With market in panic mode, what is equally stunning (and amusing) is that, nearly all major financial news networks, radio stations, newspapers, financial advisory agencies are calling investors to stay calm, stay fully invested. The argument they use is simple, YOU CAN'T TIME THE MARKET. This leads to today's topic: Proactive Management.
Since the premise has already been set that You Can't Time the Market, if you ever do, you will end up badly with miserable returns. In today's media, what I hear the most from commentators is the following quote,
In the ten year period ended December 31, 2007, if you remain fully invested, S&P500 average annual return is 5.91%; However, if you missed the 10 best days, S&P500 average annual return reduces to 1.13%.
Let's dissect the above statement. The statement has some legitimate points. I can imagine a vivid picture how typical investors missed the best days in the market.
It is a well known fact that the biggest up days all happened in bear markets. Let's look at the 10 biggest up days of SPX500 from 1950 up to today Nov 27, 2008.
| | 11.58% |
| | 10.79% |
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SPX500 10 biggest up days from 1950 to 11.27.2008
Among the 10 biggest up days in the past 60 years, six of them are from 2008 alone. This is simply shocking! Two of them happened in 2002 when the collapse of the Internet Bubbles was still rippling through the economy. The two remaining ones happened right after the black Monday of Oct 19, 1987, the biggest one day stock market crash in history with SPX500 lost a whooping 20%.
Why the biggest up days all happened in bear market? It is simple. In bull market, you see calm orderly advance. Big institutions are at work to nimble up shares. In bear market, emotions are running high. The doom and gloom are broadcasted daily in the news. The greed and fear of human nature are at the full force. (The other times you see greed and fear in display is at the market tops). The market is characterized by choppy, volatile motions.
Here is how a typical investor Joe missed the 10 best days in bear market. When the bear was the ugliest, Joe got scared. "What if the market goes down another couple hundred points? All the news media talking heads are pessimistic about the economy!" Joe decided to pull his money out (e.g. 401k). Then within a few days, market went up 10% in a day. Joe became scared again. "This must be the bottom". He put his money back to the market. This is a classic action from a typical Wall Street participants.
The study of missing the 10 best days, which dramatically reduces your long term return, is legitimate. It shows how a typical investor, if becomes "proactive" in bear market, can end up miserably in his own financial well being.
The other side of the study shocks me too if you read the numbers. In 10 years period of time, if you remain fully invested, SPX500's annual return is ONLY 5.91%. (Majority of the mutual funds can't beat the market, the return of SPX500 is a good proximity of the long term returns).
I went ahead to look at the 30 year return which is representative for a working class for his retirement account. Here are the results,
| The year in which 30 year period is ended | 30 year annual return |
| 2008 | 7.28% |
| 2007 | 9.31% |
| 2006 | 8.69% |
| 2005 | 8.88% |
| 2004 | 9.83% |
| 2003 | 8.12% |
| 2002 | 6.41% |
| 2001 | 8.06% |
| 2000 | 9.02% |
| 1999 | 9.44% |
| 1998 | 8.27% |
| 1997 | 7.62% |
| 1996 | 7.27% |
| 1995 | 5.95% |
| 1994 | 5.08% |
| 1993 | 5.66% |
| 1992 | 6.10% |
| 1991 | 5.39% |
| 1990 | 5.28% |
| 1989 | 5.44% |
| 1988 | 4.76% |
| 1987 | 5.64% |
| 1986 | 4.89% |
| 1985 | 4.41% |
| 1984 | 4.41% |
| 1983 | 5.94% |
| 1982 | 4.98% |
| 1981 | 4.86% |
| 1980 | 5.94% |
The average 30 year annual return from 1950 to 2008 is 6.65%, which is not far from 5.91%. There is a tendency that market accelerates to the upside. The 30 year annual return is clearly growing to the upside from average 5% in the 80s to average 6.6% in the 90s to average 8.4% from 2000 onwards.
The returns from the above table is far from 12 - 15%, which is what I have been told over the years by buying and holding mutual funds in 401K.
Is the market really NOT timable? The Wall Street common wisdom says NO. Majority, if not all, talking heads on TV say NO. Nearly all financial advisers say No. You can not time the market, NO ONE can time the market. The wisdom is so overwhelming that any school of thoughts which deviates from it is considered a cult of the market.
Wall Street is a sell side. Stock brokers or financial advisers are not in the business to provide you timely advice because their job is really all about asset gathering. They love to tell you when/what to buy, but they nearly never tell you when/what to sell. They need to keep you invested so that commissions can continually be generated from your investment/portfolio.
Proactive Asset Management is not Buy and Hold. Proactive Asset Management thinks market can be timed.
Proactive Management is not hyperactive trading, in which investors engage in excessive short term tradings.
To me, Proactive Asset Management is about liquidating significant percentage of risky assets or moving the risky assets to safe assets at the onset of the bear markets and do the reverse at the onset of the bull markets.
Market can be timed. Proactive Asset Management can drastically improve your returns.
The most reliable way to identify the market tops is by looking at the actions of leading growth stocks and major indexes. If leading growth stocks, after long advance, one by one, sector by sector start to experience heavy institution selling and their technicals start to break the intermediate and long term moving averages; At the same time, major indexes show heavy volume churning and choppy actions and their long term moving averages (e.g. 200MA) start to flatten out and roll over, this is the most reliable sign that a bear market is about to start. This is the time you should be on high alert and aggressively raise cash.
In today's blog, we examine a simple yet effective way to identify market tops and bottoms. We exam its effectiveness over the span of 30 years.
What we are going to look at is the EMA13 and EMA34 cross over on weekly charts of SPX500. John Murphy has several articles on this topic in his market messages.
The chart of SPX 500 from 1999 to now.
The chart of SPX 500 from 1996 to 2000.
The chart of SPX 500 from 1990 to 1995.
The chart of SPX 500 from 1986 to 1989.
The chart of SPX 500 from 1981 to 1985.
What are your conclusions after you study the charts on the effectiveness of EMA13 and EMA34 on weekly charts (in short, EMA13/34 crossover)?
Here is mine,
- EMA13/34 crossover lags the onset of bear/bull markets. If you use it alone, you can be too late to sell in bear and too late to buy in bull (e.g. 1987 market crash, the crossover happened after the crash)
- EMA13/34, although lags the onset of bull/bear, it is a great way to confirm the bull/bear markets. There is never a miss in the span of 30 yrs.
- The longer the previous bull, the longer the bear, the more effective is the crossover. (e.g. 1981, 2000 and 2008 bear markets)
- The shorter the bear, the faster the drop, the less effective is the crossover (e.g. 1998 bear market)
- When the market is in trading range, the crossover gives false signal (e.g. 1994).
In summary, the EMA13/34 crossover is a great reliable indicator to use to identify the bull/bear markets, but it can NOT be used alone.
Current Market Comments:
- This is bear market rally. How long, how far will it go, I have no idea and I have no interest to know beforehand. Remember I don't make predictions and I don't trade based on what I (or other people) think market will happen next.
Current Portfolio:
- Trading Acct: 95% cash.
- 401k Acct: 100% money market.
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