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Current Signal Performance
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Turbo Signal
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Trade Date
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Turbo Model Returns (Long & Short Strategy)
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Nasdaq 100
(QQQ)
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Russell 2000
(IWM)
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S&P 500
(SPY)
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Classic Signal
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Trade Date
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Classic Model Returns (Long & Short Strategy)
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World
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Nasdaq 100
(QQQ)
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Russell 2000
(IWM)
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S&P 500
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Though the failure of the so-called SuperCommittee was widely anticipated. The news still got sold Monday morning. Negative comments from Moody's regarding the possibility of a slip in France's credit rating sent European markets downward. U.S. markets open lower and fell to losses of more than -2% before recovering slightly in the afternoon. A downward revision to U.S. 3rd quarter GDP from 2.5% to 2.0% played into investor nervousness leading to weakness early in the Tuesday session. Stocks managed to recover to close the day with only modest losses. The weakest German bond auction since the European Union was formed set investors on edge yet again Wednesday pushing stocks down sharply in a broad selloff. Adding to the glum mood was a contraction in China's manufacturing sector, fanning fears of global economic slowdown on top of the Eurodebt mess. The result was a 2-3% shellacking as investors ran for the exits ahead of Thursday's Thanksgiving holiday. "Black" Friday's return to trade saw an effort to recoup some of the early week losses. Those efforts were going well, with markets up modestly, before a report that S&P was downgrading Belgium's credit rating. This spread of Eurodebt woes to countries beyond the initial PIIGS group was enough to push investors to the sidelines ahead of the weekend, leaving stocks with another day of losses, though fractional in scope.
The S&P 500 (SPY)
suffered a -4.62% slide this week outdone by the -7.45% drop for the Russell 2000
(IWM). The QQQ
notched its second consecutive -4%+ losing week, this time giving up -4.55%. The
week's declines put all three indexes below their 50 and 200-day EMAs.
The top 5 World ETF portfolio delivered a
-4.87% drop this week. With the Classic Model
on a Sell signal, the World
approach calls for staying in cash if you follow the "Long Only"
methodology, or taking a short Nasdaq 100 (QQQ) position if the "Long
and Short" strategy is your guide. Only "Buy and Rebalance"
followers should be invested in the World portfolio at this time.
Go to the Classic Model "Description"
page for a more detailed explanation of the strategy choices.
.
Our Turbo Model is on a Buy
signal while Classic issued a Sell
after the close Friday.
Our view of buy-and-hold investing
This year has been a rough ride for almost all equity investors. When equity
investors find the road to be bumpy and spirits to be dragging, we often see articles
such as some we read this week telling investors how cheap stocks are. Of course,
they toss off comments that they are taking a "long-term" perspective
- that term being 10-20 years. We won't argue that point. Over a 10-20 year period,
one would expect at least SOME positive return from stocks. And buying them lower
is certainly preferable to buying them higher. Our view, of course, is that most
investors do not have that kind of time and/or patience. We are in a secular bear
market, defined by stocks becoming cheaper and cheaper as investors care less
and less about corporate earnings as a driving force and focus instead on any
number of other negative factors. On the heels of another strong quarter of corporate
earnings, which investors embraced for a few days only to be distracted once more
by other concerns, we see the secular market forces at work again. We thought
it might be of interest to remind our subscribers why we view the investing world
as we do.
The vast majority of investment
advisors and brokers preach the wonders of buy-and-hold. It is industry doctrine
and much print is devoted to convincing clients that buy-and-hold is the only
rational approach to investing. As trend-timers we have largely rejected the buy-and-hold
mantra of the investment industry. But why do we reject it? This week, we'll explore
some of the more common arguments presented to support the buy-and-hold investment
approach and our contrarian view of those arguments.
Buy-and-hold argument 1: despite the ups and downs, the stock
market generates a significantly positive return over time. Investors should stay
invested for the long-term and take advantage of this natural tendency for stocks
to go up as the economy grows.
This is certainly true. Stocks DO tend to go up over long periods
of time. The chart below shows that over the past 100 years, stocks have generated
an average annual return of about 10%. The chart also shows the variation in returns
over various rolling periods of time. For example, over any 10-year period, stocks
have almost always delivered a positive return with some 10-year periods offering
almost a 20% return. Of course, stocks just concluded a rare "lost decade"
where the return was negative. Over any 20-year period, stocks have never given
a negative return. Hopefully, that statistic continues.
Chart 1: Range of Stock Market (Dow) Returns (for holding periods from
1 to 100 yrs)
If an investor is now 20-30 years old and has decades of investing ahead of them,
perhaps there is some comfort to be taken in these long-term averages. However,
if an investor is recently retired without enough resources to last, they can
ill afford a 10-20 year period of single digit annual returns. In summary, the
stock market delivers a solid return over long periods of time. But those returns
can vary dramatically over shorter periods of time, even to the point of being
negative for entire 10-year periods. Having just gone through such a "lost
decade", it seems highly unlikely such performance will be repeated, however.
Buy-and-hold argument 2: missing the 10 best days in stocks dramatically
reduces returns. Thus, investors must stay the course in order to be present for
these critical days.
This argument is trotted out frequently to support buy-and-hold. And the data
can look pretty compelling. To whet our appetite for buy-and-hold riches even
more, let's take the most recent secular bull market from 1984-2000, a period
where stocks offered an enormous 17.89% annual return. $100 invested at the beginning
of 1984 would have grown by almost 14x by the end of 1999. So, what's the impact
of missing the biggest up days? Table 1 below shows the impact
of missing not only the best 10 days; but extends that to the impact of missing
the best 20 days, best 30, and 40 days. The effect is dramatic. We obviously cannot
afford to miss those key days.
Table 1: Missing best days impact
Number
of Trading
Days Missed
|
Miss
the
Best Days
|
"Lost"
Annual Return
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0
days
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17.89%
|
None
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10
days
|
14.24%
|
-3.65%
|
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20
days
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11.99%
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-5.90%
|
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30
days
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10.01%
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-7.88%
|
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40
days
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8.23%
|
-9.66%
|
Okay, it's obvious that missing large up days damages returns. What is usually
missing in this argument is the other side of the coin: What if you miss the WORST
days? It turns out the impact is far more dramatic than missing the best days.
Table 2: Missing best days versus missing worst days
Number
of Trading
Days Missed
|
Miss
the
Best Days
|
Miss
the
Worst Days
|
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10
days
|
14.24%
|
24.17%
|
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20
days
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11.99%
|
27.04%
|
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30
days
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10.01%
|
29.45%
|
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40
days
|
8.23%
|
31.66%
|
Chart 2: Growth of $100 from 1984-2000
Almost every investor has heard the story of missing the 10 best days. How many
have heard about missing the 10 worst days? And the data above was during the
longest running Bull market of our generation. A period when buy-and-hold generated
outstanding returns. Even during this stellar stock market period, the benefit
of avoiding losses to preserve capital for future gains is abundantly clear.
Buy-and-hold argument 3: You can't time the market. Just look
at the dismal performance of professional mutual fund managers! As a group, they
underperform the market over any extended period of time. If the best minds in
the investing world cannot beat the market, why would you, Mr/Mrs Individual Investor,
think that YOU can do it?
This one we won't spend much time on. Many of the articles espousing this view
focus on timing the market from one day to the next, which misses the point. Timing
the market on a given day is not what any trend following strategy attempts to
achieve. We think it's ludicrous to believe you cannot time markets. We acknowledge
that it's impossible to consistently call the tops or the bottoms. But that's
never our intent. We simply argue that taking a passive buy-and-hold approach
to investing is a disaster in a secular bear market such as we are in. The data
above shows that, while not a disaster, being mindful of avoiding losses even
during a strong secular bull period can improve results handsomely. We feel that
our results speak for themselves, and offer a very strong endorsement for the
benefits of preserving capital and building wealth through a trend timing philosophy.
Our Weekly Updates are filled with tips, pointers, and methods
for successfully implementing and making the most of our approach to investing.
Buy-and-hold has its place for investors who do not have the knowledge, capability,
or resources available to pursue any other strategy. But with the advent of discount
brokers and the vast information available on the internet, excuses are far fewer
than they once were. Spread the word: there are better ways to invest! You need
not rely completely on the generous spirit of market forces to deliver your returns.
After all, we have seen that the market can be anything but generous.
Question: What are Eurobonds?
The current structure of the European Union's finance system has each
nation financing their own debt through issuance of their own bonds,
using the Euro as the currency. There are no pan-European bonds in
the same way as the U.S. has Treasury bonds. Many commentators are
calling for the European Central Bank (ECB) to create and issue Eurobonds
as a way to generate more funding for debt-strapped countries who
are increasingly finding it difficult to raise money themselves in
the bond markets. Interest rates for Greece, Spain, Italy, France,
and several other EU nations are rising to varying degrees as investors
shy away from the perceived risks of buying these nation's bonds.
It is thought that investors would be more comfortable investing in
broader EU bonds, as they would be backed by the collective resources
of the European Union. Of course, those "collective resources"
rely heavily on Germany's financial strength and willingness to financially
support the ECB and the EU bonds. Germans do not appear ready to make
that level of commitment.
This reluctance defines the Eurozone debt crisis. As nation after
nation finds investors less willing to invest in their bonds, calls
increase for the ECB to step forward as a "lender of last resort"
much like the Federal Reserve in the U.S. However, Germans are reluctant
to step further into the loan pool until concrete plans to reduce
debt in Greece, Italy, Spain, et al. are more clear. When and how
that happens is also unclear. As investors see Germany taking a harder
line against support for broad-based European bonds, they become ever
more nervous about the prospects for owning the bonds of each country.
This week, they also became nervous about buying German bonds, feeling
that Germany is now in a lose-lose situation - either Germany commits
more resources to help the debt situation (a lose for Germany at some
level), or they let the interest rate crisis continue to spike which
drives investors further away and damages the economy, in the near-term,
still further. With Germany reliant on fellow Eurozone nations to
buy much of their goods, a weaker European economy hurts Germany as
well.
Thus, stock and bond markets sell off as the Eurodebt situation degrades
further. The notion of Eurobonds as a single backstop financing source,
a la U.S. Treasury bonds, seems still far away. And the European Union
continues to struggle with how much of a true "union" they
want to be.
Warm wishes and until next week.
The TimingCube
Staff
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