Earlier this week, I unveiled the Greed Gauge to the public for the first time.Some viewers noted that it looked familiar…They’re right. At first glance, my Greed Gauge looks a lot like the popular MACD.MACD is a widely followed momentum indicator. I’ve tested it extensively. And out of the hundreds of indicators out there, I’ve found it’s one of the best.The problem is MACD is most useful for identifying long-term trends. When it comes to active trading, it doesn’t do well.If you’re satisfied with smaller gains that take a long time to play out, MACD is fine…But if you want quick gains that add up to significant wealth, let me show you exactly how the Greed Gauge is so different.
MACD v. Greed Gauge
To see the difference between MACD and my Greed Gauge, it’s important to understand how they’re calculated.MACD is calculated using a series of moving averages. This series, shown as bars at the bottom of a chart, identifies the long-term trend.My Greed Gauge, on the other hand, uses relative strength to show short-term trends in the market. It measures the ratio of the most recent close to the 52-week high.Academic research shows that relative strength strategies tend to beat the market. It’s the momentum anomaly to the efficient market hypothesis.And my Greed Gauge certainly outperforms MACD…The chart below shows both indicators charted for the S&P 500 ETF (SPY) in the last six months. The Greed Gauge is in the middle of the chart, and MACD is at the bottom.
(Click here to view larger image.)
While MACD remained bearish the whole time, the Greed Gauge provided six trade signals. Four of those were winners — two in December, one in March, and one this month.(The most recent buy signal is still playing out. If you want to be notified the instant my Greed Gauge turns red, click here.)Now, many traders are satisfied with tools like MACD. But that’s because they don’t bother testing them — and don’t realize these popular indicators have a number of issues…For one, MACD’s long-term signals mean that you need significant capital to trade it. On average, buy signals last about two months.This long holding time is partly because MACD’s sell signal develops slowly. It comes only after the downtrend is obvious. At this point, you’ve often lost a significant portion of any gains.So for such a long holding period, MACD delivers pretty small average gains per day.I set out to fix these problems with my indicator.The Greed Gauge is a short-term tool. The average signal only lasts about a week…And the average gain per day is 2.1 times the average for MACD — while the average loss is smaller.When it comes to trading the markets, the Greed Gauge is a no-brainer.I’ll continue using indicators like MACD to define the direction of the trend and provide long-term signals.But the Greed Gauge is for the greedy. It’s for traders who want to accumulate short-term gains that add up to significant wealth over time.If that’s you, go here now while my presentation is still available.
Regards,
Michael Carr, CMT, CFTeEditor, True Options Masters
Proof the Fed’s Sowing Chaos
By Michael Carr, Editor, True Options Masters
(Click here to view larger image.)
Your managing editor Mike Merson is out of the office today, but I couldn’t send you into the weekend without a chart to mull over…Federal Reserve policy is in transition. Interest rates are going up and the Fed is downsizing its balance sheet.We know what to expect when interest rates go up. For one, loans become rapidly more expensive.But understanding the Fed’s balance sheet is more difficult…During the financial crisis that began in 2008, the Fed bailed out Wall Street. They didn’t say they were doing that, of course. But that was basically what quantitative easing did.
Under QE, the Fed bought bonds from large Wall Street firms. The firms used this money to increase lending to consumers and businesses, and to increase their profits.All those bonds ended up on the Fed’s balance sheet — i.e., their investment portfolio. As the Fed spent trillions of dollars, they bought more and more bonds.Now the Fed holds more than $2 trillion in mortgage-backed securities, about 30% of the market.As the Fed unwinds its balance sheet, no one knows what will happen. That uncertainty is disrupting global markets. Today’s chart shows that jumbo mortgages (loans for more than $ 647,200) now carry lower interest rates than standard mortgages. Conventional mortgages (the red line) became more expensive than jumbos earlier this year.Jumbo mortgages, unlike conventional mortgages, are not insured by the government and generally don’t carry private mortgage insurance. Because they lack insurance, they are riskier — and therefore should carry a higher interest rate.But as the Fed unwinds its balance sheet, traders are more worried about risks in the mortgage market.If the Fed didn’t foresee this disruption to the mortgage market, we have to wonder what else they missed. Of course we’ll know shortly, as soon as the next Fed-induced crisis unfolds.
Regards,Michael Carr, CMT, CFTeEditor, True Options Masters
