Martin Zweig Winning on Wall Street
Page 13
Once again I’ll try to keep the model as simple as possible. We’ll start directly with the Monetary Model from chapter 4 and use the gradings as described there. Recall that the model can run from zero up to 8 points. The Monetary Model gives a buy signal when the model hits 6 points or more, and stays on the buy until the model drops to 2 points or less, when it gives a sell signal. To that model we will add a weighting for the Four Percent Model, as developed in chapter 5.
When the Four Percent Model is on a buy signal, award it 2 points. When the Four Percent Model is on a sell signal, give it zero points. Then, add the points from the Four Percent Model to the points in the Monetary Model. Theoretically, the combined model, which we’ll call the Super Model, can range from zero to 10 points. That is, if all three indicators in the monetary model were bullish, and if the Four Percent Model were on a buy signal, the Super Model would be +10. Conversely, if all three monetary indicators were bearish, with the Four Percent Model on a sell signal, the Super Model would read zero. You’ll find the Super Model construction in table 20.
TABLE 20
SUPER MODEL WORKSHEET
Date
ZUPI
S&P 500
Dow
Prime Rate
Fed
Installment Debt
4%Model
Super Model
12/31/79
112.33
107.94
839
2 0 0 2 4
2/19/80
117.09
114.60
876
0 * 0 0 0* 0
4/11/80
100.52
103.79
792
0 0 0 2* 2
5/1/80
103.73
105.46
809
2* 0 0 2 4
5/6/80
105.52
106.25
816
2 2* 0 2 6 BUY
5/22/80
110.68
109.01
843
2 4* 0 2 8
6/16/80
117.46
116.09
878
2 4 2* 2 10
8/26/80
132.08
124.84
953
0* 4 2 2 8
11/7/80
133.15
129.18
932
0 4 2 0* 6
11/14/80
138.18
137.15
986
0 2* 2 2* 6
12/4/80
136.90
136.48
970
0 1* 2 2 5
12/12/80
128.23
129.23
917
0 1 2 0* 3 SELL
12/22/80
132.87
135.78
959
2* 1 2 0 5
12/26/80
134.98
136.57
966
2 1 2 2* 7 BUY
4/24/81
148.46
135.14
1020
0* 1 2 2 5
6/16/81
149.84
132.15
1003
2* 1 2 2 7
6/22/81
149.02
131.95
994
0* 1 2 2 5
7/10/81
144.14
129.37
956
0 1 2 0* 3 SELL
9/9/81
128.22
118.40
854
0 2* 2 0 4
9/21/81
127.04
117.24
847
2* 4* 2 0 8 BUY
10/2/81
126.78
119.36
861
2 4 2 2* 10
1/15/82
128.45
116.33
848
2 4 2 0* 8
2/1/82
128.68
117.78
852
0* 4 2 0 6
3/8/82
121.07
107.34
795
2* 4 2 0 8
3/16/82
120.96
109.28
798
0* 4 2 0 6
4/2/82
127.71
115.12
839
0 4 2 2* 8
5/28/82
127.76
111.88
820
0 4 2 0* 6
6/4/82
125.50
110.09
805
0 2* 2 0 4
7/19/82
124.03
110.73
826
0 4* 2 0 6
7/26/82
124.39
110.36
825
2* 4 2 0 8
8/20/82
126.35
113.02
869
2 4 2 2* 10
5/19/83
203.54
161.99
1191
2 2* 2 2 8
7/29/83
205.39
162.56
1199
2 2 2 0* 6
8/10/83
200.53
161.54
1176
0* 2 2 0 4
9/23/83
209.93
169.51
1256
0 2 2 2* 6
10/13/83
209.04
169.88
1261
0 2 0* 2 4
10/21/83
204.43
165.95
1249
0 2 0 0* 2 SELL
11/25/83
207.01
167.18
1277
0 2 0 2* 4
2/3/84
201.64
160.91
1197
0 2 0 0* 2
4/6/84
189.74
155.48
1132
0 1* 0 0 1
8/3/84
187.22
162.35
1202
0 1 0 2* 3
10/6/84
192.21
162.13
1178
0 2* 0 2 4
10/15/84
194.61
165.77
1203
2* 2 0 2 6 BUY
11/21/84
193.94
164.52
1202
2 4* 0 2 8
11/30/84
193.25
163.58
1189
2 4 0 0* 6
1/11/85
200.36
167.91
1218
2 4 0 2* 8
1/17/85
205.40
170.73
1229
2 2* 0 2 6
5/3/85
214.71
180.08
1247
2 2 0 0* 4
6/7/85
226.40
189.68
1316
2 2 0 2* 6
8/16/85
227.71
186.10
1313
2 2 0 0* 4
11/8/85
230.66
193.72
1404
2 2 0 2* 6
4/18/86
288.02
242.38
1840
2 4* 0 2 8
7/11/86
278.66
242.22
1821
2 4 0 0* 6
8/22/86
279.39
250.19
1888
2 4 0 2* 8
9/12/86
264.84
230.67
1759
2 4 0 0* 6
10/31/86
276.57
243.98
1878
2 4 0 2* 8
1/9/87
258.73
2006
2 2* 0 2 6
3/20/87
322.33
298.17
2334
2 2 2* 2 8
4/16/87
309.07
286.91
2276
2 2 2 0* 6
5/1/87
304.87
288.03
2280
0* 2 2 0 4
6/12/87
313.54
301.62
2378
0 2 2 2* 6
9/4/87
325.23
316.70
2561
0 1* 2 2 5
9/18/87
321.70
314.86
2525
0 1 2 0* 3 SELL
11/5/87
231.53
254.48
1985
2* 1 2 0 5
12/18/87
224.35
249.16
1975
2 1 2 2* 7 BUY
3/4/88
255.80
267.30
2058
2 2* 2 2 8
4/15/88
252.77
259.77
2014
2 2 0* 2 6
5/11/88
249.35
253.31
1966
0* 2 0 2 4
5/20/88
248.76
253.02
1953
0 2 0 0* 2 SELL
6/10/88
261.64
271.26
2102
0 2 0 2* 4
8/9/88
260.07
266.49
2079
0 1* 0 2 3
8/12/88
256.38
262.55
2038
0 1 0 0* 1
10/7/88
262.93
278.07
2150
0 1 0 2* 3
10/21/88
264.07
283.66
2184
0 1 2* 2 5
11/11/88
254.70
267.92
2067
0 1 2 0* 3
1/6/89
262.59
280.67
2194
0 1 2 2 5
2/7/89
276.12
299.63
2347
0 2* 2 2 6 BUY
2/24/89
270.45
287.13
2246
0 1* 2 2 5
3/20/89
271.78
289.92
2263
0 1 0* 2 3 SELL
7/14/89
298.17
331.84
2555
2* 1 0 2 5
8/24/89
307.51
351.52
2735
2 2 0 2 6 BUY
10/13/89
293.56
333.65
2569
2 2 0 0* 4
11/15/89
288.22
340.54
2633
2 2 2* 0 6
12/18/89
282.62
343.69
2698
2 2 0* 0 4
1/18/90
283.08
338.19
2666
2 2 2* 0 6
3/16/90
279.34
41.91
2741
2 2 2 2* 8
4/27/90
265.27
329.11
2645
2 2 2 0* 6
5/11/90
273.21
352.00
2802
2 2 2 2* 8
7/27/90
271.05
353.44
2899
2 2 2 0* 6
11/30/90
220.02
322.22
2560
2 2 2 2* 8
12/4/90
221.14
326.35
2580
2 4* 2 2 10
6/28/91
276.95
371.16
2907
2 4 2 0* 8
8/23/91
288.65
394.17
3040
2 4 2 2* 10
11/22/91
281.74
376.14
2903
2 4 2 0* 8
12/27/91
287.61
406.46
3102
2 4 2 2* 10
4/3/92
311.23
401.55
3249
2 4 2 0* 8
6/22/92
302.75
403.40
3281
2 2* 2 0 6
7/2/92
307.83
411.77
3330
2 4* 2 0 8
7/31/92
314.35
424.21
3394
2 4 2 2* 10
8/18/92
312.05
421.34
3329
2 2* 2 2 8
10/2/92
304.95
410.47
3201
2 2 2 0* 6
10/30/92
309.95
418.68
3226
2 2 2 2* 8
4/1/94
384.18
445.76
3637
2 2 2 0 6
4/19/94
377.33
442.54
3620
0 2 2 0 4
5/17/94
376.97
449.37
3721
0 1* 2 0 3 SELL
7/12/94
376.70
447.95
3703
0 1 0 0 1
8/12/94
385.38
461.95
3769
0 1 0 2 3
11/15/94
375.05
465.03
3826
0 1 0 0 1
12/30/94
368.33
459.27
3834
0 1 0 2 3
2/1/95
373.55
470.40
3848
0 0* 0 2 2
2/15/95
384.95
484.54
3986
0 1* 0 2 3
7/6/95
424.92
553.99
4664
0 4* 0 2 6 BUY
10/27/95
431.92
579.70
4742
0 4 0 0 4
12/1/95
449.14
606.98
5087
0 4 0 2 6
12/20/95
448.50
605.94
5059
2 4 0 2 8
There are many complex ways you could use this model, including going fully invested above certain levels, or perhaps three-quarters invested at other levels, or half invested on certain values. To simplify matters, we’ll just create a system for going either 100% invested or 100% in cash.
The rules are these: When the Super Model reaches 6 points or more, it gives a buy signal. We’ll assume that at that point the investor goes 100% invested in stocks. The buy signal remains in effect until the Super Model drops to 3 points or less, at which time it gives a sell signal. Upon a sell signal, it is assumed that the investor goes out of stocks and 100% into money market instruments such as Treasury bills, CDs, or money market funds. We’ll use the Treasury bill yield as a proxy for the interest rate one could have earned over the years.
Obviously, if all the indicators in the two models are bullish, the Super Model would be bullish, and vice versa. But the virtue of combining the monetary and tape indicators is that, if the monetary indicators were relatively neutral but the market�
��s momentum was positive, it could be just enough to give us a buy signal. At such a time, it might make a bit more sense to be invested in stocks rather than in cash. Alternatively, if the Monetary Model were roughly neutral and the tape soured, it might be just enough to trip a sell signal, which is what we’d want under those circumstances. Obviously, our first choice is to have both the monetary and the momentum indicators on our side. But that’s not always possible. The Super Model allows for some reasonable trade-off between the monetary and the tape indicators.
Table 21 shows how the Super Model performed when traded against the Zweig Unweighted Price Index between 1966 and the end of this study in March 1996. The left side of the table shows the dates of the Super Model’s buy signals, the values of the Zweig Unweighted Price Index (ZUPI) at those points, the percentage changes in the ZUPI during the buy signals, and finally, the approximate number of months that the buy signals were in effect. For example, the first buy signal occurred on November 16, 1966, when the ZUPI was 108.75. That signal stayed in effect 20.5 months, finally ending with a sell signal on July 26, 1968, when the ZUPI was 156.34. During that span the ZUPI rose a mighty 43.8%.
TABLE 21
SUPER MODEL VS. ZWEIG UNWEIGHTED PRICE INDEX: 1966 to 1996
BUY SIGNALS SELL SIGNALS
Date
ZUPI
% Change
No. of Months
Date
ZUPI
% Change
No. of Months
3/10/66
125.43
-13.3 8.0
11/16/66
108.75
+43.8 20.5
7/26/68
156.34
+1.2 1.2
8/30/68
158.29
+9.4 4.0
12/31/68
173.15
-45.7 17.0
5/29/70
93.96
+32.2 13.5
7/16/71
124.17
-12.4 4.2
11/19/71
108.82
+11.2 7.5
6/26/72
121.02
-37.1 19.5
2/14/74
76.18
+2.4 1.5
3/29/74
78.02
-33.3 7.0
10/25/74
52.03
+76.0 31.0
5/31/77
91.57
+15.2 35.0
5/6/80
105.52
+21.6 7.0
12/12/80
128.32
+5.2 .5
12/26/80
134.98
+6.8 6.5
7/10/81
144.14
-11.9 2.5
9/21/81
127.04
+60.9 25.0
10/21/83
204.43
-4.8 12.0
10/15/84
194.61
+65.3 35.5
9/18/87
321.70
-30.3 3.0
12/18/87
224.35
+10.9 5.0
5/20/88
248.76
+11.0 8.6
2/7/89
276.12
-1.6 1.3