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).
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!
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!
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.
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%.
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.
Overall, the system did was it was supposed to do; limited losses from large market sell-offs.
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!
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.
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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.
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.
For reference, the signals are:
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.
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.
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:
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).