Market Insights: Long-term momentum model provides buy signal

Long-term momentum model provides buy signal

Last week we came across a long-term momentum model from BMO* that is signaling a buy on the S&P 500.  As opposed to short-term signals, typically used by day traders, these signals have a much better track record of providing good entry point indications for longer-term retail clients.  In looking at their research, it appears to us that this signal has been very reliable in the past.  What we found interesting is that the last time this signal provided a buy signal was the summer of 2009.  There is no doubt that today's environment is vastly different from back in 2009, at what may turn out to be a generational low in the equity markets.  However, this signal is positive in our view and a nice offset to a lot of negative media press we have seen of late on the markets in general.  

In looking at the numbers more closely, a buy signal has been triggered by this model 22 times in the past 86 years.  Of those instances, only three have been false indications; an 86% success rate.  This, in our industry, is considered extremely reliable.  When taking all of these instances together, the average long-term uptrend following the signal has been approximately 23 months and a return of over 58%.  

We also want to add that there is another long-term momentum indicator that we follow from another source that is very close to triggering a buy signal.  It also last provided a buy signal in 2009 (and subsequent sell signal in the spring of 2015).  We will be sure to comment on this potential buy signal in the future if we indeed see it come to fruition.

As we always advocate, one indicator does not make an investment process.  However, it is one more tool, whether viewed in the positive or negative, that can add to our overall strategic decision-making.  

 

*Source: This research came via BMO's head technical analyst of their portfolio management team