Blay Timing Indicator Q&A

Questions regarding the 4/20/23 BTI Buy signal.

Q: Why buy now when the banks are stressed, earnings are cooling, and the economy will enter a recession soon?

A: Our Indicators have an excellent record, so I made a habit of not second-guessing signals. In real-time, acting on most Buy signals hurts. It’s human nature. Historically, 78.38% of BTI BUYs have been winners. The win/loss ratio stands at 3.42, meaning we make much more when winning than when losing. So I know the odds favor a successful outcome, and if it were a loser, I know that the next successful trade is around the corner. Regarding the economy, we should pay little attention to stock market predictions based on fundamentals. It is good to keep an eye on them, but the market has a mind of its own.

Q: This 4/20/23 BTI Buy signal has been flashed after the DT21C 11/10/22 Buy. Are late BTI signals worse than early signals?

They are as good as “early” signals. The profit factor and the average trade are almost the same irrespective of being the trade an “early” or “late” entry.

Q: I hope all is well. I’m curious why you say to buy just before the close instead of earlier in the day.

A: There are several reasons:

1) I devised the BTI to be as stress-free as possible. So, I wanted to have 24 hours between the date of the signal and the execution date.

2) The close is less volatile than the open. So, unless you have a great broker, buying on the open does not guarantee you will get a fill at the open’s price. The risk of slippage is much higher.

3) I tested three variations:

3a) Buy at the close signals’ day (that would have been yesterday’s) close, which is quite stressful, as one has to rush.

3b) Buy at the next day’s open (that would be today’s open).

3c) Buy at the next day’s close (that would be today’s close).

There is a consistent pattern: 3a is the worst option (fewer profits and lower profit factor). 3b is better than 3a. And, finally, 3c is the best one.

So, while the difference is small, and all variations are good, I settle with option 3b (today’s close).

Q: Question regarding the 4/20/23 Buy signal: So the previous high for S&P and one other do not need to be exceeded to go to 100% for the BTI to signal a BUY? Please provide some background on the reason, if possible.

A: The Composite takes its signals from the DT21C and the BTI.

Taking out previous highs is one (not the only, of course) element of the DT21C. The relevant highs for a DT21C BUY were broken up on 11/10/22. Subsequent break-ups merely confirm the BUY signal but are NOT a new BUY.

The BTI is not based on breaking up previous highs. If the two indicators that make the Composite we

A: The Composite takes its signals from the DT21C and the BTI.

The BTI is not based on breaking up previous highs. If our two indicators that make the Composite were based on taking out highs, they would be too correlated. Diversification of strategies is vital. More about the BTI HERE.

So, given that the BTI signaled a BUY for 4/20/23, the Composite goes to 100% invested.

General questions:

Q: did you also backtest with the (delayed) signals for margin debt? I’d guess that a 20-day delay (19th of April vs. last day of March) in ‘taking’ a trade would make a big difference in its result.

A: Yes, of course. I assumed in my backtest that margin debt figures were released on the 22nd of each month relative to the previous month. So, January 2002 margin was coded like February 22^nd, 2002, etc.

This month MD was published very early (on the 19th). However, it tends to be published around the 22nd. So, in the backtest, the trend assessment of MD was made, taking into account figures on the 22nd of each month. Please mind that the 22nd is NOT the date of a Buy/sell signal (as the signal depends not only on MD) but the date I took in the backtest to input changes in MD level concerning the previous month.

So the backtest took entirely into account the delay in the publication. As an aside, given that MD is not the buy/sell signal but merely one of the three factors needed for a signal, its publication date is not so critical, as, in some instances, the buy/sell signals are given some days after MD is published. In the latest trade, we had enough momentum and market health before MD turned positive, so the last input we needed was margin debt, so we acted a.s.a we got the MD reading. However, if, for instance, market health had been bad, we would not have bought on 4/20/23 and would have waited to act until market health turned positive. This makes the specific timing of MD even less critical.

Q: Will the BTI be covered the same way as the Schannep Timing Indicator (STI) or the Dow Theory for the 21^st Century (DT21C)?

A: Yes, the BTI will be covered the same way as the STI or DT21C. If a signal is given, we will alert you by email/Discord, and our Letter will echo it.

Q: Will the STI be updated in the future?

A: The STI will not be updated in the future (more details in our November 1st 2022 Letter

https://thedowtheory.com/what-no-capitulation/

The BTI will replace the STI. The BTI is at least as good as the STI.

Q: What are the similarities between the STI and the BTI?

A: The STI and BTI have more similarities than differences:

Both consider the liquidity that may influence the stock market—the STI through monitoring the monetary policy, and the BTI by tracking the trend of margin debt.
Both take momentum (the trend) into account, and the required strength of the trend changes depending on the monetary environment. In other words, if liquidity abounds, both Indicators will demand less momentum to trigger a “BUY” and more downward momentum to start a “SELL.” If liquidity is negative, more upward momentum will be required for a BUY and less downward momentum for a SELL.
Both use several indexes to require confirmation. Momentum in just one Index is not enough to signal a BUY or SELL. Confirmation is vital.
Both can trigger a signal every day.

Q: What are the differences between the STI and the BTI?

A: There are the following differences:

The STI is based on the NYSE, DJI, and the S&P500. The BTI is based on the S&P500, DJI, DJT, and Utilities.
The BTI’s way of assessing liquidity is by using margin debt instead of “free reserves” & the “Fed Funds rate.” After all, margin debt is actual money invested in stocks, not “potential” money.
In addition to the trend of margin, the BTI uses the relative strength between such 4 Indexes to assess whether the market environment favors higher or lower prices.
The STI Buy/Sell levels are fixed for the whole week (albeit they can trigger daily). The BTI Buy/Sell levels vary every day.

So as you can see, there are more similarities than differences. The approach is very similar.

Q: Does the BTI make a good component for the Composite?

Yes. The Composite based on the BTI and DT21C works perfectly well. From 1978 to 2022, the Composite handsomely outperformed Buy and Hold and each of its components.

Q: Why do you keep the BTI proprietary?

A: As with the STI, the BTI will be proprietary. It took so much work to develop and ensure its robustness that, at this moment, I prefer to keep it proprietary. However, you can get an excellent grasp of the BTI’s workings by reading our Special Report.

https://thedowtheory.com/subscriber/special-reports/blay-timing-indicator/

Q: Given that the BTI gave a BUY signal a week ago, I am wondering what the stop loss mechanism is? In your original write-up, you wrote: “…by having trailing stops based on confirmation which change depending on the market condition;”

I cannot say much, as the BTI is proprietary. I can say that:

a) it is based on confirmation (as you know) to weed out false SELLs

b) it is evaluated every day (so not based on weekly or monthly bars) but triggers seldom (one of the four requirements of a good trend following system: http://www.dowtheoryinvestment.com/2022/10/dow-theory-update-for-october-28-four.html )

c) it trails (as you know), so as prices go up, it goes up and never goes down again until stopped out.

d) market health affects the “tightness” of the stops. There are two regimes.

e) it is not based on moving averages. You’ll probably know by now that I am not a big fan of moving averages.:=)

Q: The period from 7/9/2010 and 3/4/2015 multiple Buys were signaled but that some occurred on the same date. Those trades are exited on different dates. Note that there is no note about capitulation. Could you please provide an explanation about the correct signals? Is there a mistake?

A: There is no mistake.

Explanation:

On 7/9/2010, there was only one buy signal.

On 8/8/2010, there was Capitulation. Since we were already 100% invested, we did not buy. We did nothing, and our record shows nothing.

On 8/9/2010, the BTI triggered a SELL. Given that we had Capitulation (one day before), we only sold 1/2 of the position. This is not new. This is standard praxis with Capitulation: It entails a 50% Buy if we are 0% invested. And if Capitulation triggers before a Sell signal, then we only sell 1/2 to remain 50% invested. The first Capitulation always implies a 50% investment. If we are in cash, go to 50%. If we are 100% invested and get a SELL, then sell only 1/2.

Given that on 8/9/2010, we only sold 1/2, there were two consequences:

a) we had 50% cash to be deployed at the next Buy, which occurred on 12/7/11 (trade #28)
b) the 50% bought on 7/9/10 not sold on 8/9/10 was sold together with the 50% Buy on 12/7/11 on 3/4/15.

So, it was only one Buy on 7/9/10 with two separate SELLs.

Q: Have you tested the BTI applied to high Relative Strength ETFs?

The BTI has not been tested on high RS ETFs. So, I withhold judgment. I don’t venture into untested waters. However, the day I find time, I will research integrating high RS ETFs with the BTI or, even better, with the Composite. It will undoubtedly come, as it would provide an additional layer of diversification (buy 50% high RS ETFs when the DT21C gives a BUY, buy 50% when the BTI triggers a BUY)