Update on SPY-UI timing indicators

This post is a brief update of the SPY-UI indicators I reviewed in this post and this one. Refer back to both those posts for details on the two indicators I presented. Turns out we’re in the midst of a real time test of both of these indicators.

As a quick reminder the basic SPY-UI indicator attempts to time the market by being risk on when the unemployment rate is below its 12 month simple moving average and by being risk off when the unemployment rate is above it’s 12 month simple moving average. The second, combo indicator, uses basic unemployment rate indicator to gate the uses of the 200 day simple moving average as a buy and sell signal. Lets first take a look at the unemployment rate in relation to it’s 12 month SMA.

screen-shot-2016-11-07-at-3-49-37-pm

As the chart shows the unemployment rate crossed above it’s 12 month SMA on Oct 7th, triggering a risk-off signal. However, in the most recent unemployment report, released on Nov 4th, the unemployment rate crossed back below the 12 month SMA going back to risk-on. So, was this signal valid? Let’s take a look at the SP500 index to find out.

screen-shot-2016-11-07-at-3-46-54-pm

Based on the unemployment rate trigger you would have sold the SP500 on Oct 7th (closed at ~2154), then subsequently bought back in last Friday, Nov 4th (closed at ~2085). During that time the SPY was down -3.02% and IEF was basically flat (up 0.02%).  And today the SPY was up over 2%. The combo indicator was in risk on the whole time since the SPY did not close below its 200 day SMA while the UER was above its 12 month SMA.

So, was this a valid signal for the basic SPY-UI indicator? No. This was a false positive. Yes, it happened to work out that it outperformed but it is not the intent of the indicator. The indicator is meant to capture the beginning of a recession which we do not have as of yet. Now both indicators are in risk-on mode. The real time test continues. The next unemployment report will be released on Friday, December 2nd.

Full Disclaimer - Nothing on this site should ever be considered advice, research or the invitation to buy or sell securities. These are my personal opinions only.

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3 Responses to Update on SPY-UI timing indicators

  1. Tony says:

    Thanks for this update Paul. Very helpful to see the indicators used in a real-life example to confirm that I was using them correctly.

  2. Victor says:

    Paul, check this out:
    https://arxiv.org/ftp/arxiv/papers/0904/0904.1431.pdf
    it’s a paper by Elliot Middleton (which he originally wrote in 1996) regarding the use of unemployment numbers for economic turning point detection. One way to approximate this with stockcharts is to overlay bollinger bands on the UER time series. Middleton’s methods are more complex than PhilEcon, but it may be more robust than using the SMA alone. In this case “more complex” doesn’t seem “overly complex.” 🙂
    Thanks for the update… I’ve been monitoring this myself, IndProd is not in good shape, the market has gone nowhere for while, etc. On the other hand, S&P yields beat bonds by a historically high margin (TINA), and anything that grow sales and/or earnings is doing ok. The future will be interesting.

    Cheers.

    • paul.novell@gmail.com says:

      Thanks Victor. I’ll check the paper out. I’ve been doing quite a bit of research into econ indicators. A fascinating and quite broad field.

      Interesting times indeed.

      Paul

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