick maybe four different very basic timing indicators for bull
versus bear. How much the S&P went up or down in the last month or three
might be one of them. I use one which is, how long since the index
crossed above a trendline which is the average of the (200-day high and
a 150-day SMA). Or, is that line rising or falling? Is the market above
its 200 day SMA? The VL 4% rule might be good. Whatever. All you need
is simple metrics which work pretty well most of the time---perfection is not needed.
Just pick things which give very few signals per year---under 1, ideally.

Then, much like QTAA, simply allocate 1/4 of your portfolio to each
of the four signals. If all are bullish, put all your money into the
bullish blend. If three are bullish, put 75% of your money in the
bullish blend and 25% in the bearish blend, etc.

Since all the screens do well on average, your risk is modest,
and you should benefit nicely on average. It doesn't really matter
if the individual signals are right or wrong at any given time, as
long as they work passably well on average. You can't be whipsawed,
since you're long at all times.

This could be done with more than 4 signals, of course. The fraction of
your portfolio in the bullish blend could be the percentage of bull/bear
indicators among dozens whcih are bullish on your rebalance day.
You could use 20 different crossovers or lookbacks that work on average,
which means you can avoid the entire issue of [over]tuning for the best one.
You could weight each subsignal by how good it is in backtest---the
magitude of the gap between CAGR's during its bull and bear periods in
the past---provided no individual signal is overtuned.

Jim
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