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This signal suggests risk-on for stocks

Dean Christians
2021-12-30
A trading model based on the SentimenTrader risk-on/off indicator triggered a buy signal for S&P 500 with an 83% win rate.

Key points:

  • The SentimenTrader risk-on/off indicator cycled from risk-off to risk-on
  • A trading model based on the indicator registered a new buy signal
  • The S&P 500 has rallied 83% of the time over the next 4 weeks after other signals

Composite models are more reliable than a single indicator

The SentimenTrader risk on/off indicator utilizes a weight-of-the-evidence approach by combining 21 diverse components into a single model to assess the current market environment. A level above 50% is considered risk-on.

A trading model that identifies a reversal in the SentimenTrader risk-on/off indicator

The trading model applies a range rank to the indicator to identify a bearish to bullish reversal. This same signal triggered in October, leading to a substantial 1-month gain.

Similar reversals have preceded gains 83% of the time

This signal triggered 48 other times over the past 22 years. After the others, future returns, win rates, and risk/reward profiles were excellent across all time frames, especially the 4-week window. Since 2012, the 2-week time frame has registered 25 out of 27 winners.

What the research tells us...

When the trading model for the risk-on/off indicator reverses from a bearish to bullish condition, stocks are likely to trade higher. Similar setups to what we're seeing now have preceded rising prices for the S&P 500, with a 4-week win rate of 83%.

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Risk Disclosure: Futures and forex trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardizing ones’ financial security or life style. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Past performance is not necessarily indicative of future results.

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