A “Failed” Buy Signal?

Reader Gary brought up an interesting question regarding the fact that a new domestic Sell signal has been generated after just having received a Buy signal on 5/15/08. Here’s what he had to say:

Enjoy your newsletter very much. You are on the “mark” with your criticism of government “doublespeak”.

I know you are not in the “prediction” business but I would like your opinion of “Failed” signals and what they might mean to your trend tracking.

I have looked back through my records all the way back to 1991. The closest incident may be the events as they shaped up in the year 2000. Take a look at the chart below (double click to enlarge):



This is our domestic Trend Tracking Index (TTI) and the topping formation (on the left), which occurred during the blow-off period starting in April of 2000. Notice that we subsequently went through 3 very short-term whip-saw signals (the buys are the blue arrows) before the bear trend was confirmed, and we finally exited to 100% cash on 10/13/2000.

As you can see, while in the bear market, we experienced another whip-saw, this one lasting about 3 months (from 3/7/02 to 6/12/02), which turned out to be the precursor of the bottom of the bear market and the subsequent turnaround, which moved us back into equities on 4/29/2003.

While this past history is certainly not conclusive, I believe that a short-term Buy signal is a sign of uncertainly and could possibly be considered a blow-off until the real major trend settles in. In today’s market environment, that would translate into bullish rally attempts before a bear market establishes itself.

Since we won’t know for sure how this current scenario will play out, you simply need to follow the trends even if it means a whip-saw or two. The ultimate goal here is not to go down with the bear, which you need to avoid at all costs, especially if the future holds anything like past represented in the above chart.