What’s causing the underperformance in my R2G Ports?

[Market_Neutral]

My take on the oil situation is that the price will probably bottom out around $25-$30 per barrel. After all it descended down to $30 for a short period of time around 2009 after spiking to $150. Also the price was as low as $10 per barrel back in the 1990s. Factoring in inflation, $25 per barrel seems reasonable. There is no shortage of oil. The dropping price is all driven by Saudi Arabia. Other countries don’t have the financial reserves that Saudi Arabia has. They have debts to service and have to sell their oil at any price. There will likely be sovereign defaults along the way down.

So what does this mean for the USA?

Let’s keep in mind that almost all of the economic recovery in the USA has been energy-related. 93% of the jobs created have been in the energy industry. We can expect that those jobs plus more in the energy industry will be lost. The keystone pipeline will be cancelled, the Athabaska Oil Sands (in Canada of course) will be put on hold (not the first time). The fracking industry in the USA will in all likelihood cease to exist. Green energy projects will also take a major hit. This is the gloomy side of things.

However, as noted by Chipper, lower oil prices are good for the economy. So we should get the rebound that was expected in 2009. Back then the recovery was thwarted by the high price of oil. Europe will eventually recover from being cut-off from Russian gas so the picture will (eventually) improve. China will also benefit as America recovers - low shipping costs (due to low energy price) will be a big boost.

Much of the current sell-off could be tax-related. So we need to see if there will be a quick recovery in early 2015.

Why is Saudi Arabia flooding the market?

The most obvious answer is that they are protecting their market share in the presence of American fracking and green energy coming on-line.

However, there may be a less obvious reason. After the second world war, USA and Saudi Arabia made an agreement that the USA would protect Saudi Arabia in exchange for use of the US dollar for all oil trades. As I understand, this is extremely important for the USA. When the British Pound lost its status as the international currency reserve, their economy suffered for decades. The same could happen in the USA if the dollar lost its status.

So here we are, with ISIS breathing down the necks of many Islamic countries and Saudi Arabia in their sights. And on the other hand, agreements are being made between Russia, China and other countries to trade oil in their own currencies. Can you see what I am thinking? The low oil price makes such agreements between Russia and China meaningless, because they can’t deliver oil at that price. This in effect protects the status of the US dollar. It isn’t being said, but I believe that the lower oil price is being coordinated between the Saudi’s and the USA. Saudi Arabia needs the USA as no other country can protect them from ISIS. USA needs Saudi Arabia for protection of the US dollar status.

Steve

[Chipper6]

Steve,

Your statements warrant a long discussion but I don’t want to get into a discussion about the cause of falling oil prices because I am not convinced that the conclusions will have bearing on our investing. Meanwhile I am keeping a cautious eye on the economy; mostly with P123 tools.

EDIT:
P.S. After reviewing many decades of oil prices and their causes, I use an inverse oil ETF in one of my private ETF portfolios to be activated only during recessions and only when oil prices are falling faster than government bonds are rising.

[Market_Neutral]

Well, my point is that the falling price of oil is important for the future of USA, its economy and hence our investments. Great for everything except oil, emerging markets, gold.

Steve

[Jrinne]

I generally agree with the above statements. However, I am amazed by the talking heads on TV.

One month Greece is a big deal The next month we are decoupled from Japan, China and Europe. Great after the fact stories that are constantly changing and inconsistent. I predict that if there is a significant correction (probably not likely or short) they will tell a story that we are mostly not hearing now like the collapse of the high-yield bond market (which clearly has not happened yet).

[Tomyani]

Chipper,

I’d love to see any data from tests you’ve done that you want to share.

This basic result isn’t really what I’ve found (I used the monthly SP500 earnings data from Robert Shiller’s site, http://www.econ.yale.edu/~shiller/data.htm). Simply looking at US SP500 data from the following recent drawdown periods 1962, 1973 to 1980 (multiple drawdowns), and 1987 to 1989. These are large drawdowns in the SP500 where SP500 earnings were still generally rising throughout most or all of the drawdown period (in these periods most MA based rules would have added something in terms of minimizing DD’s). And ‘common sense’ (which can be wrong) says that any time there is some ‘big news’ that breaks ‘fairly suddenly’ and doesn’t grow out of a very long build up (recession), the market may collapse before companies start showing that large drag on earnings. Earnings related rules will often have a much longer lag then price based rules.

A basket of timing rules (if people want to time at all), is still likely to be the best / most robust bet. I use earnings and think earnings has some real value. But, while I think stand alone rules like SMA5 EPS>SMA 21 EPS can be part of a blend of systems, they have real inherent limitations (as do any single rule). I don’t think there’s any one ‘magic rule’, but think baskets of them work best. I agree that, in general, market timing will often limit absolute returns (if no major DD’s occur, will likely nearly always have lost money using them), but can over many types of market cycles significantly boost risk adjusted returns.

@Jim. Stop watching investment TV for news (apart from entertainment). They simply have to jack up fear or hype to drive ratings. They need extreme views, they need ratings.

Best,
Tom

[aurelaurel]

I’m surprised this hasn’t been major news in the US but the IMF officially announced that China had become the largest economy - ppp adjusted - ahead of the US of A. Truly the end of an era and a strong symbol.
Meanwhile the US is indebted over $18 trillion worth and counting, the stock market is at an all time high, the margin debt is at an all time high, the monetary base is at an all time high, the velocity of money is at an all time low and QE has just ended. Nothing can go wrong.

[InspectorSector]

aurelaurel - something will go wrong but when? The Fed didn’t have a whole lot of options going forward so low oil prices is the next stimulus they couldn’t generate themselves. This will likely buy us a couple of years. But now the Fed will have the next dilemma on their hands… they can’t raise interest rates significantly to control inflation without bankrupting themselves

Steve

[Chipper6]

They say that a picture is worth a thousand words. The following chart shows what your returns would have looked like had you timed the market to be out during NBER official recessions. The cash was assumed to have earned 0%:

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[rallan]

The total return using next open was 27.5% with a Max DD of -13.6%; the total return using Avg of Hi & Lo was 25.8% with a Max DD of -14.3%; and the total return using next close was 19.5% with a Max DD of -15.1%. So the excessive underperformance using next close vs next open is 8% in 21 months. I always buy and sell close to the open (emphasis mine).

In an OOS study I drew the same conclusions:

www.portfolio123.com/mvnforum/viewthread_thread,7650#38851

The performance boost from acting right at the open was considerable for Small Gems, 1.5% /week improvement on average for trades of both types, but all ports outperformed variable slippage over the three-month period for both buys and sells. This study used (Hi + Lo)/2 +or- slippage for comparison, not (Hi + Lo + 2*Close)/4 +or- slippage.

In another study slippage degraded continuously all the way to close, on average:

www.portfolio123.com/mvnforum/viewthread_thread,7100#35263

The retail investor who trades at open and applies the stay-under-5%-of-daily-volume-average rule-of-thumb appears to have an unassailable advantage over large traders in that respect.

I do not know how this encouraging information can be accurately determined and measured for all R2G ports, then presented to subscribers, but this would help all parties if compared to the slippage associated with different trading approaches, i.e, open, mid-day, close. Many (?most) R2G ports are likely better than they appear, OOS.

The price for the transaction will be today’s (Hi + Lo + 2*Close)/4 +or- slippage. The slippage is calculated as a per share amount using the variable slippage algorithm, and it’s either added to the price for buys&covers, or subtracted form the price for sells&shorts.

My understanding is this formula is used for OOS, but (Hi + Lo)/2 is used for back-testing and/or simulation. I can’t remember where I read this. Please somebody set me straight, needless to say this would make a huge difference as (Hi + Lo + 2*Close)/4 +or- slippage appears to be the slippage benchmark most biased towards reporting lower performance, of all the ones discussed here.

[Chipper6]

Oops, here is the corrected chart:

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[iavanti]

too bad you only know that months after it happens. i.e. NBER declared the recession ended in june 2009, but they did not do this until September 2010, similar delays for the start of the recession in December 2007 was not confirmed until late 2008.

[Jrinne]

@Tom,

Yep, that was my point about TV news.

[plan_trader]

Ivanti,

Check out www.recessionalert.com . I forget which P123 user mentioned this site, but it seems quite useful

[semanuel]

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[kumar]

Hi,

There is any way to predict the market top, using market timing rules or when big guys are moving away from market ?

I am looking for swing trading strategies in P123,

1. Buy stocks when dow/nasdaq is oversold,
2. Sell stocks when dow/nasdaq is overbought

In, yahoo finance market news commentary,

Most of the time if market comes down, more fear in the market, they will say buying opportunity,
if market is going up they says more greed in the market,

1. investors are selling short or stay in side ways without participating in the market and
2. stock price rises without volume and
3. stock price rises and money is flowing out of market.

There is any way to include the above strategies in P123 systems ?

I would like to stay away from market before market turn down using timing rules and come back when buying opportunities present after market oversold.

Thanks
Kumar

[Market_Neutral]

Chipper - It doesn’t appear that the NBBR recession graph has been of much use since 1980. The logarithmic graph shows 1987 and 2000 as wee little blips, where in fact the drawdowns were huge. So one out of the last three crashes/bear markets were picked up, but as was stated, the 2008 recession was not declared until long after the fact.

Steve

[Tomyani]

Chipper,

As others pointed out, here’s the NBER website (http://www.nber.org/cycles/recessions_faq.html):

Q: Typically, how long after the beginning of a recession does the BCDC declare that a recession has started? After the end of the recession?

A: The committee’s determination of the peak date in December 2007 occurred 11 months after that date and the committee’s action in determining the trough date of June 2009 occurred 15 months after that date. Earlier determinations took between 6 and 21 months. There is no fixed timing rule. The committee waits long enough so that the existence of a peak or trough is not in doubt, and until it can assign an accurate peak or trough date.

(In addition to the ones I mentioned above, earnings only data also misses getting you out of all the major DD’s of the 1940’s… so, it’s missed a lot more than it’s called).

You’re using an indicator that is ‘curve fit’ after the fact to determine peaks and troughs and is not point in time. The spreadsheet I sent shows raw monthly PIT earnings for SP500. Just take a look at it. SP broad earnings data typically gets you out and adds something in total, but it very often only works after most / all of the major DD has occurred. It can be used in combo with other indicators to give a more accurate picture, but it still looks like a poor standalone indicator. Curious if anyone else sees Robert Shiller’s data differently or finds interesting stuff in it they want to share?

Best,
Tom

[geov]

Chipper, it takes the NBER committee about 8 months to figure out the start and ends of recessions. Those dates are completely useless for market timing. We use the point-in-time COMP and BCI recession indicators which provide adequate warnings for recession starts when one should exit all long positions. Problem is that it is more difficult to pick a re-entry back into the market. Here are the most recent charts of the indicators. There is no recession in sight.
COMP: http://imarketsignals.com/wp-content/uploads/2014/12/Fig-3.-12-12-2014.png
BCIg: http://imarketsignals.com/wp-content/uploads/2014/12/Fig3.1-12-12-2014.png
BCI: http://imarketsignals.com/wp-content/uploads/2014/12/BCI-12-11-2014.png

Georg

[Chipper6]

Of course we cannot use the NBER for market timing. Sorry if I did not make that clear. And thanks guys for clearing that up.

The NBER chart is just proof of concept. Once we know what drives the stock market we can try to build a timing model to detects recessions in real time. I built one that I use for myself and in some of my R2Gs. Here is a backtest of a slightly simplified version of my recession indicator:

EDIT: Clarification - This indicator is not trying to predict the NBER but the market. Therefore there are differences in the dates between it and the NBER.

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[OP]

T’was me

RecessionAlert.com is pretty useful and so is

Nospinforecast.com

FWIW: Mojena has gone to a “sell”