This week’s hot topic has been the fact that many over-eager investors are trying to find a way or some reasoning to re-enter the market on the assumption that a bottom has been made. Reader Joao emailed me prior to the election and had this to say:
I keep reading your blog with great interest. Observing your index graphs and TTIs, two questions have sprung in my mind:
1) In the 20 years that you have been using your TTI system, have you ever seen such a huge gap between the price of the index and the TTI (other than perhaps for the odd day or week, like around 9/11)? The gap is huge for the International index and quite large for the US Domestic index … so, if prices move generally sideways from now on, it will take quite a while (years ?) for the TTI red line to eventually cross the index …
2) If the market has a knee-jerked upward reaction, by the time it has approached the TTI line it will have gained (quite) significantly from current levels (30% or so). Maybe it then hits the TTI line and reverts down (like it does with a 200 d MA in a bear market) …. and a short-medium term ‘trading’ (or investing?) opportunity has been missed. The question is whether you don’t have/use (or have tried with) a “faster” indicator that may provide some shorter term indication of direction, even at a higher risk of not being as reliable as your TTI line?
The short answer is “no;” I don’t have a “fast” indicator. I believe that trying to enter the market at a level that some consider cheap may work during pull backs in bull markets, but are a very dangerous road to travel on when in bear market territory.
As we’ve seen, October had several rebounds of +10% or so, yet we ended the market down by almost -17% (S&P; 500). I sure like to know how those bottom pickers fared during that month.
Of course, the subsequent move higher had everybody giddy and feeling good, but now again, reality has set in and took the legs right out from under the rebound. In my view, you have to control your ego more than anything else and accept the fact that trying to pick a bottom is an exercise in futility. More often than not will your decision have a negative effect on your portfolio.
If you are trader vs. an investor then you can make different decisions, some which may be designed to take short-term profits. I mentioned before that this is a market for aggressive traders and not for investors.
This bear market has just started and, in a way, reminds me of the year 2000, when the initial sell off took the market down sharply but not as severe as this time. Several rebounds caused several whipsaws back then.
This year, the break through the trend line accelerated sharply and buy-and-holders were hit hard and fast. To me, as a trend follower, this current situation is preferable. Why?
Because of the rapid drops, we have sunk way below the trend line and are somewhat immune to sharp bear market rallies. I mean this in the sense that they did not quite have the power to generate another buy signal quickly because the distance from the TTI to its trend line was simply too great.
As a result, time will be on our side in that the trend line (red) will be slowly dropping every week while TTI index itself will be slowly rising as the markets recover over time. Depending on market activity, they may meet somewhere in the middle or possibly in the lower third.
This assumes that this bear market has a ways to go, because I simply can’t see that the cause of the current economic situation will be resolved in a few months. Bear markets, once in motion, simply take time no matter what the underlying reasons were which brought about the downturn.
Decide if you are a trader or an investor. If you’re the latter, you should not touch this market until there is clear evidence that the trend has in fact reversed.