Very, very long post: How to time the market and how to time ETFs & Strategies via the Quads

The call for next week: Quad 1-2 again: bullish, staying long!

Existing subs who are familiar with the Quads:

Sorry, this is a very long post, I got in a writing flow and got dragged away into the abyss. But I also do not want to ditch it now, too much work in it and I think here is some value to be found. Please skip - if you want - to the end of this post. Also, I need a reference post on how the Quads work. Thank you!

For new subscribers: What are the Quads and how to use them?

Here is a video about the Quads (in a nutshell: Quads = Network momentum, bullish when high(er) beta instruments (ETFs, Industry Groups, Stocks) show momentum + relative strength, bearish when defensives, dollar and long-term bonds are dominating).

Again, in a nutshell: Quad 1-2 = bullish, Quad 0 (nothing strong), 3-4 = bearish:

Those numbers are put on the chart on Friday evening or the weekend: and they stay there, no revision of the calls! Every Quad call is for one week, I do not look further out.

The call (last weekend):

Now (close of Thursday evening):

How to use ETFs + Quads

If Quads change from Quad 3-4 to 1-2: pick the ones that hold up the best during the drawdown of the market:

Quad 3-4: protect! I like the dollar (UUP) the best.

Example QQQs on 3/3/23:

3/3/2023 (yes, the tape was bullish at the height of the regional banking crisis, higher beta showed unbelievable relative strength).

Above: Watch the relative strength line (red line) of the QQQs —> above the kelter channel, it was one of the strongest Quad 1-2 ETFs (e.g. with the highest relative strength) in that moment, e.g. a great pick. Here is the chart template for TC2000: https://www.tc2000.com/~CVOPD9

Quad 3 example (below) from 2008: USO —> see the relative strength line: above the upper Keltner Channel.

How to use Quads via Portfolio123.com strategies

Only strategies with a bit of higher beta (expressed through earnings growth) can be timed well. Super low beta, value, defensives do not trend well.

Here is a paper of the best trending factors (residual variance = relative strength, relative weakness). Best trending factors are at the top of the list —>

Now here is a big cap strategy (very good one, a bit of higher beta + quality stocks from the SPY, nice!). This one will be rented out via portfolio123.com, I will post the link when it is live —>

Now let’s dig in and do an (approx.) overlay with the out of sample Quad calls (arrow from above sell or hedge, arrow from below long it).

—>

Here is the idea:

a) Be in high(er) beta exposures in Quad 1-2

Not necessarily super high beta ARKK stuff, seldom that stocks with bad fundamentals are strong, for this you need a “perfect” Quad 2 market (after a deep crash), hard to time, so I go a bit lower with my beta (1.2 - 1.5 is the sweet spot).

Also working well in Quad 1-2:

• CANSLIM / Breakout strategies / Episodic Pivots (for example on stellar earnings reports).

• Momentum trend following strategies.

• Crypto trend following strategies.

• Small cap value momentum strategies (best with an earnings tilt, e.g. ranking systems that give stocks with stellar earnings better rankings, small cap value momentum without an earnings tilt can underperform badly in a late stage Quad 1-2).

• Higher Beta + Quality P123 big cap strategies (not pure Quality = beta is too low to beat the market!).

• Combine with “hot themes”: best traders, which I do not belong to, have a golden hand to spot “hot themes” discretionary, they spot a Quad 1-2 (mostly buy just watching the tape) and spot the hot theme and then trade their setup in the exact right stocks with 3-8 positions: Champions!

b) Protect in Quad 3-4

Long XLE / short IWM pair trade or long the Dollar (UUP) in Quad 3.

And be in the Dollar (yes, boring, but it trends the best) in Quad 4.

Higher cash level in Quad 3-4 is a very fine idea.

Also hedged small cap value momentum stuff works o.k. in Quad 3-4. Gold can be a theme in Quad 4, but it is not trending well since 2011.

If you want to short stocks, Quad 3-4 is the time, just not my cup of tea (hard to get bullish again if you have been successfully short, it’s addictive as heroin, no touch for me!). IWM is a good short in a fresh Quad 3-4 (especially in a year when liquidity is down).

Again examples:

Quad 4 exposures in 2022 (a prolonged Quad 3-4 time, + liquidity was down the whole year):

Now look at the difference to “no touch” high beta in Quad 3-4:

Small cap value momentum in a Quad 3-4 (dominating theme was Quad 3, so small cap value momentum picked energy stocks, which are strong in a Quad 3, that saved 2022!).

Small cap value momentum (with an earnings tilt) unhedged:

Small cap value momentum hedged (with an earnings tilt):

High(er) Beta with Quality in 2022, better than the market, still not recommended in a Quad 3-4:

No touch for longs in Quad 3-4:

• High Beta (it is a short in Quad 3-4, not a long!). Do not get dragged into great fundamental stocks with a high beta in Quad 3-4, they will crash, no matter the fundamentals!

• Super high beta stocks with no earnings lose up to 95% in a prolonged Quad 3-4 and takes 10-15 years to come back. I warned not to long high beta (especially ARKK + Crypto) the whole 2022 year.

• Crypto (it needs liquidity and a Quad 1-2!)

Bigger Picture 2024: forget most macro data, watch Liquidity and how good trending factors react (measured by the Quads!)

Druckenmiller:

https://macro-ops.com/lessons-from-a-trading-great-stanley-druckenmiller/

“Earnings don’t move the overall market; it’s the Federal Reserve Board… focus on the central banks and focus on the movement of liquidity… most people in the market are looking for earnings and conventional measures. It’s liquidity that moves markets.”

[…]

“I never use valuation to time the market. I use liquidity considerations and technical analysis [comment from me: in my interpretation he is looking at higher growth / higher beta instruments and how they behave, Tech + higher beta cycs —> e.g. network momentum of those instruments, e.g. in my words the Quads] for timing.”

There are always 1000 reasons (and one will find 1000 reasons in every bullish market) why this market should crash: valuation, seasonals (second half of Feb is bad!), weak breadth, strong interest rates, strong dollar etc.

But: there is one big thing driving this market: Liquidity —> China is pumping like crazy, the Fed also provides liquidity (not too hot though but supporting). Therefore, the market is very forgiving right now and it can swallow a ton of things.

Watch all the videos from Crossborder Capital on YouTube. They have (again in my opinion] the best measurement of liquidity (up or down).

If you want to look at macro data, watch liquidity (and #2 inflation via truflation.com). Every other macro data point is secondary because the market leads macro data, the market reacts weeks and months before macro data turns around (like in the beginning of 2023!).

If liquidity is up (now the case, probably all 2024 + 2025) we have a tailwind. So, there is no reason to be bearish if we see a Quad 1-2 bullish tape.

So what is the Quad nearcast for next week?

All right, after a stellar earnings reaction to the NVDA earnings (lol!) we are back to square, e.g. back to all-time highs.

This stuff stayed bullish all of last week:

We stayed in Quad 1-2 all week, even on Wednesday when the advance-decline line pulled back to support.

There was zero damage to be seen on Quad 1-2 exposures, they have hold higher lows. (Picture from the close of Wednesday, the low of the week, I will show how it looks now at the end of this post):

Quad 1-2 System, leading stocks from the QQQs (will also be rented out on portfolio123.com, I will post the link when it is live), if we hold the low of the last flag, we are fine, again no damage to be seen (picture from the close of Wednesday).

Quad 3 and Quad 4 exposures were nowhere to be seen (pictures from the close of Wednesday).

UUP and 10Y are up, but they are not bullish trend (since the red line = relative strength is not above the upper Keltner Channel): The market pulls away from interest rates, as long interest rates are not strong via price + (!!!) show relative strength against the SPY we are fine!

Leading stocks: This system buys very good-ranked stocks (momentum, industry momentum, earnings, value etc.) and sells 2 weeks after earnings. (I have tons of similar systems like this, buying 2 weeks before earnings etc., they all look fine) So, earnings reactions are good now.

There was not a lot of selling pressure lasts week. I love this indicator from TrendEdge —> https://trendedge.app/indicators, it looks at stocks which get sold hard versus the stocks that get bought hard —>

The Quad Call for next week

Now have look at the Quad 1-2 ETFs on Fridays close (looks like an uptrend to me ;-))

The call for next week is bullish: Quad 1-2!

Here we go —>

All good, we ride the trend until the Quads change. I am long about 90% right now.

Have a great weekend. Again, sorry for the long post, I got dragged away in a writing binge ;-)

All the best and best regards.

Andreas

P.S.

If you make money with the Quad calls, please consider supporting this blog (it is 25$ a month). Thank you!

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