I've been working on a drawdown-probability model (macro + credit) as an alternative to the 200-SMA de-risk rule. Would like this sub's take.
Most of the de-risking talk here comes down to price rules: hold while SPY is above its 200-day, step aside when it drops below. It works, but it whipsaws, and it's always reacting to price after the move has already started.
I spent the last year on a different version of the same question. Can you estimate the probability of a large S&P drawdown before it shows up in price, from macro and credit data instead of a moving average? That turned into a paper, and then into a model I now re-run every month.
What it actually does: each month it scores the odds of a 10%+ S&P 500 drawdown over the next 1, 3, 6 and 12 months from a set of macro and credit-market indicators. It's estimated walk-forward, so every month's forecast only uses data that existed at the time. The track record is out-of-sample, not a fit done in hindsight. There's a threshold around 30% where the model would say cut equity exposure.
Right now it reads calm. Its latest run (macro inputs go through June) puts the one-month odds of a 10%+ drop near 5% and the six-month near 18%. Nothing close to the 30% line, so on this signal you'd still be fully in.
The limits, because this sub will poke at them anyway and should:
- It forecasts S&P drawdowns, not the volatility decay that actually grinds down a leveraged position. Related, but not the same thing.
- It's a slow signal. It's built to catch credit and macro deterioration building over months, not a flash crash or a one-week geopolitical shock. If the next drawdown is a sudden stop, this won't warn you.
- The live, in-public history is short. The out-of-sample tests in the paper run back decades, but actually running it monthly where I can't quietly re-fit is only a few months old.
- I have not tested it as a TQQQ/UPRO overlay against the 200-SMA rule. That's the comparison I most want to see and haven't done properly yet.
That last point is really why I'm posting. Plenty of you have backtest setups for exactly this. If you swapped "SPY above/below its 200-day" for "de-risk when this model crosses 30%", how would it have gone through 2018, 2020 and 2022? My hunch is it gets out slower but whipsaws less. That's only a hunch.
It's free and there's nothing to buy. It's a research framework, not a signal service. The model, the current read and the papers behind it are at agreeableinvestments.com, and I'm happy to get into the indicator set or the walk-forward setup in the comments if anyone wants it.