On February 10th this year, we wrote a piece that graphically represented IBD’s market calls (“uptrend” and “correction” only, “under pressure” omitted) against the equity graph of our IBD50 Top-10 model portfolio. Based on that review, I concluded that in that application these market timing signals might not be the best signals to enter or leave the market.
In the real world I am still favoring a system that uses trailing stops of 7% or 8% set on individual stocks for exits, but using market calls to determine if replacements will be made.
That said, last week I took a list of IBD market calls beginning with the “market resumes uptrend” call on 1/26/11 (after close) and purchased Vanguard’s total stock market ETF VTI. I held the ETF until the next “market in correction” call and sold at the open the next day. Positions were replaced at the open following the next “uptrend” call, and so on. I ran the model through to the last “market in correction” call on February 25th this year.
The period was 761 days long. The model would have held VTI for 494 days or 65% of the time. The longest holding period was 106 days (+13.6%), the shortest 1 day (-2.0%) with an average of 45 days.
The best profit was +13.6%, the worst loss -2.8% with the average result being a gain of 2.2%. Given this period covered some significant down periods, I like the way downsides were limited.
There were 11 holding periods. 7 resulted in a profit, which is 64% of the time.
Compounding the results for each of the periods the total gain obtained was 25.6%. Buy and hold for the same period would have yielded 15%. So, the strategy beat buy and hold by 71%. Not shabby. FYI, for the same period, SPX, COMPEX and RUT returned 14.8%, 13.8% and 12.9% respectively.
CONCLUSION: IBD’s market timers can be used as a market timing guide, and, based on the results we obtained, can beat a buy and hold strategy. Using different instruments will return different results.