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Stock Market Outlook
2020 Performance

It is time! Time for the annual review of the Stock Market Outlook's performance.

calculator and personal financial statement

Back in 2014, I started publishing weekly posts on the current stock market conditions in the United States. The outlook evolved over time, but remains an example of the steps you can take to “monitor” the current state of a market. With this information, you can figure out if it’s a good time to put your money “at risk”.

But monitoring market conditions is just one part of the process. You need to take action (e.g. the “execute” step). So in 2016, I used the weekly market outlook signals to create a simple, rules-based trading system.

With those rules in place, it’s possible to simulate trades, as well as profits and losses, based on the market outlook. And that theoretical performance allows us to discuss what, if any, adjustments are needed. Evaluating and improving the process is critical to achieving better results (the “adjust” step).

Looking Back

Here's what I said about 2020 when I posted the last performance review:

    Tariffs and trade talks are on the back-burner to start 2020, now that the Phase 1 deal between the US and China is signed, the new NAFTA is ready to go, and Brexit is confirmed. Implementation is still an issue, and many details are lacking, so any of these topics could positively or negatively impact the market at some point this year.

    Instead, the start of the year has focused on the impeachment of President Trump and the coronavirus pandemic that’s starting to spread from Wuhan China. The latter could have serious impacts on sectors of the global economy (e.g. negative for travel, positive for medical supplies), if not all of them.

    Speaking of the economy, the U.S. also experienced a yield-curve inversion last year. On average, recessions start 14 months after that event, putting the economy on notice for October this year…one month prior to the presidential election in November. And let’s not forget soaring government and corporate debt levels. All of which means there should be many opportunities to make money and/or reduce the impact of losses this year!

Nailed It

2020 was a crazy year. The pandemic derailed the stock market in late February, plunged the U.S. economy into a recession and decimated the service industries (airlines, travel, entertainment, food, etc.).

The Fed stepped in, as well as other central banks around the world, and equities exploded higher. Records broke on both sides (losses and gains). Instead of the 2019 “Sell in May and Go Away” market, it was the “Buy in March and Go Away” market!

Stock Market Outlook 2020 Performance

The trading signals reduced the impact of the first quarter sell off, as expected.

Trading System Performance Comparison

Analysis

As in years, past, I’ve created a few charts to show the daily performance of the market verses the system, as well as uptrends, downtrends, and the buy/sell signals. Here, uptrends and downtrends from the stock market outlook are overlaid on the S&P500 price chart: red for downtrends and green for uptrends. Also included are the entry and exit points: green circles for entry and red circles for exits.

S&P500 with Trading Signals

The stock market outlook generated sell signals in January, February, May, September, and October.

The S&P500 experienced a major sell-off in late February and early March, dropped ~36% at its peak. The stock market outlook drawdown for the same period was 2.6%. By the time the signals indicated an uptrend was underway, the market recovered roughly half of the drawdown (~18%).

In September the market sold-off ~11%, rebounded by mid-October, only to test the low’s again by the end of the month, and then rally again throughout November.

Trading System Performance Comparison

Here’s the chart showing daily performance of the market verses the system.

Unlike last year, the market entered the year in an uptrend, so we don’t have to account for sitting on the sidelines. You can clearly see the difference in drawdowns during March and April. By the end of the year, the overall performance gap narrowed, probably due to some whipsaws later in the year when the market was rangebound.

In terms of risk management, the stock market outlook put money at-risk (i.e. in the market) for 192 days, or 76% of the trading days in 2020. Or said another we, the outlook increased profit by ~4%, while decreasing the amount of time money was at risk by 24%.

Cumulative Performance

2020 marks the 6th year of performance data for the stock market outlook, and here’s a look at cumulative returns since beginning of 2015.

Trading System Performance Comparison

Trading System Performance Comparison

Over the 6 year period, from the start of 2015 until the end of 2020, using the trading signals reduce the amount of time an investment was “at risk” by 30%, while improving returns by 17% over buy and hold.

Adjustments

I tried my hand at Elliott Wave analysis; nothing like trial by market meltdown then melt-up to learn the ropes. I assume that the signals may have been slightly different had Tony still been at the helm of OEW, but "thems the breaks".

Overall, the system did was it was supposed to do; limited losses from large market sell-offs.

Looking Forward

The pandemic is still with us, but vaccines are being rolled out as we speak. The speed with which we get a majority vaccinated will have a big impact on the pace/timing of economic recovery.

The stock market sits within a few percentage points of all time highs, and remains fairly extended from key support levels.

A changing of the guard, in terms of which party controls the US government, will have an impact on spending. Soaring government and corporate debt are still a thing, as interest rates are still relatively low.

Should interest rates rise, expect yield curve controls to be deployed. And that isn't so far fetched, considering the Fed's current stance on inflation (allowing it to run "hot" - more than 2% - for an extended period of time).

Best to your 2021!
Joel

If you find this research helpful, please tell a friend. If not, tell an enemy. I share articles and other news of interest via Twitter; you can follow me @investsafely. The weekly market outlook is also posted on Facebook and Linkedin. All stock charts courtesy of Stockcharts.com.

--- APPENDIX ---

Remember: All models are wrong, but some are useful.

The objective here is to give readers of my blog an example of systematically using an investing process, covering translating signals, executing trades, reviewing performance and adjusting methodologies. Providing this analysis (which mimics what I do for all my personal trading) gives you an example of the safe investing processes in action.

A Note on Investment Processes: From an investing technique perspective, I’ve used trend following for many years. I find that rules-based indicators, along with regular reviews, helps me improve performance over time. As far as timing, my goal is to enter and exit positions in line with market trends, and you can see that bias reflected throughout the Weekend Market Outlook.

Data

For analysis of the stock market outlook, I used historical data from Yahoo Finance.

Historical Summary

I posted the first annual review in 2016, examining the 2015 outlook, the opportunities & challenges that come with translating signals into trades, as well as refinements to improve performance. The market outlook model was a success. The signals and subsequent trades protected capital from losses and even generated some profit; buy and hold returns from the general markets were flat or even negative.

In 2016, the trades continued to limit losses, but price movements between the time of signal generation and placing a trade influenced results significantly. As part of that year’s review, I changed the way I selected a price to represent a more realistic trade, and performance improved substantially.

In 2017, the trading model underperformed the market. Shallow sell-offs and the signal/trade delay were the main causes. I covered potential issues with the signals themselves (two were based on moving averages, making one redundant). But the cumulative performance since 2015 was still pretty good, so no changes were made.

2018 was the year I thought results would be great, and they were anything but! I erroneously used my blogging schedule as a trading schedule. I don’t model trades during the week or when a signal is actually generated. if I want to trade weekly prices, I would need to use weekly indicators (verses a summary of daily indicators on a weekly basis).

2019 was a great year for returns, so I expected to see some money left on the table, so to speak. The markets started off 2019 recovering from a steep correction, and almost the entire difference between the stock market outlook and buy and hold occurred while waiting for confirmation of the uptrend. Tony Caldaro passed away, taking away a very generous soul, as well as the signals generated by OEW.

Methodology

The weekend stock market outlook continues to be based on the overall methodology from 2016; using 3 techniques to assess the state of the S&P 500. Each weekend, I determine whether the outlook (uptrend or downtrend) has changed, based on signals from those 3 methods. By cross-referencing three different methods and only changing the overall trend for the stock market outlook when they all align, I continue to attempt to reduce the number of false signals.

For reference, the signals are:

  • ADX (14 day) (Bullish/Bearish price trend)
  • 50-day moving average + trading volumes (institutional investor behavior)
  • Objective Elliott Wave Theory (overall market behavior / psychology)
With some technical analysis thrown in for flavor (potential trend inflection points, counter-trend rallies, etc.).

Trading Criteria – Investment Type

I base the signals and the trading model on the S&P500 benchmark index. The reason is twofold: 1) The index is often used as a proxy for the general U.S. stock market 2) You can’t buy it

You might be asking yourself why I model something you can’t buy. The answer is simple. I am not a registered investment advisor. Therefore, I cannot give you, my readers, any investment advice and/or recommendations to buy/sell a security. Since you can’t buy the index, the blog posts, signals, and trades can’t be considered recommendations to buy or sell a security.

I can provide you with educational materials and/or entertainment. Since we can’t directly buy shares of an index, I also show you an example of the signals if they were applied to the next best thing: funds. I use 3 S&P funds (SPY, VOO, and VFINX) to show you the variation that can occur between investing instruments…even ones that are supposedly the same.

Trading Criteria - Buy and Sell Prices

The forward looking outlook is posted on Sunday, based on stock market price action from the prior week. Since the outlook reviews signals at the end of the week, the assumption for 2019 is that trades will be entered at the opening price the day after a signal is generated. In previous performance assessments, the “price” used for calculating performance is the market open price the week following a signal change.

Trading Criteria - Position Sizing

For this study, I used a position size of 100 shares to keep the math simple. If I were buying shares of an index ETF, my position size would be calculated based on the size of my total portfolio and my risk tolerance (how much I’m willing to lose before selling the position).

Trading Criteria - Buy and Sell Signals

Shares are purchased if the market outlook changes to an uptrend. If the outlook is mixed, watch and wait. If the outlook changes to a downtrend, the entire position is sold.

Issues & Objections - Trade Prices

If a signal is generated, simulated trades are entered based on the market's opening price on the following trading day.

Are you always going to get the opening price? No. As an example, one astute observer pointed out that I’m using opening price across the board, yet it’s not possible to purchase mutual funds at their opening price.

Will the opening price always be the best price? No. Price slippage between your signal generation and trade execution is one of the reasons that individual results can and WILL vary…as shown in the 2018 performance review.

Issues & Objections - Trends & Timing

Are you always going to buy an uptrend, sit on your hands when the market is "mixed", or sell exactly when a downtrend takes hold? No. General trends are great for giving you a sense of the overall investing environment. But each position needs to be evaluated on its own merits.

For instance, there were several times in 2018 when the stock market outlook had been in an uptrend for a few weeks before any of my individual stock trades were executed.

IMPORTANT DISCLOSURE INFORMATION This material is for general communication and is provided for informational and/or educational purposes only. None of the content should be viewed as a suggestion that you take or refrain from taking any action nor as a recommendation for any specific investment product, strategy, or other such purpose.

To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisors of his/her choosing. Invest Safely, LLC is not a law firm, certified public accounting firm, or registered investment advisor and no portion of its content should be construed as legal, accounting, or investment advice.

The material is not to be construed as an offer or a recommendation to buy or sell a security nor is it to be construed as investment advice. Additionally, the material accessible through this website does not constitute a representation that the investments described herein are suitable or appropriate for any person.

Hypothetical Presentations: Any referenced performance is “as calculated” using the referenced funds and has not been independently verified. This presentation does not discuss, directly or indirectly, the amount of the profits or losses, realized or unrealized, by any reader or contributor, from any specific funds or securities.

The author and/or any reader may have experienced materially different performance based upon various factors during the corresponding time periods. To the extent that any portion of the content reflects hypothetical results that were achieved by means of the retroactive application of a back-tested model, such results have inherent limitations, including:

  1. Model results do not reflect the results of actual trading using assets, but were achieved by means of the retroactive application of the referenced models, certain aspects of which may have been designed with the benefit of hindsight
  2. Back-tested performance may not reflect the impact that any material market or economic factors might have had on the use of a trading model if the model had been used during the period to actually manage assets
  3. Actual investment results during the corresponding time periods may have been materially different from those portrayed in the model
Past performance may not be indicative of future results. Therefore, no one should assume that future performance will be profitable, or equal to any corresponding historical index.

The S&P 500 Composite Total Return Index (the "S&P") is a market capitalization-weighted index of 500 widely held stocks often used as a proxy for the stock market. Standard & Poor's chooses the member companies for the S&P based on market size, liquidity, and industry group representation. Included are the common stocks of industrial, financial, utility, and transportation companies. The S&P is not an index into which an investor can directly invest. The historical S&P performance results (and those of all other indices) are provided exclusively for comparison purposes only, so as to provide general comparative information to assist an individual in determining whether the performance of a specific portfolio or model meets, or continues to meet investment objective(s). The model and indices performance results do not reflect the impact of taxes.

Certain information contained herein has been obtained from third-party sources believed to be reliable, but we cannot guarantee its accuracy or completeness.

Investing involves risk (even the “safe” kind)! Past performance does not guarantee or indicate future results. Different types of investments involve varying degrees of underlying risk. Therefore, do not assume that future performance of any specific investment or investment strategy be suitable for your portfolio or individual situation, will be profitable, equal any historical performance level(s), or prove successful (including the investments and/or investment strategies describe on this site).