More on The TSP Trader System, taken from a late December Daily Market Commentary:

... "Trader Fred" will not be giving us the system.  He will be telling us when we have a buy or a sell signal.  It's kind of like taking an indicator like the ARMS index.  We don't need to know exactly how each measurement is determined.  We just need to know what the market tends to do at specific levels of the indicator.  That's what we'll be getting here.  But it is based on more than just one piece of market data.

Trader Fred will run his programs each night using that day's data, and the output will tell him whether the system is on a buy or sell signal.

A quick and simple overview shows us that there are 8 separate short-term trading models, each based on certain market criteria.  If any one of those 8 models is on a buy signal, then the system (labeled the long-term trading model below) is on a buy signal.  If all 8 go to a sell signal, then the system goes into a sell signal. 

In the example below, which is tough to see, The A, D, E, and F sub-models all had a buy signal at one point which put the entire system into buy mode (the black bars).  Those are dates on the left of those black bars.  You can see that there were a couple of points where there is a gap in the black bar and that is because none of the 8 sub-models were giving a buy signal.  That would be a time to sell.  But once one sub-model gives a buy signal, it's back to a buy for the system, and for us.
    

That doesn't tell you too much and I may be oversimplifying the explanation, but that is the gist of what we will be seeing. 

The system has been on a buy signal since early August of this year.  That would have equated to a 10.8% gain if you used a 100% C fund allocation during that time.  (More on allocations later.) The other day Trader Fred had told me that it looked like we would be getting a sell signal by the end of the week, but the last two days' activity set another one of the sub-models (sub-model J) into a buy mode so the system remains on a buy signal.

Oh, how I was hoping it would give that sell signal because you know I don't want to be a buyer with the market up this high.  Perhaps a sell off in the next couple of days will put us both on the same page.

What you do with the buy signal is basically up to you.  More conservative investors may never want to go to a 100% stock allocation, while aggressive investors / traders may want to move all their chips into one stock fund.  Not surprisingly, the back testing has proven that using 100% S fund on a buy signal and 100% G fund on a sell has shown the best results.  That may not always be the case and that may be where we have to use some analytical information.  Trader Fred is working on tweaking the system to generate an optimal allocation.  But to reiterate, your own situation should determine the amount of risk you wish to take.

As an example of the type of returns the system has been seeing (and again this is back testing and back tested results always seem to be a best case scenario since they are designed around past data) the system generated a return 2.5 times that of a buy and hold of the C fund since July 2003.  That is when share data was first introduced.  And, very importantly, you would have only been in the market 68% of the time.  That means about a third of the time you would have been safely in the G fund, as opposed to a 100% C fund buy and hold allocation where your account is at risk 100% of the time.

We will begin monitoring the returns of the system for tracking purposes on the first day of January 2007.  The signal will be determined by the program each evening and Trader Fred will then pass the info along to me.  I will then update the site with that information in the following morning's market comments. 

- One of our readers made an interesting point, asking if there was a "hold" signal rather than a buy or sell signal.  That is a great question.  The over-simplified answer is that the system is either on a buy (in stocks) or a sell (in the G fund).  But the buy signal, once given, really turn into a "hold" signal because you may have missed the optimal buy point.  We started offering the system signals here earlier this month, five months into a buy signal, so the buy signal is not very strong at all at that point, which we have stressed.

I posed the question to Trader Fred and here is his response: