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The ARMR Report (Algorithmic Risk Management Research)

Summary

Each month we recap what our proprietary risk management investing algorithms were and are signaling about each of the 5 important equity indexes.

S&P500 (SPY) DOW30 (DIA) NASD100 (QQQ) Small Cap (IWM) Mid Cap (MDY).

You have heard the terms “Risk On” or “Risk Off” but what does that mean and how does it effect your investing portfolio?

The ARMR Report has the answers and will help you manage risk to improve your investment results no matter what strategy you employ.

Get your complimentary report at the start of each month that includes Charts with step by step Algorithmic execution at RosenthalCapital.com

What the Algorithms said in the month of April: Risk is elevated beware

SPY (S&P500): “Risk On” signal results in small profitable trade

4/4/18 – SPY long entry $263.51

4/14/18 – SPY exit $264.31

Comment: On day 7 of the “risk on” signal conditions changed and risk was calculated to be increasing. Each day the algorithm calculates whether the reward from the current level is worth the risk being taken. On day 7 of the move the equation called for an increase in the stop loss price and by days end the stop had been violated.

DIA (Dow30): “Risk on” signal followed by immediate stop tells a story

4/5/18 – DIA long entry $245.42

4/6/18 – DIA exit $238.03

Comment: Whenever a “risk on” signal is followed immediately with a stop loss exit we sit up and take notice. This is a very bearish sign and has a serious impact on how we view risk across our entire portfolio structure.

QQQ (NASD100): The March ARMR report called a clear end to the QQQ leadership. This held true throughout the month of April as no new “risk on” long entries were logged.

IWM (Small Cap) & MDY (Mid Cap): The strongest part of the market in March flashed the same major warning sign as the DIA in April and on the same 2 days.

IWM – Long entry 4/5/18 $153.38 à Stop hit on 4/6/18 $151.35

MDY – Long entry 4/5/18 $344.23 à Stop hit on 4/6/18 $339.63

Comment: With IWM and MDY joining DIA we now have 3 of 5 major indexes flashing serious risk off signs.

Our interpretation of what the Algorithms are Saying Now 5/1/18:

In the March report we wrote “The highest degree of danger now exists in the stock market”. This sentiment continued in the month of April but the growl of danger grew louder as the Bear begins to awake from a long hibernation. All 5 of the ARMR report algorithms are calling for cash positions again and another test of the all-important 200 day moving average seems inevitable for the S&P500 (NYSEARCA:SPY). We must watch closely and see how the next attack on the 200-day MA unfolds. While our algorithms remain “risk off” now they can turn at any time. A defense of the 200-day MA followed by a risk on signal could be a powerful setup for capturing upside in the month of May.

The beauty of allowing algorithms to guide your investment approach is simply this: Algos do not respond to fear or greed.

So, at major turning points in the stock market, for instance a challenge of the 200-day, fear and uncertainty will be running high. Financial news networks will be whipping up hysteria about impending doom if the support fails. Meanwhile, whether the support holds or fails, the ARMR report algorithms will be unemotionally and instead mathematically calculating whether the reward is worth the risk of new investments. And as always we will share these insights with our readers.

April Algo answers for different investor types: Repeat of March

The Longer Term Fundamental Investor (Buy and Hold): This danger signal can be used as a reminder that smart house cleaning is required from time to time. Use the knowledge that “Risk Off” is the call to action now and prune the portfolio of weak investments in the coming days.

The Active Manager: Be more aggressive raising cash. Prune the portfolio of weak assets and book gains where appropriate to protect capital.

The Swing Trader/Investor: All the above but even more so. We would not, however, recommend the short side of the market just yet. “All cash risk off” is negative but we prefer to use this type of Algo information to step out of what has been a very positive and long bull market. We do not advocate the immediate switch to short selling for Swing Traders/Investors because:

  1. The quick switch is very difficult to execute emotionally.
  2. Our extensive algorithmic research has revealed that after long bull markets a period of aggressive chop unfolds before a new sustainable direction can be statistically expected. Hence, short selling too early will most likely result in frustration.
  3. Markets have had a big and quick sell off. Our research suggests shorting after a statistically significant rally will improve results. Shorting extreme weakness can be very detrimental to your asset base. Be patient