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The CCM 80-20 Correction Index
A Submodel Feeding Into Master Model
The Ciovacco Capital Management (CCM) Bull Market Sustainability Index (BMSI) helps us better assess the health of an established bull market. Even sustainable bull markets, from a longer-term perspective, experience corrections from time-to-time. Stock market corrections can last for weeks or even several months. The CCM 80-20 Correction Index uses probability distributions to help us identify market conditions where the risks of market correction are elevated.
We studied fifty-six instances (1981-2010) where, with the benefit of hindsight, you would have wished you reduced your exposure to risk prior to, or during the early stages of, a relatively significant correction in stocks. The CCM 80-20 Correction Index allows us to assign a single numerical score to the present day market. We can compare that score to the historical scores present just prior to significant corrections in stocks.
The "80" in the 80-20 Correction Index refers to the hypothetical 80% portion of a client's portfolio that would remain invested as long as the bull market appears to be healthy from a longer-term perspective. The "20" in the 80-20 Correction Index refers to the hypothetical 20% portion of a client's portfolio that would be used to reduce risk, raise cash, or even hedge in some cases. The CCM 80-20 Correction Index can help us more effectively manage risk. The 20% and 80%, may, or may not, be appropriate for all clients based on their individual goals and risk tolerance. However, the basic concept of attempting to identify periods of elevated risk can be helpful to all CCM clients.
The logic flow of the chart below is from top to bottom.
Additional comments can be found in Short Takes.
Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC. More on the web at www.ciovaccocapital.com