Published July 21, 2017
After an extraordinary seven months sitting in Buy, our Turbo Model finally succumbed to a pullback in the Nasdaq and issued a Sell signal at the end of June. That kicked off a string of signals, six in all, that was essentially breakeven with a -0.4% return. This came after a near +20% run from the seven-month Buy signal of early December.
These two periods demonstrate well the Turbo Model’s incorporation of both trend-following and mean-reversion. Whereas the trend-following mode of Turbo provides fairly slow and longer duration trades, the mean-reversion mode of Turbo is quick-trading.
Chart 1 below shows the price action of the Nasdaq (QQQ) in the top portion with the volatility of the Nasdaq in the bottom section. We see volatility rising in late June (circled). This rise in volatility accompanied a pullback in price and set in motion the mean-reversion feature of the Turbo Model. Once that shift to mean-reversion mode was triggered, it led to the back-and-forth trading that we experienced during the period of time shown in the box. In this particular case, the market pulled off a v-shaped recovery and went on to post new highs which our current Buy signal is still riding. That Buy signal came as volatility dropped and Turbo returned to trend-following mode.
Chart 1: Rise in volatility kicks Turbo into mean-reversion mode
Investors looked this week to examine a flood of quarterly earnings announcements in hopes that those announcements would justify the near-flawless performance of stocks through the first seven months of this year. Monday kicked off the week with little news and no movement. Tuesday gave us Netflix (NFLX) and a strong earnings report that pushed the Nasdaq higher by +0.5%. Wednesday brought a continuation of the Nasdaq’s strength with another +0.6% gain on good news from biotech firm Vertex (VRTX). Outside the Nasdaq, weakness over Wednesday and Thursday in transport shares nicked the Dow but did nothing to derail the Nasdaq’s 10th straight winning day. Friday brought a rest day as good news from Visa (V) offset weak market responses to earnings from GE and Microsoft (MSFT).
The Nasdaq (QQQ) added to last week’s liftoff adding +1.04% this week to a new record. The S&P 500 (SPY) gained +0.54% while the small-cap Russell 2000 (IWM) posted a +0.58% move.
Warm wishes and until next week.