Using economic indicators to reduce risk in stock market investments

This paper shows how the risk of price declines in stock market investments can be reduced by using a sequential signal system to determine when to buy or sell. The signals are based on growth rates in long-leading indexes and in broad stock price indexes. Tests of the method during the past 20 years or more are shown for Australia, France, Germany, Japan, the U.K. and the U.S.A. In some instances the reduction in risk (measured in terms of volatility of rates of return) is achieved at the cost of a lower average rate of return, but in other cases the average rate of return may be significantly higher than that obtained by a simple buy-and-hold strategy.