For traders and investors, one of the challenges is how to build a robust discipline that works well through different market regimes. As a case study, consider this study from Simple Stock Model that generates signals based on the cash flows in and out of the SPY ETF as a sentiment signal. The trading rule is: "If the 4-week average of the 3-month change in SPY's percentage of shares outstanding is greater than +5%, be out of the market."
The chart below shows the equity curve from this trading system (white line = buy and hold, blue line = trading system). The results look pretty good, especially for a relatively low turnover model. (Incidentally, it's on a sell signal right now).
SPY shares outstanding trading system
Not so fast! Don't jump to conclusions before digging into the data and reading the fine print.
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