Market Direction/Sentiment Indicators

Introduction

There's no shortage of Market Indicators available online—all intended to reveal important characteristics of the market to help you make better investment decisions. Although their documentation generally includes descriptions teaching the proper interpretation and use, actual trading examples are generally quite limited and virtually never show trading proficiency over long periods of time. However, occasionally a technical author will put an indicator seriously to test, as was done by (1) Rob Hanna in "A Look At The S&P 500 Death Cross" where his tests of the famously hated Death Cross Indicator show it has erratically poor performance, and (2) Steve LeCompte in "AAII Investor Sentiment as a Stock Market Indicator" where tests of the AAII Sentiment Survey shows it has great hindsight correlation, but is negatively correlated to future returns. 

This page was designed to provide (a) daily charts for nine of the better market direction indicators and (b) provide comparative testing of them over multiple decades and three different asset class strategies. While some of these indicators are available through AlphaDroid's StormGuard option, others are included only because of their notoriety, in spite of their relatively marginal performance. While these indicators were designed to measure and react to the market in different ways (such as maximum return, maximum safety, quick reaction, momentum, breadth, or highs/lows) none of them come close to the performance provided by StormGuard-Armor! 

Market Direction/Sentiment Indicators—Updated Daily

 • StormGuard-Armor: Adds Momentum (volume), Sentiment (highs/lows), and Fuzzy Logic analysis to StormGuard-Standard. SG triggers month-end only.
 • StormGuard-AQR: Same as StormGuard-Standard with a 3x acceleration when rebounding from a crash. SG triggers any day.
 • StormGuard-Standard: Double EMA 50-day of daily returns (x21), offset by .55%. SG triggers month-end only. 

 • Market Momentum: A component of StormGuard-Armor. Double EMA 50-day of daily returns, modified by relative daily volume.
 • Value Sentiment: A component of StormGuard-Armor. Double EMA 15-day of ratio adjusted new highs and new lows.
 • Death Cross 50/200: The classic S&P500 SMA 50/200-day price crossover going down or up. SG triggers month-end only. 

 • Dr. Don's Double Cross: The EMA 75/300-day crossover for market exit, and the 50/200-day for entry. SG triggers month-end only.
 • McClellan AD Oscillator: The difference between the EMA-19d and EMA-39d of the ratio adjusted (RA) NYSE advances - declines.
 • Delta Market Sentiment: The position of ~3,600 stocks relative to a medium-term moving average. SG triggers month-end only.

Market Sentiment/Direction Indicator Comparative Performance

In the table and charts below, the performance of seven market direction indicators is evaluated for each of three major classifications of ETFs (broadly diversified, U.S. sectors and world regions). The market direction indicator determines whether it is a bull market (risk-on) or a bear market (risk-off). During a bull market the Strategy selects the trend leader to own at the end of each month from among the Strategy's candidate ETFs. During a bear market, the Strategy will either move to the safety of CASH or own a long-term treasury ETF, depending on its configuration. Performance for both Bear Market Strategy configurations is detailed below. Please review the Bear Market Strategies page for a discussion on how hindsight selection bias can be avoided during bear markets using a well-designed Strategy that selects from a diverse set of asset classes that often (but not always) do well during a market crash.

 • US Diversified ETFs Strategy

  True Sector Rotation Strategy using IVE, IVV, IVW, IWB, IWV, RSP, SPY, SPYG, MDYG and MDY.  (TLH bear symbol)

 • ETF SPDR Sectors Strategy

  True Sector Rotation Strategy using XLE, XLF, XLK, XLI, XLP, XLV, XLY, XRT, XHB, XPH, MDY and SPY.  (UST bear symbol)

 • ETF World Regions Strategy

  True Sector Rotation Strategy using DGT, EEM, EFA, EPP, FEZ, IEV, ILF, IOO, MDD, MDY, SPY and QQQ.  (TYD bear symbol)