Technical Refinement of the CMI

Word of warning...this post mainly serves as a reminder for me. It is devoid of any entertainment value. The second to last paragraph may be more interesting because the 2008 CMI results are posted there.

The signals used for the CMI are called P1 and P2. These are the primary signals (hence the P) that have been used from the start. During this ‘no trade’ period, while swinging from the vines, I was thinking that there must be a way to reduce the noise resulting in a few false signals during the last year and a half. One of these false signals generated a 5% loss. The largest loss, 6.8% and not due to a false signal, was during the very volatile period at the end of the year. Keep in mind that this 6.8% loss could easily have been traded with stop losses and a gain would have resulted. I am purposely disregarding any potential trades and back testing only the actual signals generated from the CMI.

Rather than just using the P1 and P2, I have included in the calculation a set of secondary signals that I call S1 and S2. S1 is a QLD/QID specific signal that supports the P1 signal. If S1 does not agree, the trade or ‘buy’ signal is still ‘on’ but closer stops may be warranted. The S2 signal is considered an inverse of P1, P2 and if S2 does not agree, the trade, or ‘buy’ signal is not confirmed and will wait until there is agreement between P1, P2, and S2. This ‘disagreement’ is rare and had occurred only once in fourteen trades. This resulted in the 5% loss in 2008. If both S1 and S2 do not confirm the primary signals, no buy signal will be given. This occurred once in 2007 for a 0.6% loss. Interestingly enough, after the sell signal was given only a few days later, the market dropped severely.

For the year 2008, straight CMI buy signals occurred eight times with an average gain of 8.6%. This resulted in a 69% annual gain. Adjusting this with our new secondary signals resulted in seven trades with an average gain of 10.6%. This resulted in a 74% annual gain. The 5% annual increase is not that impressive but could prove to be a good defensive play in the future.

It’s no easy task swinging from tree branches with one hand and typing with the other so I’ll take the rest of the weekend off. Keep in mind that all this P1, S1 signal stuff happens behind the scenes. No need to do anything but watch the CMI signals on the left side of the screen with one eye and read the almost daily commentary with the other.