An in-depth look into Reality Shares quantitative market indicator

Many experienced investors and money managers, in the pursuit of maximizing long-term investment results, know how minimizing downside volatility can be just as important as capturing upside moves. In the last two decades alone, the S&P 500 experienced several severe declines that eroded overall market results. This came to the detriment of many investor portfolios. For example, the S&P 500 Index fell about 47% from 2001-2002 during the technology bubble and nearly 57% during the Great Recession of 2008-2009. It took the market three-to-four years to return to pre-crisis levels after these downturns, bringing investors back to where they started.

Seeking to protect investors from this type of market turbulence, Reality Shares developed the Guard Indicator. The Guard Indicator is a proprietary system designed to measure overall market strength utilizing predictive algorithms of risk and return across market sectors to better anticipate potential broad market declines and major market swings. The innovative market timing system is designed to inform investors once potential downtrends are identified, offering the opportunity to act prior to what could be potential volatility.

How the Guard Indicator Works

The Guard Indicator incorporates a quantitative, technical analysis comparing long-term and short-term moving averages inprice momentum and downside deviation of price volatility across the broad market sectors on a daily basis. The Indicator notes when a sector’s long-term and short-term moving averages in the specified criteria intersect.

Guard Scores are calculated for each of the broad market sectors. As each sector’s Guard Score is calculated independently, it is possible to analyze each individually to see inflection points and to predict how they might impact the overall Guard Indicator. A percentage is assigned based on the available data, indicating a particular sector’s likelihood of approaching negative or positive territory.

guard-chart   guard-indicator
Source: Reality Shares Research. For illustrative purposes only.

When eight or more of the sectors have a positive Guard Score, the Guard Indicator forecasts a broad market upswing. However, when seven or fewer of the sectors have positive Guard Score, the Guard Indicator points toward possible market weakness.

An analysis of the information across the sectors allows the Guard Indicator to pinpoint potential broad market inflections in both positive and negative directions

In Pursuit of Performance

The Reality Shares Guard Indicator is designed as a tool to anticipate broad market downturns. By recognizing broad market rallies through a detailed technical analysis of individual sectors, the Indicator is able to filter out market and sector noise and concentrate on broader market swings. Though the Guard Indicator, as a result of its moving analysis, may not always capture the shorter-term market movements, the model shows potential in identifying opportunities to exit and re-enter the market.

The Reality Shares GARD ETF incorporates this broad market analysis as part of its dynamic hedging strategy. Learn More.

S&P 500: A broad stock market index of 500 large companies based on market capitalization. You cannot invest directly in an index. Downside Deviation: The measure of downside risk as calculated by taking the standard deviation of negative volatility.

The models used in the GUARD indicator may be incomplete, flawed or based on inaccurate assumptions.