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This is our flagship mechanical market timing system, the culmination of 12 months of in-depth research and back-testing. The SUPERModel is a combination of three main market timing models we have published on this site, namely the Repo Rate Model, the Trendex Momentum Model and our adaptation of the SA Reserve Bank Leading Economic Indicator into a Econometric timing model.

Each of the above timing models have shown to be excellent performers over time, significantly outperforming the ALSH index by at least a factor of 5 to 10 over 31 years, whilst being exposed to stock market risk less than 50% of the time. However each one has its good and bad points. Some will be overly conservative and miss great bull runs. Others will be less conservative and catch the great bull runs but then get caught in some major market corrections. Some will avoid all corrections but miss some bull runs. Some will catch all the bull runs but also catch some hefty corrections.

Even with their various weaknesses, all these strategies significantly outperformed the ALSH index. However we feel that the volatility of being caught in some of the crashes or the doubt caused by sitting on the sides when the market is roaring would not suite many private investors.



The SUPERModel combines these three market timing systems into a single composite timing model. Our studies encompassed which systems did well in bull runs, which did well in bear markets and which combinations of systems worked well together. In addition we included the actual value of the Repo Rate monetary policy indicator (MPI) in the composite model, since we have shown various values of this indicator to be a good predictor of likely market returns.

In addition, the number of models presenting simultaneous BUY signals also impacted returns. When 2 models were firing the JSE returns were far higher than when 1 or no models were showing a signal.  Certain pairs firing together ALWAYS produced stellar returns. When 3 systems were firing BUY signals and the MPI was greater than a certain value then amazing returns were consistently generated for the 4-6 months these conditions existed. Under certain pairing configurations good returns were generated even though the Repo rate MPI was showing -2 or -1.

The above allowed us to program FIVE SIMPLE RULES into the SuperModel based on the presence of Repo Rate, Trendex and Reserve Bank model BUY/SELL signals as well as the value of the daily MPI. We will not disclose these rules as we have done with all the other models we have published, but they are just as simple, specific and unsubjective. The reason we are not disclosing these rules is that we have a patent application pending. The five rules generate a SuperModel signal-line score from -2 (very bearish) to 3 (very bullish). We will show later how predictive these scores are in determining likely JSE returns at any point in time.

So the SUPERModel takes the best of all the models we have researched and in addition to generating very specific, unsubjective mechanical BUY/SELL signals it also shows a "market power" score that is indicative of likely future stock market returns.

PERFORMANCE BACK-TEST
The SuperModel Signal line over the last 31 years appears below together with a log-scaled ALSH index. A BUY is triggered when the signal line touches zero from below and remains in force until it drops through the zero line back into negative territory.



The transactions that were performed together with the respective period growths are shown below. We note that not a single period of being invested in the JSE resulted in a loss. The strategy had us in the JSE for 47.7% of the time, earning on average 36.5% per annum. Average JSE growth whilst the strategy had us sitting in the bank or money markets was  -3.6% per annum - EXACTLY when we wanted to be out the stock market!



The Total Return Index (TRI) of the SuperModel Versus the JSE and the 3 main sub-models that it is comprised of is shown below. At this stage we need to point out that none of our timing models perform well due to one or two isolated "lucky breaks" as the TRI curves over 31 years shows CONSISTENT performance and behaviour from inception. The "jagged" sections of the curves below are periods in the JSE, the more smooth lines are periods in the bank/money markets.



The first two 10-year periods are shown separately below, since the long time horizon in the above chart makes them indistinguishable.





CRASH RESISTANT STRATEGIES
We examine the last 10 years starting from a R1.00 investment to see how the various strategies performed in more recent history, and more specifically how they fared in the recent great 2008 crash:



Look at how the Reserve Bank model cruised all the way up the last bit of that massive 2003 five year bull run, ending some 12 months after all the other strategies had "bailed out". In fact, up until all the other strategies switched to cash, the Reserve Bank model and the SuperModel were neck and neck and the last 12 months of the JSE bull run allowed the Reserve Bank model to gain a lead. Note that the Reserve Bank Model has yet to fire a signal as of 1 July '09.

Whilst this may create the impression the Reserve Bank model is better than the SuperModel, this is the only instance in the last 31 years where the Reserve Bank Model "hung on" till the bitter end of a market peak before bailing into cash, and long term tests show the SuperModel more consistent in its performance over time. You can see this by looking at the "First 10 years" and "2nd 10 years" charts in the previous section where the Reserve Bank model trailed the SuperModel. But remember, the Reserve Bank model is a component of the composite SuperModel and when it does well, it gives the SuperModel a boost.

Note how every one of the core timing strategies sensed a crash coming and "bailed out" into cash. The above chart is indicative of all the 8 major crashes going back 31 years and is predominantly what allows these timing strategies to comprehensively out-perform the ALSH buy-and-hold strategies. Whilst the more conservative strategies had to sit by the sidelines and watch the JSE on that "last gasp" crazy irrational exuberance run, they all ended up the better for it after the fat lady sung.

PREDICTIVE POWER OF SIGNAL LINE
The SuperModel differs from all the other core market timing strategies in that its signal line has been designed to indicate "Bull market strength" depending on its score. Just how predictive is this score in determining likely JSE returns? The table below shows what cumulative returns you would have achieved over the last 31 years by only investing in the JSE ALSH index when the SuperModel score was a certain figure. In the top table, your funds are not considered to be earning interest during periods you are not invested in the JSE. The chart below the table shows how your Rand would have grown had you been earning prime less 3% interest during non-vested periods.



For a total of 52.4% of the time (22.3% for -2 and 29.8% for -1) the SuperModel kept us "out the JSE and in the bank." We see that SuperModel Signal Line (SSL) scores of -2 and -1 indicate bearish periods with negative or low returns. Investing in the JSE for the 1,789 days (59 months or 4.96 years) when the SSL showed -2 would have lead to a 59% loss over the 31 year period, or -16.4% per annum. Similarly, investing in the JSE for the 2,396 days the SSL showed a reading of -1 would have lead to a meagre 5.3% growth per annum (versus the 13% CAGR achieved in a bank account).  You do not want to be invested in the JSE when the SuperModel is showing less than zero signals.

However, things really hot up for that 47.6% of the time when the SSL is showing greater than zero values. A zero showed for just 5% of the time in the last 31 years. During those 411 days you invested in the JSE you would have achieved a 83% cumulative growth, which amounts to a CAGR of 69.6% Similarly, investing in the JSE when the SSL was showing a +1 would have grown your funds to 277%. And investing only when the SSL was showing +2 would have grown your funds 1,166% by only being vested in the JSE 27.3% of the time.

Now look what happens when the SSL shows a +3. Although your funds would only have grown 34% if you only invested in the JSE when the SSL was +3, this growth was achieved with only 103 days of investment, an astonishing 175% CAGR. When the SSL shows +3, not only is it rare, but it means the JSE is entering a SUPERCHARGED returns phase. This growth is so powerful that if you only invested in the JSE for these 103 days in the last 31 years, and kept your money in the bank for the other 98.7% of the time, you would almost have matched the JSE buy-and-hold returns by only been exposed to stock market risk 1.3% of the time!

Now lets look at the SSL of +2 again. You can see this is the foundation for all the returns of the SuperModel since this signal is showing 27% of the time. If you simply invested in the JSE ALSH index during these times, and stuck your money in the bank for the rest of the time earning the interest of the day, your R1 would have grown to R300 over 31 years, a 29,553% growth (20.3% CAGR). No other strategy we have covered has managed to achieve this by being exposed to the JSE for such a short period of time (27% only which equates to very low exposure to stock market volatility and risk). Investing in the JSE when the SSL is showing a +2 or +3 probably equates to the best risk adjusted long term investment strategy we have covered to date.

So quite clearly, the SuperModel Signal Line values are very indicative of expected JSE returns.

SUPERMODEL "BLUE"
We showed in our RiskCurves research that a specially crafted equally-weighted five-share BLUECHIP portfolio taken from the JSE TOP10 would serve as an excellent proxy for the ALSH index. It would mirror the ALSH moves and direction but significantly out-perform it. What if we applied the SUPERModel timing signals generated for the JSE to the buying/selling of such a portfolio? Since BLUECHIP outperforms the ALSH, and mimics its moves, surely this would yield superior performance?

We tested exactly such a strategy, but we could only go back 10 years since some shares in BLUECHIP were not even listed before that. The total return indexes are shown below and makes for rather jaw-dropping viewing:



Straight out the starting blocks, on 1 Jan 1999, the SuperModel timing system applied to the BLUECHIP portfolio started pulling away from the SuperModel system applied to the ALSH index. The overall 10-year performance of the SuperModel "BLU" strategy is nothing short of staggering, delivering a consistent 30% compound per annum, versus the ALSH buy and holds 14%. After 10 years, R100 invested in SuperModel BLU would have turned into R1,649 versus the buy-and-hold strategy that would only have delivered R419. That's a whopping 3.96 times out-performance.

WEEKLY TIMING SIGNAL UPDATES
An updated SuperModel Signal Line Chart appears on the JSE Pulse Report, available to our subscribers only (not for general public use.) An outdated sample is shown below, as at April this year. The stopwatch signifies that a SwissClock signal is present, the calendar signifies that a seasonality event is occuring and "MARK-UP" refers to the stock market cycle we are in.



Many investors use the signal line by moving 25% into shares when the signal line crosses through zero from the bottom, then a further 25% when the signal line hits 1 and the balance when the signal line hits 2. When the signal line hits 3 they find additional funds to place into the market as this is normally very rare but very bullish territory. Similarly if the signal line drops, that may be used as cues to move funds from the stock market to fixed-interest instruments.



TURBO CHARGE      ---> | Using Cyclicals to triple your performance |
                                  | Using JSE Seasonality to boost performance even further |

OTHER INVESTMENT MODELS --> | Big Mac | Long-Bond Yield Curve | Cash/Equity Model |
 
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