Previously described market timing models (listed in Appendix-1) are used to determine the basic risk-on and risk-off periods for equities, similarly to what was described in the iM-Multi-Model Market Timer article.
For this model signals for basic risk-on situations arise when eitherthe Inflation Lower Timer plus the Consumer Sentiment Timer, or the Cyclically Adjusted Risk Premium Timer, or the SuperTimer indicate this, otherwise
if none of the above three options are true basic risk-off periods are indicated.Inflation considerations
During risk-on and risk-off periods for equities one should consider inflation risk as well. Rising inflation means that interest rates are increasing and the discounted value of future cash flows from stocks is driven down, lowering equity prices.
Higher inflation, or an inverted yield curve signal a higher risk environment for equities.
We define rising inflation with data from the University of Michigan Inflation Expectation© series (MICH) and the 6-month moving average of the inflation rate as discussed in Evaluating Popular Asset Classes For Inflation Protection.