Mike
08-16-2012, 02:19 PM
Since I first talked about the Market Exposure Model (MEM) two changes have been adopted. First is the Distribution Cluster S13 rule. Distribution is normally counted in a 25-day trailing window. If any particular distribution day close is exceeded intraday by the market index by 6% or more that day is dropped from the count (no longer relevant). This also applies to stall days. However distribution that occurs in a short period of time is worse than distribution that is spread out over time. An analysis was conducted from January 1973 by running an equity model along side the MEM buying and selling NASDAQ shares at the recommended exposure. Various distribution cluster sizes and look back periods were tested. What was found was that if 4 distribution (and or stall days) are experienced within an 8 day trailing window that this S13 sell rule maximizes the portfolio value. This rule is now part of the official MEM. Additional S13 sell rules are triggered if 5, 6, 7 or 8 out of 8 distribution events occur in the look back window. However once one of these levels trigger (say 5 out of 8) a later 5 out of 8 does not count unless the interim period falls to 3 out of 8 first. Falling to 3 our of 8 resets the S13 rule to allow counting all levels again. The no-double-counting rule applies to each S13 level. The second change is that an S13 will turn the power trend switch off.
The definition of a power trend has changed. Prior rule was a power trend switch goes on if the 21-day ema is above the 50-day sma for 40 days and the index does not close below the 50-day during that interval. The new power trend is as follows:
1. 21-day is above the 50-day for 5 or more days
2. Index lows are above the 21-day for at least 10 days
3. The 50-day line is rising
Today if we don't experience a sell off we should see the power trend switch come on in addition to seeing a B5 (living above the 21-day) buy signal bringing the exposure count to +6.
The definition of a power trend has changed. Prior rule was a power trend switch goes on if the 21-day ema is above the 50-day sma for 40 days and the index does not close below the 50-day during that interval. The new power trend is as follows:
1. 21-day is above the 50-day for 5 or more days
2. Index lows are above the 21-day for at least 10 days
3. The 50-day line is rising
Today if we don't experience a sell off we should see the power trend switch come on in addition to seeing a B5 (living above the 21-day) buy signal bringing the exposure count to +6.