A weekly equity stance from the discount-bill spread

A weekly stance from short-term credit

A weekly equity-timing procedure can be built from the Federal Reserve discount rate minus the 13-week Treasury bill yield. That weekly difference is the discount-bill-spread.

The timing inputs are taken only from short-term credit rates and are constructed independently of the equity price path being classified.

How the spread is read

The intermarket rationale treats bill yields as competitively set and the discount rate as administered. A positive spread is read as easier liquidity. A negative spread is read as tighter credit.

The baseline exponential-smoother

The baseline smoother is a 12.5 percent exponential average, treated as a 15-week span and started from a simple 15-week mean of the weekly spread. That recursive average is the exponential-smoother.

Each week's update equals the prior average plus 0.125 times the gap between the latest spread and that prior average.

The unfiltered zero-line-stance

The unfiltered stance goes long after the smoothed spread turns positive and closes that long after the smoother turns negative. That rule is the zero-line-stance.

The four-hike-filter and the conditional-short

Four consecutive discount-rate increases are treated as a highly restrictive sequence. Only then may a negative smoother open or keep a short rather than merely exit a long. That policy-sequence rule is the four-hike-filter.

When that four-hike sequence is absent, a negative smoother closes any long and leaves the procedure flat until the next signal. A short is opened only when the four-hike-filter is active and the smoothed spread is negative. Otherwise a sell leaves the procedure flat. That restricted short is the conditional-short.

A more sensitive smoother in the evaluation

An evaluation variant raised sensitivity by replacing the 15-week smoother with a 20 percent exponential average, described as a nine-week equivalent.

The evaluation used weekly observations and end-of-week closing prices, with illustrated episodes covering 1953 through 1992. Assumed execution is a weekly-close-fill at the end-of-week closing price of the equity index being timed.