Two Types Of Whip-Saw Signals

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Reader VR posted these comments:

I understand there are two ways you can get whip-sawed. One is the big bang event in which the trend line crosses from buy-to-sell-to-buy.

The other and more frequent one within the buy cycle is if your fund drops more than a certain percentage points stopping you out and then going back up through the old high prompting you to get back into the market.

Can you give us an insight into any analysis you may have done to tell us whether it is beneficial to follow only the larger cycles or to follow the more frequent cycles within the ‘buy’ zone?

In other words, is it better to just follow the trend line?

The short and incomplete answer would be: It depends on market behavior.

If you have a slow and steady uptrend, with the Trend Tracking Indexes (TTIs) remaining fairly close to their trend lines, then you could use the trend line as your exit point. Actually, that’s what I have done throughout the late 80, 90s and into the year 2000.

Things changed when the tech bubble burst and the markets not only crashed but also whip-sawed several times during the first nine months of 2000. Take a look at a chart of the domestic TTI for that period:



The large red arrows on the left show the highs and lows the domestic TTI made during the blow-off period. It is obvious that, if you had followed the piercing of the trend line as a signal to sell, you would have given back most of your accumulated profits since the Buy of 11/17/1999.

That is the inherent problem. Whether you use the TTIs as I do, or simple 200-day moving averages for individual funds/ETFs, the issue remains the same.

A strong bullish period will drive the price line (green) way above trend line (red). If this happens within a short period of time (6 months or less), the trend line lags too much to lock in any profits in the event of a trend reversal. While you may avoid an above the trend line whip-saw here and there, you also risk giving back most of your gains.

That creates an emotional problem for investors as well when seeing accumulated profits evaporate by waiting for the trend line piercing to generate the sell. I have seen, during violent moves such as the above chart shows, unrealized gains of 40% evaporate down to 3%. While you personally maybe be able to handle that, if you manage money for others, that is simply not acceptable.

The bottom line is that I have found the use of a trailing sell stop, when above the trend line, a far better choice in controlling risk (locking in profits and limiting losses), especially in the volatile environment we are living in.

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Comments 5

  1. Ulli,
    While I believe you are truly an honest Investment Manager, I do believe you make investing way to difficult. I truly believe that most of your conservative readers would be better off in a Balanced buy and hold portfolio with asset allocation driven by their risk tolerance.

    Reason# 1:Hedging doesn't work!
    Simple Hedge can be a big loser. Having been an investor in your Simple Hedge, I watched the the Short position in the Hedge "Bearx" lose 10 + percent in 2 months, the Hedge overall 2 percent, while the Market rallied 10+ percent. This goes to show how truly hard it is to time the Market.

    Reason# 2:Market Timing Accuracy!
    Market timing is not an accurate science, even the best timing news letters like the "The Chartist" are at best only about 60% accurate. Many Market Timers actually recommend keeping 50% of your portfolio in a buy and hold portfolio.

    Reason# 3: Expense!
    Whip-Shaw, while getting constantly stopped out of positions doesn't cost the investment Advisor, it does cost considerable money over the long run. When these fees are added up along with Management fees, investors in general loose out.

    Conclusion: A well balanced Portfolio (rebalanced quarterly) with a 10 to 15 year + plus time horizon will out perform most if not all Money Managers (The Chartist being an exception)due to the 1 + percent management fee, and trading costs.

    A great news letter for anyone wanting to set up a balanced portfolio is "The No-Load Fund Investor". This news letter helps investor avoid making the the biggest investor mistake, which is not having a diversified portfolio.

    For Investors wanting to Market time, the Chartist is the absolute best pick. The Chartist is the only timing New Letter that puts their own Money where their mouth is, and they have consistently outperformed the Stock Market over the last 20 years. The Chartist has a $1,000,000 dollar account invested with their very own recommendations.

  2. I'm afraid that the sell-stop methodology is going to become a problem for investors.

    In my view it is going to start a new trend of "churning." Churning used to exist when an advisor traded a clients account excessively. Now churning is going to define the behavior of the individual investor who is bent on protecting himself, playing defense.

    Recently, I was speaking with a 40-ish mother of two grown children who remarked that her and her husband were seeing the importance of taking a more hands-on approach to their 401K's. When I mentioned the concept of sell-stops she said her husband had just enrolled in a class that taught sell-stops.

    That's the point I'm trying to make. Wall Street knows that more and more people are going to use tools like this to protect themselves. And Wall Street knows about 7% to 10% drops trigger stops. Brokerages are going to prosper, at the expense of so-called "investors."

    The words "investing" and the "stock market" can no longer be used in the same sentence. It's more of a casino than ever before.

    Your retirement will depend mostly on your savings, not how much you can make on your savings. Wall Street has it figured before you ever get the chance to sell-stop.

    Happy churning,
    G.H.

  3. Ulli,

    Boy I can see why the person remained anonymous that blirted out about timing the market. It is very clear that he/she does not know anything about timing. Sounds like a disgruntled buy & holder that needed to vent some resentment.

    I have tried NoLoad Fund-X newsletter method and I ran into these problems, either my discount broker doesn't offer a fund that that was at the top of their list that I wanted to buy or there are such high redemption fees etc. One can just simply buy Fund-X mutual fund symbol FUNDX and accomplish about the same thing, but hold on to your hat during downturns because it gets hammered and it is very diversified and gets upgraded periodically, but still goes down in down markets. I like FUNDX in up trending markets though.

    I have found in all my circles that those who put down market timing or the so called trend timing are those who know nothing about it and expect all their audience to agree with them.

  4. Ulli,

    For whatever it is worth these people writing here on this blog are apparently unaware of this being a losing decade. Just think if someone would have dumped a bunch of money into an S&P; 500 index fund 10 years ago would now have less money than they started with. So I will choose trend timing anytime over buying and hoping.

  5. The Chartist is not number 1 for timing. Dan Sullivan is a long time guru. His Chartist stock letter uses little timing. His separate mutual fund timer does use timing and has for over 12 years with good results. It too is not the number 1 timing newsletter. He charges a separate fee for the mutual fund timer.
    That said, I like to hear buy and hold or hold and hopers. They always have good tax reasons for holding on, yet when it comes, they sell near the low. Not good timing.
    I have a long only system I bought 10 years ago with 5 additional years of data that has done 29% per year with a max drawdown of 10 1/2%. Wish I had more than $50,000 in it but I didn't trust the system early on. It is simple and sure beats buy and hope! It does create short term capital gains but like I said NO 40% drawdowns!
    Ulli has an excellent conservative system. It's free and he even holds your hand! It averages between 9 and 10% per year. Why are these contributors knocking it?
    One last thought! My diversified holdings were 50% stocks and 50% fixed income just like all the recommendations of the hold and hope crowd. It was down 40% because the bond funds dumped in 2008 along with stocks. Sure its come back now after a huge run up but -40% takes 66% increase to get back to break even. My SPY system shows that SPY price was 1347 on Oct 28,1999 and now ten years later it is substantially less. Good luck with buy and hold!

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