Another Black swan is China. Panics always happen when their is a lack of transparency. Opacity is layered, Enron like, in China. They will not tell the outside world what their true economic conditions are, their internal states/cities will not tell their federal level what is happening and there is no open SEC like overseer to insure companies and entities are not lying. Many western companies earnings have grown to depend on China fueled growth and if China overnight decides to take a turn, and not tell anyone what it is doing, it could set off a worldwide panic. We have already seen their impact on commodities. That is the canary in the coal mine. I have never seen an article where someone modeled the impact on SP500 EPS at different, lower, China national growth rates. Has anyone seen this? China is already signaling this is beginning to happen.
David,
To put China in context, the issue is what percentage of US stock sales are to China and what pct of that will slow down and/or shrink temporarily. Ex: If US companies sell 5% to China and China slows down from growing 8%/year (and I don’t mean what the Chinese report but the actual growth) to 0% a year, then the impact to US stocks would be 8% of 5% which is -0.4% reduction in sales. (These numbers are made up for illustrative purposes). You would also need to factor the increased profit margins of some companies due to lower commodities prices and the increased sales to US consumers due to increased discretionary spending (lower gas prices) and the loss of US shale jobs caused by lower oil prices. I’m sure that I didn’t include everything yet. Guys, predicting macro is hard. Almost no one does it well consistently.
Hi again,
two month after my initial post the technical weakness of the S&P500 is now confirmed by the break below the support level.
I therefore am curious to know: Did anybody see this coming using any sort of market indicator / custom series or the like?
…
My Best(SPY-IEF) Market Timer has been signaling 25% stocks and 75% bonds or cash since mid-March 2015.
http://imarketsignals.com/2015/spy-ief-market-timer/
Sisters and all,
I published a free article on my website yesterday (and another last Wednesday) that predicted this week’s selloff based on technical analysis. I expect this to be a significant correction. It will probably be blamed on headlines out of Greece or some other such nonsense. But just like the sellof last October was blamed on a virus, the headlines are just market-writer’s attempts to answer what people want to know (why?). The real reason is easy to see from technical analysis. I know TA has a bad rap on p123, but check out these articles:
(Bad links now fixed. No password required.)
My portfolios have been mostly in cash for some time based on this type of analysis. Again, the articles are free and I’m not trying to sell anything. I am publishing all of my content for free now and will be publishing some of my portfolios into the free area as well because I am retiring soon (thanks to p123). If you have a question for me directly about the articles, use the Support link on my website.
The links ask for a password.
KJ
PS: They work now.
Christopher, what is a Major drop, what is a significant correction 10%, 20%, 30%?
I would consider a 20%-30 drop as healthy, it can not go up forever.
Yes, my port will “suffer”, but in the Long run there is only one risk for me:
permanent losses (e.g. never leverage, it takes you out of the game sooner or later!) and low Performance.
(At least that is the Definition of risk by Buffet.)
A nice drop, then come out of that bump with a Turbo recovery based on
value and momentum.
Today was noice, 2% Drop? Piece of Cake, in the 90s 3% swings where totally normal!
Szenario:
My port got 300k (I do not Need this Money the next 20 Years!), lets cut that in half, put 50k to it (thats what I can put away in one year).
So I got 200k after that very bad year.
All of my Systems recover fast and with a lot of bang to the upside, one year later I am where I began.
I will take that rollercoster, because I know I am not smart enough to time well.
The only Thing you have to do: Keep your emotions in controll!
The Kitchen is really cold now, it is going to be much hotter (if not, also okay)
I know, that is totally against the norm, just my stupid 2 Cents!
Regards
Andreas
(Bad links now fixed. No password required.)
Andreas, did you hold on through the creash of 2007-2009? My system had me out in October 2007 and back in on March 9, 2009. How about 2011? My system had me out in May of 2011 and back in October 9, 2011. I’ve found that by eliminating significant drawdowns, you can triple the returns of your portfolios. The articles above will explain some ways how.
That is the one thing that 98% of investors cannot do (witness the mass liquidation of portfolios in October 2008, near the bottom). This is going to be a doozy of a drop, not a few percent! Today was only the opening salvo in a selloff that could rage for months. You don’t have to be ‘smart’ to learn how to time the market. It’s simply another discipline, just like learning how to do quantitative analysis. By combining the two, you have a can’t-beat combination. Read my articles and see what you think.
I am not saying I do not time the market, get out when the 200 Ma is broken and Performance lots of my Systems improve as well (though not all,
some agressive 5 Stock modells do actually not care based on Performance (though mdd gets better with Timing).
Get out when the earnings are trending down and they improve even more.
My Point is: what if your Timing is wrong? Are you prepared for a 50% Drop?, if not, your are in Trouble, because if you can not
get trough it and give up at the wrong Moment, lets say 30% drop of you port and get into cash and see how your Modell snaps
back in no time, THAT will break your Performance much more, maybe even your ability to invest ever again (I got a lot of friends who got burn
2008 and they still wait for the next drop to get into the market again, they missed a multy year bull market!!!) And that is why most Investors “do not make it”.
And I got friends who get nervous, when the market Drops 10%, sorry, but that is plain nuts. If you can not controll your emotions, then
your need to work on them.
We are in a ring with a Gorilla, he will swing hard and we will knock you down one day. To believe to be able to controll all 100% of those swings
gets you in Trouble (as well as leverage) Be prepared for a 50% drop and follow your Modell even then trough.
All great Investors have their emotions in check. To have your emotions under controll is 100% of the game, it is a kick out
criteria (e.g. criteria not fulfilled = no sucess). You can have an average Modell + emotions controll = Success.
Best Modell in the wold + emotions not in check = no sucess!
That is the reason why everybody is in search of modells with 45 dregree angle going up with no dds, they
search a Modell where they do not need to have their emotions in check.
Well that road leads to deasaster.
I mean look at the modells of he great Investors. The free modells of p123 are mostly better then theirs.
They could not care less, because they just be able to make 10-20% year after year and ride out the bumps in between.
Think about it: why does buffet not time the market? Why could he not care less? In his case, he only cares
about the value of his stocks and he knows, that Long term the value will determine Price, he simply waits
until the market is “rationale” again. And so far that has worked since 1870.
I think it is okay to time the market, get out if the 200 ma on the markets are broken,
get out if the sp500 does not make a new high for more then 12 Months etc.
Fine! But be prepared when you are wrong, for that Moment you need to be prepared.
Work on your emotions!
Regards
Andreas
There is no sign of a coming recession in the US for the next months: unemployment is low, housing starts are in an uptrend but just half of 2006 bubble level, the 10-year / 3-month credit spread has not been inverted since 2007.
I use an aggregate indicator taking into account 10 elementary data. Its value is between 0 and 10, maximum risk is 7 and above, current value is 4. Of course, all is about probabilities, risk zero doesn’t exist (old mountaineer’s saying). Black swans are by nature unpredictable. I am about 60% hedged on my main trading account.
A 20% correction like in 2011 might allow this bull to live a happy a longer life.
Gents,
thanks for your feedback.
Both technical and fundamental approaches are valid. Georg’s SPY-IEF market timer seems to have the risk profile in line with current circumstances.
I take a similar standpoint as Andreas: I don’t try to time the market. Therefore I put great emphasis as a designer to develop models that are fit across a variety of market conditions.
Happy trading!
Great post Andreas. The average retail investor seriously underperforms for the exact reason you outline.
If I could go back in time and give one piece of advice to my former, naive self when he first joined P123, I would tell him to absolutely relegate all model trading to tax advantage accounts, especially to start off. Not just because of the simple math (turns out slippage + bid ask deltas + transaction costs + tax man’s cut at regular rates = A very formidable accumulative hurdle for even good models to overcome out of sample), but I’m still (relatively) young(ish), and I can’t touch this money for quite a while anyway without penalty. I’m able to ride out drawdowns much easier. It’s allowed me to just sit back, let my model do the work for me and not allow myself to get caught up in small market timing devices that whipsaw me out of rebounds. As long as my model has built up enough active return in the good days to provide cushion on the bad days to ultimately beat my benchmark in the long run, I’m happy. This gets easier as time goes by.
I recently read a speech by Charlie Munger where this really hit home.
Just bumping this to the top.
Interesting read for “predicting” the stock market about a year and a half ago.
And what do we learn from this?
That the IWM had a 37%DD and that I had a very hard 2015, and so far a great 2016;-)
Who would have thought that small caps are back in such a strong way. Unbelivable, but
very enjoyable 
Regards
Andreas
I completely agree, Andreas! In particular regarding the attached, which I bought back in June for 7.6$ a share. I’m so glad that I did hold on to it 
HI IQ. Named after some of P123’s SA designers: you know who you are.
And what do we learn from this?
For me, that “perceived” government future policies can affect the stock market “sentiment” (ie, forecasts), in the short term, in a dramatic fashion. It shows the effect of government (fiscal and monetary) policies on the private sector. I think it is a much larger effect now than say 50, or even 20, years ago.
The interesting thing to me is that my models (which have all done well since the election) don’t use any sentiment factors/formula (except short interest). And no technicals. Just financial statement basics and valuations. None have bond hedges.
I think this optimism has created a sector rotation like effect and maybe even changed where we are in the business cycle. Don’t know. Facebook, Amazon, Alphabet, etc were all down today. Big Tech seems to have lost leadership.
It would be interesting to review in a year’ s time after things have actually happened. Could be better or worse.
As I posted around a year ago when small caps where in the abys. The size effect usally works (e.g. small caps outperform big caps) over the
long run an it is one of the strongest effects that can be used to generate alpha.
Combine this with low liquidity, value, a bit of momentum and some tweaks on the earnings side in the buy and sell filter and
with a relative small account and you have huge weapon (Thank you P123!!!). Easy to write but hard to do (same as
you loos weight if you work out and eat healthy, very easy to say, hard to implement).
Then the following is needed: “We do not have to be smarter then others. We do need to be more diciplined”. (Waren Buffet).
Discipline was the key to get through the big DD on the russel and to wait until small caps are in favour again.
Regards
Andreas
…and discipline is needed not to get overexited, things could change fast, so follow your system