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Rally continues as the Dow & Nasdaq extend their bull
market peaks from last April and the S&P at 1345 jumps to within about 1% of its 1365 cyclical bull, also last April. The
Nasdaq now stands at an eleven-year high, yes impressive, but for
perspective it remains 42% below its secular (and bubble) peak in March,
2000. No complaining, though, as
it has gained an impressive 160% since its October, 2002 low. Respective
gains for the Dow and S&P sit at 96% and 99% since that low. The actual (live) standard and
aggressive timing strategies over the same time period (October, 2002 to
now) show gains of 103% and 92%, respectively, with about half the risk of the
S&P. The standard strategy
over this time horizon slightly bests buy and hold, but more than doubles
the risk-adjusted return. Why is
this important? Because risk (fear)
affects real-world investing, which when coupled with the desire for
return (greed) or regret missing rising markets, clearly shows through Morning
Star studies that investors significantly underperform the buy-and-hold
strategy: selling when fear is high (near bottoms) and buying when greed or
regret is high (near tops). In
other words, buying and holding is rarely practiced, as it requires
disciplined and unemotional investing that goes out the window when fear
and greed interplay. The benefit of a reliable timing model, assuming its
signals are followed, is unemotional discipline.
Another key advantage of a
good timing model is the avoidance of severe declines that devastate
portfolios, so-called capital-preservation strategies. Consider the bull-market peak for the
S&P 500 in March, 2000. From
that high until now, twelve years,
an S&P portfolio advanced just 10%, the
consequence of a “lost decade” with four bear markets. The live standard strategy gained 82% over this
time period, while the live aggressive strategy popped 106%. Reread the last sentence: 10 v 82 v 106%. During extended bull markets with
little or no intervening bear markets, as in the 1980s and 1990s, even
good timing strategies tend to lag buy and hold, the consequence of some
mistimed switch signals; not so when capital preservation becomes
critical. And, as a bonus, we don’t
experience fear when we’re on the sidelines in declining markets. Yes, we do experience fear at a scary
buy signal or regret if we’re late buying a bottom or early selling a top. Imperfection is part of modeling, part
of any good timing strategy. What
counts are the ending dollar amounts of portfolios when comparing
alternative investment strategies.
January 29
S&P and Nasdaq eke out
gains for the week, their fourth straight weekly advances; the Dow breaks
its three-week winning streak with a slight loss. The model continues to assert the
strength of the current primary uptrend.
The usual strategy while the model is on a buy signal is to buy
the inevitable dips, for underinvested portfolios that can deal with
market volatility. Speaking of
volatility, the market has been quiet this new year, so far, even as it
shows encouraging gains year to date.
Risk in the form of
volatility, an erratic market, will
be back, as conditions remain that caused last year’s swings: In the US,
high unemployment, mired housing, sluggish growth, political uncertainty;
the European crisis, with its over-the-top sovereign debt and bank
insolvencies not supported by economic growth, and officials that fail to
take dramatic steps that will mitigate, but not avoid, negative
consequences; and suspicions that emerging economies (in particular the BraziRussialndiaChinas) may not pick up global
economic slack. And globally:
Continued deleveraging as governments, corporations, and individuals
reduce the extreme debt hangover of the past decade, thus further
hampering growth, especially in the absence of structural reforms
regarding taxation, wages, benefits, and regulation. Actual or perceived progress or the
lack thereof regarding these issues will cause market swings. They will be resolved, eventually, to
be replaced by others, hopefully less dramatic than the current. The best case scenario for now is that
we muddle-through; the worst outcome is that we slip into another severe
recession. Worse yet? A negative black-swan event.
As we know, there’s always
risk in the market. To mostly
avoid it invites portfolios that will significantly underperform over
long time periods. Fear after the
1987 crash is what motivated me to develop the model. It’s served me well since its
implementation in late 1989. I
always have a stake in stocks while it’s on a buy signal; I’m always out
or somewhat short the stock market when it’s on a sell signal. As stated before, I’m currently
cautious because of my concerns over extreme tail risk. Many of you have asked about my current
positions, so here goes: 40%
equities (S&P 500, Nasdaq 100, biotech, high dividends ETFs), 10%
commodities (gold, oil, energy services ETFs), 10% bonds (corporate and
Treasury ETFs), 40% cash (under the money market and T-Bills electronic
mattresses). Loose buy targets
under “normal” circumstances are 50% equities, 20% commodities, and 15%
each bonds and cash.
January 22
Market advances third week
straight, as the S&P marks 1315,
nearly 20% above the 1099 October pullback low and
just 3.5% below the 1364 cyclical high from last
March. Still, the index sits 16% below the 1565 all-time high in 2007. The mood seems to have brightened some
on Wall Street: Economic and
earnings reports are looking ok on balance and, for a change, we had a
quiet week from Europe, although the current “fix” is far from solving
the crisis… more on that in a future posting.
The web-page revisions for the
2012 model are ready. Click menu
items at left or at the bottom of the page for specifics. A question on external events and black
swans has been added to the FAQ.
The data file in the Downloads page is also updated. Use this file to (1) view the model’s
optimized timing decisions over the 1970-2011 time span, (2) view the
live models timing decisions over the years 1990-2011, and, for you
propeller heads out there, (3) add indicators along with the given model
scores to develop your own model variation... and please let me know if you show
improved results over mine for a portfolio that runs from 1970 to
2011.
January 15
Despite the usual global woes,
our benchmark index advances to 1289,
extending the primary uptrend
from last August and landing just 5% below the cyclical bull market
dating back to March last year.
Recall from the model’s description that primary trends are defined as 10% or more changes over at
least eight weeks. Their confirmations through
any given just-completed year are important for accurate model updates, a
process just completed for this year’s model.
The model that will be used
for the remainder of this year is now operational. Its score for the current environment
is a bit lower than its predecessor.
It’s tuned to be slightly more sensitive as well, averaging 1.4
switches per year vs 1.1 previously, while
improving overall risk and risk-adjusted return. It stays invested 68% of the time, less
than last year’s 70%. And it adds
two new predictors, one based on a bond interest relationship and another
regarding the relative strength of the S&P 500. The web page revisions for the new year
should be ready by the next posting.
January 8
Good start for the year, as
the S&P 500 gains 1.6% to 1278. Look for a Friday close above 1285 as a reconfirmation of the
model’s primary uptrend that
began last August and a possible breakout above 1364 over the next several weeks or months, corroborating an
extension of the cyclical bull market that began in March, 2009. But… expect continued volatility, as
the issues that were responsible for last year’s turbulence are not going
away anytime soon.
Still working on the revised
model for this year. Hope to have
it ready for the January 15 posting.
Note the new archive section below for past postings.
January 1
The last week of the year ends
with a whimper, but we managed to eke out a gain of about 2% on the
S&P 500 for 2011 during a very volatile and scary year. At 1258
the index actually ended almost exactly (0.04 lower) where it started the
year, the total return solely due
to dividends. The aggressive
strategy lost about 2%, as did the Nasdaq.
The Dow gained about 8% with reinvested dividends. T-Bills were at about 0%, the
electronic version of money under the mattress. Some commodities fared better: gold up 10%, oil up 8%. The big winners in the flight-to-safety
stampede: Thirty-year Treasuries surged about 35%; the
ten-years about 17%. A diversified
portfolio with long Treasuries and some commodities paid off this past
year. Expecting another bumpy ride
in 2012.
The model’s performance
disappointed by not standing aside during the nearly 20%
seventeen-week severe correction from April into August, with the steepest
declines over the last four weeks.
Still, by not bailing during the selloff, it paid to stay in as
the market recovered in subsequent weeks, establishing a new primary uptrend. Fast, steep declines are always
troublesome for models with intermediate to long-term outlooks. We’ll see if the revised model for 2012
does a better job, with hindsight and without sacrificing prior
performances. Look for the
updated, re-optimized model by mid-January. Meanwhile…
Best
Wishes for a Healthy, Prosperous, and Happy New Year
The
TimerTrac link at left is a
free report provided by an independent company that tracks the
performance of market timers. Note that the report does not account for dividends
and their reinvestment, as we do, and as would be the case for reported
returns in the media, thus showing lower returns for both buy-and-hold
and the standard strategy during buy signals than those seen under the
live performance table in our Reality
Check page. This is a
significant difference in cumulative returns over long time horizons as
reinvested dividends make up 30 to 50% of S&P 500 total returns,
depending on the chosen time period.
Also note that the timing
model is a statistical mathematical model that issues buy and sell
signals. The strategies (standard
& aggressive) are the
trades that are made when these signals are issued.
Distribution
Copyright © 2012 Richard Mojena. All rights
reserved. All materials contained on this site are protected by United States
copyright law and may not be reproduced, distributed, transmitted,
displayed, published or broadcast without the prior written permission of
Richard Mojena at mojena.com.
You may not alter or remove any graphics, copyright or other notice from
copies of the content. You may
download or print one machine readable copy and one print copy per page
from this site for your personal, noncommercial use only.
Disclaimer
Specific and personalized investment advice is not intended by this
communication. Its contents are for the public record as a free public
service. Information is based on the analysis of past data and
assessments by the models. Future performance may not reflect past
performance. Profitable trades are not guaranteed. No system or
methodology ensures stock market profits. No guarantee is made regarding
the reliability or accuracy of data. In other words, use this stuff at
your own risk!
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