Market Exit Signal Triggered

Junk bond yield spreads triggered an exit signal on Wednesday. I am now oriented 100% for a bear market in my trading accounts.

From the start of 1997, this signal has returned the following on the Russell 3000 from 1997-01-01 to 2016-01-13 (all data from FRED, ignores all taxes and transaction fees):

Buy and Hold Russell 3000
Long and Short on Exit Signal
Long and Go to Cash on Signal

The above is based on a "dumb" strategy of staying out of the market when the yield spread is above the exit signal. In reality, you would use other information to decide a re-entry point, but that it works well on a stupid setting is a good sign.

Following this signal would have you stay out of the market for nearly the entirety of the 2001 bear market, save a couple of re-entry head fakes. Same in 2008, first exit signal was February 2008. It would give you a headfakepalooza in 2011: exit and re-entry happening 3 times (6 trades) over the course of one month, and then 3 more head fakes over the next 3 months.

Even if if offered no excess return, using this signal reduces volatility: the worst trade was a 12% loss in 2002, a buy trade amid the bear market. The biggest loss on a short-trade was 7%.

The chart below shows the first exit signal and the final buy signal for each period.

There were 25 total trades, 10 came during the 2011 period between the first exit signal and final buy signal.
There were 8 trades during the 2008/2009 financial crisis.
There were 6 trades during the 2000-2003 bear market.
There is the exit signal from Wednesday and it went higher on Thursday.

Thanks to the guys at Alhambra Partners who noticed this signal. Stock Market Warning: Credit Spreads Are Widening Again

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