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Aggregate SoT

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The Strength of Trend (SoT) indicator plays a critical role in determining if an individual market is in a trending or non-trending phase. The SoT can also be used to evaluate the potential trend strength for an entire portfolio of markets. We begin with a brief review the SoT indicator itself.

The SoT indicator quantitatively measures directional price movement for an individual market or group of markets. As a market trends, as indicated by higher highs or lower lows, the SoT value for that market increases to reflect a sustained price move. The larger the price move within a three month time window, the higher the SoT value. As most managers depend on directional price moves to generate profits, the SoT is designed to offer insight into the opportunity to profit in any given market, sector, or asset class. The SoT highlights different periods to represent different profit potential at different times. Little price movement (lower values) equates to little opportunity to generate profits. Significant price movement (higher values) equates to greater opportunity to generate profits. The SoT allows investors to analyze returns from an investment in the context of the opportunity offered by the markets to generate profits.

With the basic definition of the SoT Indicator behind us, lets see how this indicator can provide some trend perspective for the diverse basket of markets. We monitor over 40+ markets and each of these markets are assigned a numeric value relative to its trending strength over a 3 month period. If that value exceeds a level of 5, the market is considered to be trending. If, however, the SoT reading is below 5, the market is defined as being in a trendless phase (e.g. consolidation period).

The SoT market readings for each market above 5 are then combined together to form the Aggregate SoT value. This value represents a view of a diversified basket of markets and their potential to provide profitability. It is not designed to be a precise indicator, but it is a valid gage of opportunity. In other words, the SoT value tells us when we should expect to make money due to trends or when not to expect to make money due to trendless markets.

Aggregate SoT Interpretation:

Aggregate readings less than 50 indicate extremely low trending periods, while readings above 200 represent extremely high trending periods. In general the markets move from trending to non-trending periods on a regular basis. Most of the time they are in some form of a trending phase, but there can be periods of extended consolidation. Let’s examine the SoT Frequency Histogram in Table 1 to determine how often the general markets are in non-trending periods. During the last 12+ years the Aggregate SoT level has been below 50 less than 1% of the time. On the other hand, markets in general have been in varying degrees of a trend more than 99% of the time. These trends range from modest (50 to 100), to strong (100 to 150), to extreme (200 and above). The bottom line is that we are in an usual non-trending period, which based on the recent history will eventually return back to modest, strong or even extreme trending periods.

Table 1: Aggregate SoT Range (1995 - 2007)

• 50 and Under 0.63%
• Between 50 and 100 22.47%
• Between 100 and 150 46.84%
• Between 150 and 200 24.05%
• Over 200 6.01%