ETF and index provider Reality Shares Advisors has launched the Guardian Indicator, a proprietary new market-strength indicator designed to identify long-term directional changes in the stock market.
The Guardian Indicator’s forecasting algorithm applies a unique combination of momentum and volatility gauges to the sectors of the S&P 500 to signal long-term market downturns and alert investors to decrease market exposure in order to mitigate the impact on their portfolios.
“Markets are subject to extended downturns driven by both fundamental and emotional factors, but Reality Shares’ Guardian Indicator provides a quantitative signal to identify market trends and help to mitigate the impact of price declines,” says Eric Ervin (pictured), President and CEO of Reality Shares Advisors. “The Guardian methodology uses a disciplined approach to help investors reduce volatility and risk in their portfolios, and has a wide range of applications for investors looking to navigate the noise and volatility of the markets.”
Under the Guardian methodology, a negative indicator in either its momentum or volatility gauge is predictive of a declining market. To generate the most accurate forecast, the Guardian Indicator applies this methodology to each of the 10 sectors of the S&P 500 in order to measure the broad-based health of the market. When eight or more of the sectors are positive, the Guardian Indicator is positive and the overall market is predicted to rise. When three or more of the sectors turn negative, it signals a broad market decline.
The Guardian Indicator has been successful identifying major long-term market declines in backtested (simulated) results. Over the past 15 years, it correctly forecast both of the major bear markets in the US, signalling to reduce market exposure from 14 September, 1999 until 21 May, 2003, during which time the S&P 500 Total Return Index fell 27.23 per cent. It also signalled to exit the equity markets from 17 December, 2007 until 8 July, 2009, when the S&P 500 fell 36.75 per cent.
As a result, the Guardian Indicator has been shown to enhance returns and reduce volatility through a wide range of market conditions. In backtested results for the 20 years from 1995 through 2014, investing in the S&P 500 Total Return Index (SPXT) during positive Guardian Indicator signals and shifting assets to the Barclays US Aggregate Bond Index during negative signals would have generated average annual returns of 14.3 per cent, about 40 per cent greater than the 10.6 per cent return for the S&P 500 alone. Over the same period, the Guardian Indicator strategy had 10.5 per cent average annual volatility, nearly one-third less than the 15.1 per cent volatility for the S&P 500.