Hitting the Brexit trifecta

As I pointed out yesterday (see Brexit: LTCM or Lehman?), my Trifecta Bottom Spotting Model, which has shown an uncanny record of spotting short-term market bottoms. This model flashed an “exacta” buy signal as of Friday’s close and it has now flashed a “trifecta” signal based on Monday’s close.

The model is based on the following three components. An exacta signal occurs if two of the components are triggered within a week of each other and a trifecta signal occurs if all three are triggered:

  1. VIX term structure is inverted: When the ratio of 1-month VIX (VIX) and 3-month VIX is above one, it indicates a high level of market fear.
  2. TRIN above 2: When TRIN is over 2, it is an indication of indiscriminate forced selling by either risk managers or margin clerks – and often marks a capitulation bottom.
  3. Intermediate term overbought/oversold: When the intermediate term OBOS is below 0.5, the stock market is oversold and stretched to the downside.
The chart below shows the past signals of this model in the last three years, with exacta signals in blue and trifecta signals in red.



The US equity market is setting up for a short-term face ripper of a rally very soon.

Short-term oversold

Other short-term breadth indicators are also showing oversold conditions that are usually followed by a market bounce. This chart of the % of stocks above their 10 day moving average from IndexIndicators is in oversold territory, though readings could go slightly lower if the market panic were to continue.



Similarly, this chart of net 20-day highs-lows, which tends to have a 1-2 week time horizon, is also indicating an oversold condition.