Back in July 2008 I first introduced the Mechanical Investing community to the NH-NL indicator that could be used to manage market risk. There are a number of ways to use this, but the method I originally presented subtracts the new lows from the new highs in the Nasdaq Composite daily, and then applies a nine day weighted moving average on the result. The original post is here.

http://www.datahelper.com/mi/search.phtml?nofool=y...

An alternative method is to use a thirteen day exponential moving average on the result. In this post I'll compare the two for the last few years using the QLD / QID as the investment vehicle. During BULL signals QLD is held, and during BEAR signals QID is held.

13-Day Exponential Moving Average

Date        Signal  Return   $100.00  % Gain
1/2/2018    BULL    24.69%   $124.69  24.69%
10/5/2018   BEAR    5.70%    $131.80  31.80%
1/31/2019   BULL    42.26%   $187.49  87.49%
2/27/2020   BEAR    -31.84%  $127.80  27.80%
4/29/2020   BULL    209.83%  $395.97  295.97%
11/22/2021  BEAR    47.38%   $583.58  483.58%
1/13/2023   BULL    0.00%    $583.58  483.58%
1/13/2023                             

9-Day Weighted Moving Average

Date        Signal  Return   $100.00  % Gain
1/2/2018    BULL    27.74%   $127.74  27.74%
10/4/2018   BEAR    8.45%    $138.54  38.54%
1/31/2019   BULL    58.08%   $219.00  119.00%
2/26/2020   BEAR    -24.99%  $164.28  64.28%
4/29/2020   BULL    213.61%  $515.19  415.19%
11/18/2021  BEAR    60.84%   $828.60  728.60%
1/9/2023    BULL    7.60%    $891.54  791.54%
1/13/2023                             

So if you are started with $100 invested on 1/2/2018 and put it into QLD you'd end up with $583.58 using the 13-Day EMA, while you'd do somewhat better using the 9-Day WMA resulting in a final amount of $891.54.

If you held QLD LTBH - no buys or sells from 1/2/2018 your gain would be 105.71% compared to 791.54% using the 9-Day WMA. In contrast, if you bought QID at the same time your loss would be -88.26%.

In other words, this does a bit better than just a risk management approach. A way to improve on this even more is to have a tool for identifying major market bottoms. Using such a tool you would not wait for it to return to a bull signal after going bearish, but instead, you'd enter based on the tool to identify a bottom. Jim has suggested signals from his tool over the years as one option for doing that.