I developed our meltdown indicator in 2013 after suffering through the Great Recession as an investor. I have since taken a lot of comfort seeing it hold steady, and knowing it was very unlikely that a market crash was approaching. The only instance where it came into play since then is the 2020 COVID-19 recession, where my smoothing with 200-day exponential averaging just rode right over it. Since then I have greatly improved the smoothing, and generated simulations of how it might work as shown below.

These simulations are based on owning an equity index fund (β = 1, R² = 100) during normal markets, and during abnormal markets — owing a cash-like fund on the way down, and the equity index fund on the way back up. If we don't have a minimum drop in the meltdown indicator, we don't worry about high-beta funds. If we do have a minimum drop in the meltdown indicator with a confirming minimum drop in the broad index, we will swap high-beta funds for cash-like funds, and start tracking the index drop. With the aid of multiple bottom finder indicators (including our meltdown indicator) we will look for a bottom and a modest return off the bottom - then get back into our equity index. Big market drops can have big bear-market rallies. If we make a mistake and catch one of those, it will just give us more upside as we will keep a trailing stop-loss and get out again after preserving some additional gains. If the index drop is deep enough we may utilize a Trading-Leveraged-Equity fund (see Leverage).

Our meltdown indicator responded very differently to the Great Recession than it did to the Dot-com bubble, where it was very early. So the simulations are focused on the period after the Dot-com bubble. We choose 2006-06-23, so we can use a leveraged equity fund that started around that date.

The simulation shown below does not utilize leverage. The equity index fund used in normal markets, and on the way up in abnormal markets, is the Vanguard 500 Index Investor (VFINX). The broad index is the S&P 500. The cash-like return is based on 3-month T-Bills. From 2006-06-23 to the close last week, the annualized performance values are, 1.5% for cash-like assets, 10.4% for the Vanguard 500 Index Investor fund, and 14.8% for the combined results of the strategy. Shaded areas in the plot show when the investments were other than normal.

The simulation shown below does utilize leverage. The equity index fund used in normal markets, is the Vanguard 500 Index Investor (VFINX). If the index drop is large enough, the ProShares Ultra S&P500 (SSO) leveraged fund will be used on the way up, otherwise, the Vanguard 500 Index Investor will be used. The broad index is the S&P 500. The cash-like return is based on 3-month T-Bills. From 2006-06-23 to the close last week, the annualized performance values are, 1.5% for cash-like assets, 10.4% for the Vanguard 500 Index Investor fund, 13.8% for the ProShares Ultra S&P500, and 21.0% for the combined results of the strategy. Shaded areas in the plot show when the investments were other than normal.