What is the MMSignal?

 

The MMSignal is a panic/euphoria index for the broad US stock market, i.e., the S&P 500 index. It is a mathematical value generated by our proprietary model, which is based on the market data of more than 5 decades. Our model digitalizes the panic (or complacency) level of the general investing communities with regard to the equity market. Combined with a very unique method of technical analysis, this model provides an independent, yet objective, measurement of how the investing public is reacting to the market with their money. 

 

Our index is different from other market models or technical indicators in two major aspects. First, its mathematical value does not have a limit range even though its value is also dimensionless. Depending on the strength of the bullishness or bearishness of the market as seen by our proprietary model, it can be ultra high when the MMSignal considers it is bearish or very low (in negative territories) when it thinks the market is too bullish. This allows us to keep tracking the market under all conditions. For instance, while the extremes for the S&P 500 index is normally from +10 (panic) to -10 (euphoria), we have seen +35 (extreme panic) in 2001. Many other models or technical indicators, on the other hand, are ranged within -1 to +1. There are period when these indicators stay on their extreme levels either at -1 or +1 while the market still moves significantly. Second, the MMSignal is neither a technical indicator nor a mathematician’s toy of market modeling. It is composed of a panic/euphoria factor and a valuation factor. While each of these two factors tracks the market movements well they tend to show some delays. When combining them into our model, we have optimized the percentage ratios of each based on the market data since 1950. This dramatically improves its effectiveness in terms of market timing.

 

When the MMSignal is zero, our model means that the investing public’s fear/love of the equity market is balanced. Theoretically, it implies that the market will stay flat. If the MMSignal is positive (above zero), it suggests that the investing public is more panic, which implies that the market should go down as a fearful investor would take more defensive positions. On the other hand, when the MMSignal is in negative territory (below zero) our model indicates that the investing public has more love than fear with the stock market, which implies that they tend to pour more money in and drive the S&P index higher. The graphs below show how it tracks the market movements.

 

                                

  

                    

The first graph is a 52-week chart of the MMSignal for the S&P 500 index up to mid-November, 2006. Below it is how the S&P 500 moves during the same period of time. From these two graphs you can see that the MMSignals model clearly detects all major market moves. For example, three deep bottoms of the S&P 500 index in late October 2004, mid-April 2006 and mid-October 2006 all are detected with a variation of less than 2 days. For those who have access to Citigroup’s panic/euphoria model (you can have a glance of it each week on Barron’s magazine), you can compare the two and will find that while Citigroup’s model in general also tracks the market movements, it gives delayed signals for the market moves. For instance, if we followed it and decided to buy the S&P 500 in early May 2006, and early November 2006, we would have missed the market bottoms by roughly 2-3 weeks. In these 2-3 weeks a lot of easy money has been made already by our members.

 

The MMSignal’s Historical Trends

 

As a market indicator, the MMSignal has a direct, straightforward correlation with the S&P yearly returns. The chart below has compiled the MMSignal’s yearly average values and compared them to the percentage annual returns of the S&P 500 for over 55 years (from 1950 to November 4^th, 2006).

 

 

The correlation, as the straight line and the equation show, is strikingly significant.  Without a doubt, this relationship clearly confirms that the MMSignal is a reliable oversold/overbought indicator for the S&P index.

 

How can the MMSignal Work as a Market Indicator?

 

When plotted against time (in days) the MMSignal value changes around zero, reflecting the ups and downs of the US broad market as indicated by the S&P 500 index. However, whether the MMSignal value is above or below zero cannot be simply considered as a buy or a sell recommendation even though it does indicate whether the market is either oversold or overbought. The dynamics of the MMSignal values detect the dynamics of the US broad market. For instance, in the example chart below, the MMSignal drops below zero on day 7. While it indicates that the market is most likely overbought, the overbought market can become even more so as the MMSignal curve continues its decline. During this decline the S&P 500 index will continue to go up. However, on day 11, the MMSignal hits a bottom and on day 12 it has clearly started its up turn. This bottoming process is a process in which the US broad market as indicated by the S&P 500 index becomes from extremely overbought to less so, and even continues on to become oversold. Simply put, a bottom of the MMSignal curve is an indication that the investing public is at its peak of market complacency, thus it is a good SELLING opportunity.  On the other hand, the peak of the MMSignal curve represents the highest panic level of the general investing public, as day 21 shows. Similarly when the MMSignal value is dropping, it is a process in which the broad market recovers from the oversold status to less so, and even continues on to become overbought. It does not need say that the peaks of the MMSignal curve are the best BUYING opportunities.

 

 

Of course in reality, it will be more complicated than this, but it is not too much more complicated. Our research has found that the 5 day moving average trend-line of the MMSignal offers the best confirmation and timing of the bottoms and the peaks of the MMSignal trend. This can be seen in the 2004 market chart by MMSignals below. In each of the MMSignal peaks, the cross-over point of the MMSignal curve and its 5 day moving average trend-line gives the excellent timing for buy. In general, when the MMSignal curve penetrates through its trend-line on the decline the market has its peaks too. When you have a current market chart by MMSignals, the decision of investing will become almost as easy as ABC.

 

 

MMSignal Expansions

 

When the MMSignals model is applied to a sector or an ETF, it generates a specific signal for that sector or ETF. The MMSignal for a specific sector or ETF works in the same manner as in the case of the S&P 500 index. The MMSignal for the S&P 500 index, in fact, can be considered as the specific signal for SPDRs (SPY). In addition, we track the most popular ETF’s covering the broad market and specific sector, i.e., DIA, QQQQ, nine Sector Spiders, GLD (a gold ETF) and TIP (a bond ETF). An example below shows the MMSignal for the Material Sector Spider (XLB).

 

 

Similar to the case of the S&P 500 index, the MMSignals for sectors or ETFs can be very useful to investors as they also detect the peaks and bottoms of the sectors or ETFs well.

 

When the MMSignals model is used for an individual stock, it becomes a pure technical indicator. Below is an example for Microsoft (MSFT). You can easily see that it is one of the best technical indicators. It is worth noting, however, that the MMSignal model is different for individual stocks compared to the index because our model cannot digitalize the panic level for individual stocks (we do not know who else can either). As a result, we do not highly recommend its use for individual stocks, especially these with little liquidity. If you need a complete database for an individual stock, please write us at info@mmsignals.com.

 

 

As you can see, we would have taken some defensive actions on MSFT in late November. Another example is Shanda Interactive Entertainment Ltd. (SNDA) as shown below. As its MMSignal high in the alert area and yet still trending higher, we consider the risk/return ratio is too high to buy back into SNDA.