MAMOx Year in Review
- Posted by DynamicHedge
- on January 2nd, 2013
Back in 2010 we came to the realization that many of the tools we were using pre-crisis had stopped working. Instead of complaining, we innovated. My trading partner and I immersed ourselves into inter-market analysis. After months of work we came up with the MAMO and MAMOx indicators (MAMO stands for Multi Asset Macro Oscillator). These indicators illustrate the relationship between risky and (relatively) safe assets. The theory is simple, when the market is favoring risky assets, stock market returns tend to be positive; when the market is favoring safe assets, stock market returns tend to be negative. The blue line is the representation of the binary risk-trade. When it’s above the zero line risk assets are in favor and the market is healthy, when it’s below the zero line risky assets are out of favor and it’s probably not a great time to have excessive long exposure. Both MAMO and MAMOx use the same calculations, but the asset pool is different. MAMOx adds additional hand-picked assets to increase the sensitivity to what is currently driving the market.
The indicator had a good year. It kept you out of the market when Europe was “definitely probably” collapsing but got you back in before the market launched in the first quarter. It kept you out of the mess in October and November but signaled a bullish market even as Congress went from plan A to B to D on the fiscal cliff. It calculates, in a unique manner, what market participants actually do (not what they say they do). It filters out all the noise and it keeps you on the correct side of the market more often than not. The best part is that it’ not a lagging indicator — it triggered before any serious downside damage occurred and kept you in the market for the whole choppy trend to the upside. What else can you ask for?
Here are some turning points that I highlighted on the blog. The actual day a mechanical system would have acted based on the signal generated is listed in brackets:
Previous signal (October 31, 2011 BULLISH)
Darkness is Spreading — April 17, 2012 (April 23, 2012 BEARISH)
Marketview: Reflation Trade or Something Else — July 1, 2012 (June 25, 2012 BULLISH)
Marketview: A Word of Caution — October 13, 2012 (October 29, 2012 BEARISH)
Marketview: Positive Perception of a Mixed Week — December 8, 2012 (December 10, 2012 BULLISH)
In retrospect I should have been yelling at the top of my lungs at each turning point. That’s just not my style. Plus, no matter what a line on a chart says, there’s always risk in the market and you have to be on guard for the unexpected. The indicator as it stands now will not work forever. It requires constant tuning and adjustment to the basket of assets based on what is driving the market. Luckily, we have a good system for figuring that out, too.
The indicator is still bullish. There should be more choppy conditions, but if history is any guide, more upside is in our future.
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DynamicHedge is an equities, futures and derivatives trader based on the West Coast. He runs a long/short opportunistic relative-value strategy within a proprietary trading group. More