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Hello PL,

Since this is a forum post, we want to first bring all readers up to speed on our previous email conversation in January.

"PL: Dear Sir, I see that the BBO has crossed into Bear territory, yet we are still "all in", so to speak. I haven't read an explanation as to why we are going against the BBO model.
Did I miss something?"

Thanks for your email. You are correct – the Bull Bear Oscillator (BBO) crossed into bear territory earlier this month, but you didn’t miss anything. As we currently sit, without changes in the BBO, we would be heading to more safety in the term of exposure to money market and/or bonds, but not until the end of the month.

Our trading protocols would not have us exiting mid-month based on the BBO going negative. However, we would likely send our newsletter subscribers some sort of alert via email, if we thought there was a total market meltdown and subscribers needed to exit risk assets in their retirement accounts. At this time, we don’t feel the month of January qualifies as a total market collapse, even as painful as it’s been. While we’d all prefer to not be invested during this volatile period, we recognize the limitations on trading and repositioning assets within your 401K investment options. These restrictions are put on you by the 401k plan custodian in order to limit short term trading by participants in the 401k plan in an effort to reduce expenses and honestly, the amount of work the custodian has to do on your behalf.

Here’s a recap of what transpired in the newsletter models last year. We hope the information helps.

1. January – August: the BBO was positive and in Bull mode
2. September – November: the BBO shifted negative and the switch was made to Bear mode, so normal model allocations were overridden
3. December: the BBO shifted back to positive and we moved back to Bull mode (it’s rare to see multiple shifts like this in such a short time frame, but the markets were showing a lot of volatility)

At year end, heading into January 2016, the BBO remained in Bull mode, but just barely. Since we witnessed so much volatility in 2015, it was determined the best course of action was not to second guess the indicators. It should be noted that even the Aggressive model allocates at least 19% to money market at all times, and the average allocation to money market across all three models (Aggressive, Moderate and Conservative) is almost 40%, and can be more, even in Bull mode.

In addition to the BBO shifts above, we also made some fundamental upgrades to the 3 model allocations to reduce risk in 2015. We modified the Velocity Score Ranking component to cap exposure to any one asset class, meaning the number of model holdings would increase. This upgrade will reduce the asset class concentration in the models, which means less risk – a good thing overall. This change wasn’t put in place until near the end of the year November, so the benefits should start appearing in the months to come.

While the newsletter seeks to help rank the assets in your 401k plan, it’s no substitute for real, active asset management, because there are limitations on what can be accomplished while the assets are inside the plan account. The limitations imposed by the plan custodians mean the modeling, while good, can’t be as nimble and responsive as what can be accomplished in an account that can be truly actively managed.

I hope this answers your questions and, if not, please feel free to reach out to us again."

To answer this newest post concerning the Bull Bear Oscillator (BBO) - On December 31st the BBO was positive with the 50 day ema at a reading of 2052 and the 200 ema at 2043. These positives meant January was indicating Bull mode and the portfolios were positioned for a bull mode allocation. The BBO did not go negative until January 8th.

The BBO buy/sell methodology is dependent upon the last day of the month reading. There was a time when an intra-month crossing would have triggered a change. Dave Lucca however changed this to an end of month crossing. Starting on January 8th the BBO crossed into bear mode and at the close of January it triggered a change for February. The system was followed and the portfolios were moved to the bear allocation.

In the last six years, Dave Lucca made the decision to take the system “offline” only three times due to extreme volatility. Since the last override of the BBO the system has been followed without exception.

If you need more clarification please let us know.