I've been working on my own, automated market timing model that blends CAN SLIM principles with those of its disciples, Gil Morales and Chris Kacher. I've also plugged in other influences on technical analysis of the market in terms of risk protection.

 

Since I'm no economist, I prefer a non-discretionary approach to timing the market. In this case however, the model should be robust enough to not cause unnecessary signaling while keeping the potential drawdown to a comfortable level.

 

Focusing only on the NASDAQ Composite, I cycled my model through every year since 1990 while also tuning the amount of distribution days it takes to give a sell signal. I used no neutral signal and compounded returns on the long side only.

 

The results are shown in the following table. It shows that over the long run, timing the market using an adequate distribution model and risk protection can outperform the composite ('inf dd' column). Although it dramatically cuts the 84% potential return in 1999 to less than half in a lot of cases, it reduces the 40% drawdown to about 15% a year later.  

 

% Yearly Returns given the Distribution Day Threshold for a Market Correction Signal

Source Data: Yahoo Finance, ticker: ^IXIC

 

It's also clear that calling a correction only when the index has accumulated 8-10 distribution days is the way to go, however this may evolve with the markets. The follow-through day threshold is another value that has varied with time.

 

This model shows that while risk protection does dampen gains in the short term, the fact that it also dampens short term corrections (which are usually deeper and harsher) means that you outperform the market over the long run.

 

This analysis symbolizes the advantages of employing risk protection, not only to protect capital, but to grow it larger than a 'buy and hold' strategy. Most people think risk reduction means gain reduction, but they forget to factor in the benefit of compounding.

 

I plan on playing this model with the TQQQ 3x NASDAQ 100 ETF with a small amount of cash to see how it works out. Note that the past couple of years seem to have been tough for trend following, which means market timing has been off as well. This usually means a very bright future is near, so stay patient!

 

@rocketPower