This post was just published on ZYX Buy Change Alert.
Nigam’s second law is that nobody knows with certainty what is going to happen next. The first step in becoming a successful investor is to learn how to deal with the uncertainty that is the true nature of the markets. The best way to deal with uncertainty is to use probabilities.
Our model to forecast the market is an adaptive model, i.e., it changes with market conditions.
The model makes two adaptations in near real-time to the eight inputs as new data becomes available.
First, the weight of an input is low if the data has been choppy or directionless. However, if the data offers strong direction, regardless of the magnitude, the weight of the input increases. Second, the weight of an input changes based on its correlation with the price movement of the underlying market.
Eight Inputs
At present the following are the key ingredients of our timing model.
- Aggressiveness of fund flows
- Leading global economic indicators
- Commodity price movements
- Relationship between currencies
- Risk appetite as demonstrated by the relationship between the price movements of the assets deemed safe vs. assets considered speculative.
- Price action of the markets at key technical support/resistance levels
- Price action of the markets as various classical technical patterns become apparent
- Changes in internals of the markets as the prices push through or fail at key support/resistance levels
| S&P 500 MOVE IN % | PROBABILITY IN % |
| Up 10 – 15 | 5 |
| Up 7 – 10 | 5 |
| Up 3 – 7 | 10 |
| Range Bound | 15 |
| Down 3 – 7 | 40 |
| Down 7 – 10 | 20 |
| Down 10 – 15 | 5 |
| NOTES:1. This table reflects only short-term and what is likely to occur first2. No inference for medium-term on long-term should be drawn
from this table. 3. Markets are highly complex and volatile; these probabilities can change rapidly.
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The Plan
If there is a pullback mostly to relieve the overbought condition, the plan is to buy somewhat aggressively on the pullback. Of course will have to reassess when the pullback occurs.
In the meanwhile, the plan is to continue to hold present positions, to buy selectively, and to take profits selectively.
