Trading Signals and The Quads With Keith McCullough

The Importance of Trading Signals

Buy, buy, buy! Everyone in the market wants a clear and obvious signal to enter a trade. The market doesn’t always give it though.  At times it can be so easy you feel like an invincible genius. Then it can be so difficult you want to throw up your hands and quit. 

Each trader takes time to craft their signals. The ultimate goal is to eliminate the noise of the market.  The headlines, fakeouts and erroneous information that could lead you to losses. By developing signals, you take the emotions out of your decisions and create a systematic process. 

Keith McCullough’s trading signals are the four quads.

  • Quad 1: The rate of change of inflation falling, as real growth is accelerating.
  • Quad 2: More inflation faster, and have real growth.
  • Quad 3: Economic stagflation
  • Quad 4: Deflation

McCullough has spent years crafting the mathematics that make up his quads.  He has refined it to track 50 countries in 175 ETF’s. To further refine the signal, McCullough employs Bayesian methods to make decisions.

Bayesian inference is a method of statistical inference in which Bayes’ theorem is used to update the probability for a hypothesis as more evidence or information becomes available.

He is playing the odds.  When they are in his favor, he executes. While the method may be different from other traders, the process is the same: find favorable situations and pull the trigger.

Vol of Vol

Volatility of Volatility is when things start to change. Asset classes are in transition. These events tend to happen at the extremes of ranges.  When near the top of a range he is looking for signs that the bears have capitulated and implied vol has discounted or bottoms of ranges and there is an implied vol spike as people buy protection. 

How does McCullough differentiate a pullback vs. a change in trend?  

“When you get a move down in a bull market in price, and the volume is decelerating and still, the volatility has not changed, it is a buy the damn dip signal,” McCullough explained. “If you get a down move in price on rising volume, on a new change, a potential cluster of volatility that will be, could be the beginning of a new trend, that is the one to pay attention to on the risk management side.”

After finding those signs, he factors in price, volume and volatility. With that three factor model in mind, the picture begins to become clear. 

If you are anticipating more volatility, how can you best navigate the markets?  Mark Newton, CMT founder & president of Newton Advisors explained such an approach to Real Vision.

Position Sizing

Trading signals are an essential factor in risk management, but so is how much you allocate to a position.  As part of McCullough’s rules based approach, he has determined how much of a max position he will allocate based on asset class. 

  • 12% Currencies
  • 10% Fixed Income
  • 6% Equities
  • 4% Commodities

Current Economic Environment and What May Be Coming

Going into next year McCullough expects the worst of the economic slowing in the U.S. to be behind us. He notes that the markets will have difficulty pricing quarter 2 of 2021 because of the nature of the black swan that occured with the COVID shut downs in 2020.  Short of a repeat event, things will naturally be better for Q2 2021. 

For China and Taiwan, he is anticipating quad 2 so he is bullish.  As for Gold, he is maintaining a bullish bet.  Regardless of his predictions, McCullough is staying disciplined.

“I always say this, I do not know what I am going to do like until like, literally t-minus one to three days.”


History can be a good tool for understanding recessions.  Here is a
list of economic recessions in the United States.  IF the worst isn’t behind us, take a look at McCullough’s first appearance on Real Vision for an understanding of managing macro risk.

RELATED CATEGORIES: Market Analysis

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