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CCM’s market model was developed by studying markets and asking questions, such as:
When you begin to develop an unbiased system, based on quantifiable and observable evidence, to answer the questions above, you begin to build elements of what is known as a trend following system. The CCM Market Model uses trend following principles, along with several other time-tested methods.
Trend Following Strategies
Once you begin to develop models based on what is happening, the next logical questions are:
The questions above can be answered objectively by studying long-term correlations between what you are tracking (market, ratio, indicator, etc.) and the S&P 500. If the correlations are meaningful, you keep the objective measure; if not, you remove it from your trend following system. The CCM market model weights each objective measure based on its correlation to the stock market and its impact on producing favorable returns with acceptable portfolio drawdowns.
Trend Following Trades
As a trend following manager, our market model must answer three major questions for our clients:
The model answers the questions above in an unbiased and unemotional manner, using prudently designed rules. The market model uses the answers to identify trend following trades. Our backtested results prove that the trade-off between average annual return and maximum portfolio drawdowns can be improved incrementally by including the answers to questions 1, 2, and 3 above in our trend following model.Trend Following Investment Strategy
A well-designed trend following strategy should pass the “that makes sense” test. For example, the CCM trend following model tracks numerous risk-on vs. risk-off ratios. One example is tracking the performance of stocks relative to bonds. It is logical and easy to understand that the ratio of stocks-to-bonds rises when demand for stocks is greater than the demand for bonds. Conversely, when fear increases, the ratio begins to fall as the demand for stocks begins to wane relative to the demand for more conservative bonds.Trend Following Model
While primarily a trend following model, the CCM market model also incorporates other logical concepts based on how markets set asset prices, such as technical thresholds and market profile probability distributions. The master market model leverages the concept of redundancy to reduce the probability of curve fitting. The model uses five separate submodels that all suggest a prudent allocation between growth-oriented and conservative assets.
Two of the submodels, the CCM equity step-in and CCM equity step-out models, are based on the concept of technical thresholds, which is simply another way to monitor stock market trends. Using a real-world example, it is mathematically and physically impossible for temperature to move from 14 degrees to 98 degrees without crossing the thresholds of 25, 50, and 75 as weather conditions improve. Similarly, for an investment to make money, it must trend (it has to go up). Our trend following models track mathematical and physical events that have to occur as a profitable trend begins to form.Trend Following Investment Strategies
If you spend any time watching financial networks or reading financial articles online, you know there are a lot of people that know “stuff that works” in the markets. The key is converting stuff that works into a trend following investment strategy that can be converted into a useable and implementable form. For example, many of us know healthy markets tend to stay above their 200-day moving average. The questions are:
The concept of trend following is not new. Trend following investment managers have been producing for institutional clients consistently since the early 1970s. Unlike, Ciovacco Capital Management, the vast majority of trend following firms have extremely high investment minimums. The CCM trend following model was designed for individual investors. We can use our trend following strategy to manage your investments and do it using a very reasonable fee structure.Trend Following Book
Trend Following by Micheal Covel is an excellent source to learn more about trend following strategies. Below are some excerpts from Mr. Covel’s book:
"While a fundamental analyst may be able to properly evaluate the economics underlying a stock, I do not believe they can predict how the masses will process this same information. Ultimately, it is the dollar-weighted collective opinion of all market participants that determines whether a stock goes up or down. This consensus is revealed by analyzing price."
"There is another type of technical analysis that neither predicts nor forecasts. This type is based on price. Trend followers form the group of technical traders that use this type of analysis. Instead of trying to predict a market direction, their strategy is to react to the market's movements whenever they occur. Trend followers respond to what has happened rather than anticipating what will happen. They strive to keep their strategies based on statistically validated trading rules. This enables them to focus on the market and not get emotionally involved."
"JWH believes that an investment strategy can only be as successful as the discipline of the manager to adhere to the requirements in the face of market adversity. Unlike discretionary traders, whose decisions may be subject to behavioral biases, JWH practices a disciplined investment process."
"Mechanical trading, used by trend followers, is based on an objective and automated set of rules. The rules are derived from their market view or philosophy. Traders rigidly follow these trading rules to get themselves in and out of the market. A mechanical trading system makes life easier by working to eliminate emotion from trading decisions and forcing you stick to the rules. It enforces discipline."
"Unlike discretionary traders, whose decisions may be subject to behavioral biases, JWH practices a disciplined investment process. By quantifying the circumstances under which key investment decisions are made, the JWH methodology offers investors a consistent approach to markets, unswayed by judgmental bias"
"Markets go up, down, and sideways. They trend. They flow. They surprise. No one can forecast a trend's beginning or end until it becomes a matter of record, just like the weather. However, if your trading strategy is designed to adapt to change, you can take advantage of the changes to make money"
"If you take emotion - would be, could be, should be - out of it, and look at what is, and quantify it, I think you have a big advantage over most human beings."
"Price must go either up, down, or sideways. No advances in technology, leaps of modern science, or radical shifts in perception will alter this fact."
Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC. More on the web at www.ciovaccocapital.com