The Matrix

Table of Contents:
1. The Matrix
2. Long-Term Seasonality and Concentration & Direction Comparison Tables
3. Understanding the Matrix
  A. Diffusion Index (DI)
  B. Capitulation Index (CAP)
  C. Price
    1. Trend (TREND)
    2. Volatility Bandwidth (BW)
      a. Compression(COM)
      b. Expansion(EXP)
    4. Trend Origin (Dateo, Po(BW), and %)
  D. Leverage
    1. Trend (TREND)
    2. Volatility Bandwidth (BW)
      a. Compression(COM)
      b. Expansion(EXP)
    3. Trend Origin (Dateo)
  E. Focused Trends
    1. Bull Opportunity Metrics
    2. Bear Opportunity Metrics
  F. Time
  G. US Stock Sentiment Model
  H. Intermarket Comparisons
    1. Gold to Silver Ratio (GSR)
    2. Junior to Majors Mining Shares Ratio (JMR)
    3. Retail to S&P 500
    4. Junk to High Grade Bonds Ratio (JNK)
    4. S&P 500 to High Grade Bonds Ratio (LQD)
  I. Monthly


The Matrix (Click Date Below)



Long-Term Seasonality and Concentration & Direction Comparison Tables





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Understanding Matrix

The Matrix 12/27/16


The Matrix updates the the progress of this trade as well 32 other markets. It also includes Intermarket analysis that includes market leadership and risk appetite, a true economic activity composite for the United States (EAC), and long-term concentration (cycles) and direction for US stocks, bonds, and commodities. The later is important for long-term timing.

The Matrix is complied from weekly closing prices (markets) and Commitment of Traders (COT) reports released by the CFTC through Tuesday and generally released on Fridays (see COT Release Schedule). It's an array that displays Price, Leverage (DI), Time, Sentiment, Key Intermarket Comparisons, and Long Term Cycles and Trend Direction - the message of the market, that helps subscribers recognize buying and selling opportunities in agricultural commodities, bonds, energy, foreign exchange, commodities, precious metals, livestock, and global equity markets.

Diffusion Index (DI)

Diffusion Index (DI), the distribution and movement of money across futures and options that measures and intentions of the invisible hand, represents the energy available to fuel an impulse within the cycle of accumulation and distribution. Bullish and bearish setups, also called cluster(s) if observed over several weeks/months, represent sufficient energy (concentration) to reverse the trend.

Quartiles (Q1, Q2, Q3, and Q4)

Quartiles, defined by DI2, determine the strength of accumulation or distribution. DI readings above 60%, bullish concentrations, define accumulation. This is bullish. DI readings below -60%, bearish concentrations, define distribution. This is bearish. Upper quartile (Q1) bullish setups, for instance, are stronger than upper middle quartile (Q2) ones. Likewise, lower quartile (Q4) bearish setups are stronger than lower middle quartile (Q3) ones.

The observation of strength when weakness is expected represents a cycle inversion. Cycle inversions, while rare, are common to markets displaying unexpected strength or weakness. This is common during periods of stress.

Capitulation Index (CAP)

Capitulation index (CAP), a composite of DI and sentiment concentrations, represents the total energy available to fuel an impulse within the cycle of accumulation and distribution. CAP readings above 50%, bullish concentrations, define accumulation and fear. This is a bullish combination. CAP readings below -20%, bearish concentrations, define complacency and distribution. This is bearish.

Quartiles (Q1, Q2, Q3, and Q4)

Quartiles, defined by DI2, determine the strength of accumulation/fear or distribution/complacency. Upper quartile (Q1) bullish setups, for instance, are stronger than upper middle quartile (Q2) ones. Likewise, lower quartile (Q4) bearish setups are stronger than lower middle quartile (Q3) ones.


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Price

Price is the final arbiter of investment decision-making. Expectations of falling prices warrant only conservative bets until confirmed by price. This makes defining the trend, a function of price, including the the cycle of accumulation and distribution, leverage, and time, an important aspect of investment discipline.

Trend

Price's Trend which flows opposite to leverage is defined by price oscillators. The intermediate-term trend oscillator (ITCO) and long-term trend oscillator (LTCO) define this trend. Positive trend oscillators, for example, define an up impulses and BULL trends, while negative oscillators define a down impulses and BEAR trends. BULLXO and BEARXO, subsets of BULL and BEAR trends, define impulse transitions.

BW

Volatility bandwidth (BW) measures volatility of the trend.

Compression (COMP) , a sharp reduction in volatility illustrated by BW closing below 25%, often leads periods of increasing volatility. Traders use compression to recognize the potential for price acceleration and expansion. Acceleration can boost the reward (profit) to risk (loss) profile of trades through better timing and risk management.

Expansion (EXP), a sharp increase in volatility illustrated by BW closing above 50%, often leads periods of decreasing volatility. Traders use expansion to recognize the potential price deceleration and compression. Deceleration can boost the reward (profit) to risk (loss) profile of trades through better timing and risk management.

Trend Origin (Dateo, Po, and %)

Dateo, Po, and % record the date, price, and annualized gain/(loss) of the trend.


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Leverage

Leverage often leads price. This leadership tendency makes the study of leverage an important aspect of investment discipline.

Trend

Leverage's Trend which flow opposite to price is defined by leverage oscillators. The intermediate-term trend oscillator (ITCO) and long-term trend oscillator (LTCO) define this trend. Positive trend oscillators, for example, define an up impulse and BEAR trend, while negative oscillators define a down impulse and BULL trend. BULLXO and BEARXO, subsets of BULL and BEAR trends, define impulse transitions.

BW

Volatility bandwidth (BW) measures volatility of the trend.

Compression (COMP) , a sharp reduction in volatility illustrated by BW closing below 25%, often leads periods of increasing volatility. Traders use compression to recognize the potential for price acceleration and expansion. Acceleration can boost the reward (profit) to risk (loss) profile of trades through better timing and risk management.

Expansion (EXP), a sharp increase in volatility illustrated by BW closing above 50%, often leads periods of decreasing volatility (chart 1). Traders use expansion to recognize the potential price deceleration and compression. Deceleration can boost the reward (profit) to risk (loss) profile of trades through better timing and risk management.

Dateo

Dateo records the date of the onset of the trend. The US Dollar Index's leverage trend, for example, originated on 06/17. This bullish crossover lead price by five weeks.


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Focused Trend

A Focused trend materializes when price and leverage oscillators agree or align. Up and down impulses in price and leverage generate a focused bull opportunity, while down and up impulses generate a focused bear. Bull and bear opportunities increase the probability of rallies and declines, respectively. The Opp column defines the trends as either focused or consolidation (C/P). Dateo and Po columns record the date and price that the market focused. % records the annualized return of the focused opportunity.

Focused Bull Opportunities Metrics

Bull, Bu, BuT, and BuST record the annualized return, the normalized annualized return, time, and normalized time of the focused bull opportunities. Traders often withdrawal their initial investments when Bu and BuST exceed 1 or 2. Bu and BuST are risk management tools for the bulls. Gasoline (GasRBOB), for example, displays a focused bull opportunity since 12/06/2016. The bull metrics define a long position that's produced a 390% annualized return but yet has to reach the midpoint of its cycle (BuST > 0); this cycle is based on TIME. Disciplined traders withdraw initial investments when standardized returns (Bus) exceed 1 or 2 and/or standardized time cycles (BuST) exceed 1 or 2.

Focused bull opportunities generated under bull phases of sentiment tend to produce the strongest advances. This combination allows bull markets to rally on skepticism or climb the wall of worry.

Focused Bear Opportunities Metrics

Bear, Bu, BrT, and BrST record the annualized return, the normalized annualized return, time, and normalized time of the focused bear opportunities. Traders often withdrawal their initial investments when Br and BrST exceed 1 or 2. Br and BrST are risk management tools for the bears. The British Pound (BP), for example, displays a focused bear opportunity since 11/10/2015. The bear metrics define a short position that's produced a 21% annualized return, a roughly standard return for a focused bear impulse (BrS near 0). Disciplined traders withdraw initial investments when standardized returns (Bus) exceed 1 or 2 and/or standardized time cycles (BuST) exceed 1 or 2. Since BrST = 2, the bears have recovered their initial investments in the short position and are leaving their profits run.

Focused bear opportunities generated under bear phases of sentiment tend to produce the strongest decline. This combination allows bear markets to decline on skepticism or roll down the hill of despair.


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Time

Trend and leverage analysis must be framed but not solely defined by time. Seasonal cycles define only tendencies or paths of least resistance. While price generally follows these tendencies, it can move against them during periods of extreme social, political, or economic stress.

High and low define the 5-year seasonal high and lows. +/- columns represents the number of weeks from the seasonal transition. A positive number, for example, defines the number of weeks to the seasonal transition. A negative defines the number of weeks past the transition. Numbers of color coded for visual recognition. Blue, red, and green colored numbers indication recognition, bearish warning, and bullish warning phases, respectively.


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US Stock Sentiment

The old American idiom of a day late and dollar short is an phrase easily applied to majority's ability to time (buy or sell) US stocks. The majority, influenced more by instinctual behavioral tendency of the individual to seek acceptance of an emotionally-driven crowd than act independently in the minority, views rising and falling stocks prices as bullish and bearish. This tendency that drives them chase when probabilities favor fading relegates the majority as the consistent bagholders of history's panics and trend changes.

The Sentiment Model, a standalone trading tool used by investors to outperform the buy-and-hold investment strategy, produces the following observations: (1) bull and bear phases have produced average annualized returns of 26% and 61% and 32% and -7% since 1992 and 2017; these returns significantly outperform buy-and-hold (B&H) average annualized returns of 8% and 7% over the same periods, and (2) stock returns are clearly not random as taught by popular academic theories.

Sentiment Model Output 2015



Sentiment Model Output 2016



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Intermarket Comparisons

The US Stock Market Cap section displays relative money flows between stock indices and across assets classes. The first section is a simultaneous comparison of the return performances various US based stock indices from small to large caps. The Precious Metals, US Bonds, US Stock Section defines the interplay between risk-taking (risk-on) and risk-aversion (risk-off). The 12/27/16 Matrix, for example, shows that the Russell 2000 (small cap stocks) and the Dow Industrials (large cap stocks) are leading the rally; it also shows risk-on flows lead risk-off by 3:2. Risk-on favors continuation of the rally.

Gold to Silver Ratio

The gold to silver ratio (GSR), a relative money flow measure that often leads the price, defines risk appetite not only for precious metals but also the financial system. A rising and falling GSR trend oscillator suggests risk-aversion and risk-taking towards precious metals, respectively. A back drop of risk-taking anticipates and/or confirms up impulses in gold. A backdrop of risk-aversion, on the other hand, anticipates and/or confirms down impulses.

Gold and silver's impulses are highly correlated. This means they move together with varying amplitude expect for periods of extreme social, political, or economic stress.

Junior to Majors Mining Shares Ratio

The junior to major mining shares ratio (JMR), a relative money flow measure that often leads price, defines risk appetite for precious metals. A rising and falling JMR trend oscillator suggests risk-taking and risk-aversion towards precious metals, respectively. A back drop of risk-taking anticipates and/or confirms up impulses in gold. A backdrop of risk-aversion, on the other hand, anticipates and/or confirms down impulses.

Retail Stocks to S&P 500 Ratio

The retail stocks to S&P 500 ratio (XRT), a relative money flow measure that leads the economic activity, represent a proxy for marginal economic growth within the United States. Future economic growth is expected when the retail stock index leads the broader market (chart). Future economic weakness is expected when it lags. Retail stocks often lead economic activity since personal consumption expenditures accounts for nearly 70% of US GDP.

Junk To High Grade Bond Ratio

The junk to high-grade bond ratio (JNK), a relative money flow measure that also leads economic activity, represents a proxy for marginal economic growth within the United States. Future economic growth is expected when risky junk bonds lead their high-grade counterparts (chart). Future economic weakness is expected when they lag.

S&P 500 To High Grade Bond Ratio

The S&P 500 to high-grade bond ratio (JNK), a relative money flow measure that also leads economic activity, represents a proxy for marginal economic growth within the United States. Future economic growth is expected when risky stocks lead high-grade corporate bonds (chart). Future economic weakness is expected when they lag.


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Monthly

The Monthly section displays Economic Activity Composite Model (EAC) and Concentration & Direction for various asset classes. The 12/27/16 Matrix, for example, shows subscribers that the US economy has been displaying the potential for Growth since 2016.11. ITCO and LTCO are intermediate- and long-term measure of future economic growth. Future US growth is defined by the direction of LTCO. ITCO represents a leading tool for potential directional changes.

Concentration & Direction defines cycle concentrations and trend directions for various assets class over the long run. C1, C2, C3, and C4 define the short-, intermediate-, intermediate-, and long-term cycle concentration for stocks, bonds, and commodities. Buying and selling panics have existed in the past. We can use their cycle concentrations and directions to define them in the present.

The majority believes the Fed is the controller or maestro financial and economic world. While history shows us (over and over) that its not, the majority stands by this belief until failed expectations driven by the invisible hand inflicts losses and pain or 'teaches' the incoming generations. This seemingly perpetual cycle of failed expectations and substantial losses, a byproduct of failed economic theories and lousy education, is big reason why the public remains a consistent loser and bagholder of trend transitions in the investment world. Understanding of the real economy, invisible hand, cycle concentrations and trend directions helps subscribers separate themselves from the majority and their tendency to become the bagholders of financial history.


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