After Monday’s pullback, the markets rebounded strongly more than wiping out the previous losses. The catalyst came in form of yet to be confirmed news that the European Central Bank has a plan to deal with Greece’s debt.
Germany is allegedly working on a rescue package with possible loan guarantees, but these rumors were later rebuffed as unfounded. Nevertheless, that was all the markets needed to hear and off to the races we went with all major indexes closing solidly higher.
While Greece maybe have been the catalyst of the recent sell off, I believe that a correction was way overdue anyway, and it now remains to be seen whether yesterday was just a one day technical bounce that can’t be sustained.
As our Trend Tracking Indexes (TTIs) move closer to bearish territory, I will more frequently report on market activity and also mention the proximity of the TTIs in respect to their long term trend lines.
With the market rebounding, we saw improvement in the TTIs as well, which are now positioned above their long-term trend lines as follows:
Domestic TTI: +2.76%
International TTI: +1.45%
While the potential for a Greece bailout had a positive effect on world markets, the story is far from being over. There are some 4-5 countries within the 16-member Eurozone with similar problems that need to be addressed sooner or later.
Whatever the “Greek solution” will be, I am sure other debtor countries will make an appearance, tin cup in hand, hoping for a similar solution. None of this is bound to be a positive for markets in general.
Comments 6
Ulli,
This is the folly of Market timing! While a 7% sell stop strategy may prevent major losses during a Market melt down, they also greatly inhibit the upside over the long run.
John Bogle, and many other highly respected investors point out the folly of trying to time the Market. There have been innumerable studies that show that moving in and out of ETF's and Mutual funds over the long run can cost an Investor as much as 25% on return.
While I do admit that being stopped out might prevent a major portfolio loss, it also locks in many 7% losses while at the same time incurring Tax and trading expenses.
Here's the thousand dollar question! Once your stopped out, when do you decide to buy back in? And when you do buy back in is there any guarantee the Market won't stop you out again for another 7% loss? Of course this loss will be on newly invested money that probably missed out most of the rally after the first stop out.
Anon,
I will respond via a separate blog post hopefully by this Saturday.
Ulli…
You mentioned some of your sell stops were hit. I have to believe all were hit since hardly anything has withstood a 7% loss, this Tuesday's rebound notwithstanding.
So given that the TTI is still above the trend line, are we to deploy into those funds that are higher on the charts? Or are to chill until they take out their highs before jumping in.
Also you mention "we are closer to bear market territory". Are you talking about "sell everything" situation – assuming there are still some positions we haven't been stopped out of – or are you talking about actually shorting the market?
Anon 2,
You bring up some very good points as well, which I will clarify via blog post, hopefully this Sunday.
Ulli…
Anonymous,
Keep in mind that there are many different viewpoints of what is the best way to invest. The bottom line, though, is that there ISN'T a perfect way to invest. All strategies have advantages and disadvantages.
So the way to successfully invest can and will be different for each investor. One investor may not be able to follow the approach you advocate because they wouldn't be able to sleep at night and would end up selling at the wrong time.
A second investor may feel more comfortable moving to cash to protect their accounts from a major downturn. That's the point of view represented by Ulli.
Is there the risk that someone using any type of stop loss will sell and the market turn right back around? Absolutely…that IS going to happen. Think of that as a cost of protection.
Likewise, with buy and hold there is the risk that the value of the account can decline 50% and take years and years to recover. Few thought it would (and thus miss-judged the risk associated with investing in equities) and suffered such a loss. Over a period of 10, 15, 20 years this approach may result in better returns. Are uncomfortable declines going to occur with buy and hold? Absolutely! Think of it as the cost of 'growth' if you will.
As an advisor and money manager, I have come to the conclusion that an account should be diversified by strategy/philosophy as well as by investment because there isn't any strategy that will work all the time. So I see the value in buy and hold. I also see the value in using techniques to limit losses. They aren't mutually exclusive and the use of things like stops on a portion of the portfolio (where money gets moved to cash) may be just what is needed to give the investor the ability to keep the portion in buy and hold invested for the long run.
I appreaciate Ulli's appproach and the calls that he's made. There are disadvantages to it, but it has also saved those that have followed it a lot of sleepless nights.
Anon#1 said:
"This is the folly of Market timing!"
You're kidding, right? Or you work for Wall St.
What's the opposite of Market Timing: buy and hold.
I defy you to show me anyone (including and especially yourself) who is ahead of the game using "buy and hold."
Go ahead: tell us your method and your results. I bet you wont.
Dick