(Please see “SPYmaster Graphic” tab for pictoral view)
Warner’s Percentimeter (WP)
WP uses advancing/declining issue and volume statistics to determine the current balance of buy/sell forces in the stock market. These are run through a proprietary algorithm developed by Seth Warner which shows the net market forces on a scale of from +100, the best market possible, to -100, the worst. During and at the end of a trading day, WP allows an observer to say what kind of day the market is having or has had. It might have been a moderately strong +56.7% market to a horrible -91.3% market as on 2 March 2009.
SPYmaster
WP is the heart of SPYmaster. To make SPYmaster, WP is multiplied by total NYSE volume and then plotted in two differentially smoothed moving averages. When one average crosses the other a buy or sell/sell short signal is given. The moving averages are fixed at lengths that have been optimized on 3,275 days of historic trading over the 13 year life of SPY to produce the most consistently profitable results. The moving average crosses are arranged in an unusual contrary manner to facilitate "buy low/sell high" protocol.
This relationship causes many buy trades to be executed near the low for a day and sell trades near the high. All trades in our studies have been executed at SPY's closing price. You need to know that SPYmaster always has a position in the market....either long or short... unless you are a long only investor in which case you should exit the market on a sell/sell short signal and stay in low risk cash or the money market until the next buy signal.
Risks
While SPYmaster's results have been excellent, one should bear in mind the following:
1) The algorithm has been optimized on historic data and thus fit to the data rather than the data fit to it.
2) It is assumed, but there is no way to know if future data will be similar to the data on which the system has been optimized.
3) As is clear from the “Results” page, SPYmaster generally works best in bear markets. Results can be amplified when the user sells short for the opportunity to make money while the market declines. Inverse ETFs, such as SH can be used for this purpose.
4) The SPYmaster model offered here was developed to be the best over the entire study period. While overall it delivered excellent results, it had poor relative results in several bull market periods.
5) 56.3% of the long/short model's and 63.3% of the long only model’s trades have been profitable. With over 40 years' portfolio management experience under our belt, we know that markets are not one way streets, and these are excellent odds for winning. We believe the spectacular results achieved here by SPYmaster in this one highly diversified security over this lengthy period compare very favorably with those of most investment managers.