The first version of PITBULL utilises the Reserve Bank Repo rate to determine the bullish or bearish force being placed on the JSE as well as to provide solid, safe entry and exit signals for the investor.

The power behind this mechanism is described in detail in Martin Zweigs' "What works on Wall Street" , but we obviously have a different "federal reserve" and economic system here, so we have made adaptations.

We discussed in a previous paper how influential the Repo or Prime rate is on the stock market and how it provides accurate and reliable timing signals, and can supercharge and create Bull markets. With our Monetary Power Indicator (MPI) we keep track of interest rate changes and use them to build a "power" indicator to measure the monetary environments' likely influence on the JSE.  It works as follows :
  1. We keep a running tally called the MPI which starts at 0.
  2. Each Repo rate change  is accorded 1 point.
  3. The point is negative for an increase and positive for a decrease
  4. The first decrease after a series of increases is awarded 2 points. 
  5. The points from the change are then added to the MPI tally.
  6. The points have an expiry date of 6 months in the future
  7. When expiry dates are reached points are removed from the tally
  8. If the Repo rate change differs in direction from the previous one (ie the first increase after a string of declines or the first decline after a string of increases) then the MPI is reset to 0 before the points are added and all existing expiry dates discarded from future consideration
Over the last 35 years on the JSE, the MPI has ranged from -6 (very negative monetary forces on the JSE) to +7 (very positive monetary forces on the JSE).  The higher the MPI the more it is going to supercharge the market and the greater expected returns. The lower the MPI the more it is going to exert drag on the market. An MPI of 0 represents a "NEUTRAL" zone (no indication if the market will go up or down) and is also the BUY/SELL SIGNAL LINE which is used as follows :
  1. BUY when the MPI crosses UP through the signal line
  2. Be wary of weakness when the MPI moves down onto the signal line
  3. SELL when the MPI crosses from above or on to below the signal line
  4. The longer the MPI stays on the signal line the more probability of impending change in market direction
The above system was back-tested on the JSE ALSH Index from 1978 to provide 31 years of data. Go to the PITBULL BACKTEST menu for full details of the backtest, but in summary, using the MPI tally to mechanise your investing decisions on an ALSH Index tracker or ETF such as SATRIX40 would have delivered 22.14% CAGR versus the ALSH "Buy and Hold" strategies 15.23%. R1,000 invested in the PITBULL Ver 1.0 strategy would have grown to R472,000 (47,144% growth) in the 31 years whereas the "buy-and-hold" strategy would only have grown your investment to R80,520 (7,952% growth).

With PITBULL V1.0, your money would only have been in the stock market 50.25% of the time, the balance being spent safely tucked away earning fat interest while the stock markets were crashing around you. PITBULL made 11 entries into the market and 10 exits for a total of 21 trades (an average of one trade every 17 months.) Each period invested in the JSE averaged 17 months. The average profit delivered on each trade was 57.8% and when the investor was in the bank, the stock markets averaged only 4% growth.

PITBULL V1.0 only made wrong-way trades TWICE out of the 11 in total and these were minimised to -1% and -4% losses respectively. This 82% success rate mirrors the back testing Zweig did on the S&P 500 in his book.

The chart below shows the JSE (Blue line, log scaled) versus the red MPI Power Line  over the last 31 years, together with the demarcated periods we were invested in the stock market (when the MPI was above the signal line)

As at 08 June 2009 the MPI reads +6 and is clearly way in the upper zone, in fact its the 4th highest reading in 31 years. We have a small 2 point expiration from the MPI occurring on 17th June 2009  and a 1 points expiration occurring in 9th August 2009. Every time the MPI has been above +3 we have had a monetary policy induced turbo-charged BULL run! History is no guarantee for the future, but things are looking rosy indeed.

The charts below show the results of investing in the ALSH during various MPI periods. We only calculated returns for the periods you were invested, and exclude any interest you could have earned whilst "sitting out" the market. We also distinguish between when the MPI reaches zero coming from -1 (designated -0) to to when it reaches zero coming from +1 (designated +0) We see that investing when the MPI reading is less than +0 leads to poor returns. The green line in the 1st graph shows what % of time that MPI reading was present.

So we see that investing in periods when MPI readings of 1 occurred would have grown R1 to R2.50 and an MPI of 1 occurred 10% of the time over 31 years (804 days out of a total of 8,040). Strategies that invested when the MPI was less than -3 or touched the zero line from below ("-0"), delivered negative returns.

Of more interest is the "growth power" delivered by various MPI investment periods. This measures the compound annual growth rate achieved by a strategy for the time it was in play. We see that an MPI reading of 4 delivered the highest growth power of 95% CAGR. However the left chart shows us that an MPI of 4 only occurs 3.7% of the time (a total of 299 days out of 8,040). What this says though is that on those rare occasions when MPI readings were 4, you would get the most growth bang for your buck. Even though you would be vested for short periods of time, the growth achieved during these periods was very high. 

An investment during any period where the MPI was less than +0 certainly delivered less than you could be earning in the bank. Only periods where the MPI was -2 or -1 delivered positive returns but these were limited to 8-12%. Since these MPI's occured during periods of rising interest rates it makes sense that these returns would be far less (and much more risky) than those where your money was sitting in a bank, especially at 15-20% interest rates.

Note we will publish PITBULL MPI figures every MONDAY on the Weekly JSE Pulse page.

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