We have an algorithm that we value greatly. I have written about it in this space and have produced a white paper on it. It uses macroeconomic data and has a record over the past 25 years of generating a 13+ percent compound annual ror with a 17+ percent maximum drawdown. The SPY's numbers are 9% and 55%, respectively. Clearly the positive returns come from dodging the drawdowns; there is no beta. BTW, the 75 year history is also very good; suffering only in the 1987 selloff.

At this time the algo is very close to going bearish. It has not signaled bearish yet, but there is a definite possibility. I would not exit long equities without that signal.

The problem is that the macroeconomic data (weekly) is reflecting the effects of two hurricanes. It is perfectly understandable that such data would mirror those unfortunate events. The circumstances clearly are different this time; when have we had two disastrous storms back to back? Because the data is macroeconomic, it is not a flexion fakeout. In fact the technical indicators all point higher. Admittedly we would like to have more information, but that's not forthcoming. An interesting and frustrating problem. At least, the signal has not yet been given.

Rocky Humbert writes: 

I believe the market's reaction tomorrow to American Airline's post-close news this evening may be generally predictive. American guided earnings lower because of the hurricane effects and also because of fuel costs. If Mr. Market doesn't blink, then expect a slew of companies to use the hurricanes as a penalty-free way to guide earnings lower. That is, the teflon market just got a fresh coat of teflon….from the hurricanes.





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