If you recall, the model is based on two moving averages, the 15- and 40-week Exponential Moving Averages (EMA). If the 15-week EMA is above the 40-week EMA, the market trend is up. Likewise, if the 15-week EMA is below the 40-week EMA, the market trend is down. It is very simple, yet very profound in identifying the trend for the market. By looking at the following chart over the past decade, investors would have done very well in following the "KISS Model," especially after yesterday when the DJIA declined nearly 800 points. For a refresher, you may want to read the two posts from January 15, 2008 and May 11, 2008 entitled, "The Market Has Spoken! and How Does One Identify the Underlying Trend of the Market," respectively.
In light of the $VIX, (see the following chart), the broad market may have capitulated yesterday or in the process of doing so. Notice that today's reading of 46.72 was higher than the 2001/02 reading.
The $VIX options index is an excellent measure of investor greed and fear. When it reaches these extreme levels, such as above 40 (fear) and under 20 (greed), it behooves traders to go in the opposite direction of the extreme. That is with a reading of above 40, traders should be looking for a sharp short-term rally. A reading below 20, traders should be looking for a short-term decline. Therefore, given the extreme reading of yesterday, look for the market to bounce from here. The rally, however, would be a counter trend move, because according to the "KISS Model," the major trend is still down; and will remain trending down as long as the 15-week EMA is below the 40-week EMA.For investors, stay the course in money funds. The "KISS" will eventually give a buy signal when the 15-week EMA moves above the 40-week EMA.
In closing, I bet those of you who have followed this model and invested according to its signals, probably had a pretty good-night sleep last night.
No comments:
Post a Comment