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The Inevitable 10% Correction
Old 10-21-2014, 02:51 PM   #121
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The Inevitable 10% Correction

With oil cheap, energy booming in the US, and companies ripe with hoards of cash, i just dont see any reason to think the future of business will be anything below average. Other countries are adopting technlogy and societies to beginning to influence their governments through faster communication. Small wars and revolutions will inevitably cause hiccups, but they will be over reported and the GDP of the human race will continue to grow.

What i really hoping for is europe to come out of its funk and catch back up to the US returns. I'm heavy in international and still buying.

In addition to cheap energy and cheap capitol, labor costs are really low. If human ingenuity cant find profit in this short term, id be shocked. It's a perfect situation for profit maximization on the production side.



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Old 10-21-2014, 04:18 PM   #122
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S&P500 already above 1900, and now it is above the 200 moving day average again. The level that so many folks warned about dropping under. There may be another shoe, but this is looking more and more like an Ebola market panic event, on a market that was vulnerable because it was already unsettled due to oil trades gone bad and traders having to sell liquid positions to cover losses.
I've got a nice spreadsheet to check out the 200 day moving average method. It stinks. Siegel did a good study of it in his book (don't know about his current edition). There are decades like the 1990's where it didn't beat buy-hold. Using this method you get lots of whipsaws. Most people wouldn't like this and you'd have to be very disciplined to use it. A better method is something like a monthly but still some whipsaws.
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Old 10-21-2014, 06:22 PM   #123
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I've got a nice spreadsheet to check out the 200 day moving average method. It stinks. Siegel did a good study of it in his book (don't know about his current edition). There are decades like the 1990's where it didn't beat buy-hold. Using this method you get lots of whipsaws. Most people wouldn't like this and you'd have to be very disciplined to use it. A better method is something like a monthly but still some whipsaws.
Oh I wasn't saying anything about using the 200 day moving average to time the market. I was simply talking about the current correction lifespan. A lot of folks warned how dire it would be to break below the S&P500 200 day moving average which hadn't been crossed in a very long time. Well, it was dire for a short period, but now it's above it and has breezed through some other even higher resistance levels that now become support.
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Old 10-21-2014, 06:55 PM   #124
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Oh I wasn't saying anything about using the 200 day moving average to time the market. I was simply talking about the current correction lifespan. A lot of folks warned how dire it would be to break below the S&P500 200 day moving average which hadn't been crossed in a very long time. Well, it was dire for a short period, but now it's above it and has breezed through some other even higher resistance levels that now become support.
I figured that's what you were saying.

If we start to think "200 day moving average" we should be aware of such a methodologies pitfalls i.e. lots of whiplashes depending on how you set the get out and get in points. Just wanted to make that distinction for those who are unaware of this.

Probably I'm trying to be a bit too precise for some (who have already rejected this technique out of hand). Perhaps it's my engineering background and please believe I'm not trying to be a know-it-all. I just need something to analyze once in awhile and stock movements are interesting.
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Old 10-21-2014, 07:02 PM   #125
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I think that the successful traders have the ability to sense the sentiment of the crowd. They may use more than these mechanical methods, and also intangible indicators like the "Wheee", or the number of posts in the "FIRE Milestones" thread for example.

I guess it is not an analytic method, but requires some people skills to sense the investor psychology. They can translate headlines and predict the crowd's action, and front-run them.

Just a theory, because I do not know how they do it.
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Old 10-21-2014, 07:29 PM   #126
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I figured that's what you were saying.

If we start to think "200 day moving average" we should be aware of such a methodologies pitfalls i.e. lots of whiplashes depending on how you set the get out and get in points. Just wanted to make that distinction for those who are unaware of this.

Probably I'm trying to be a bit too precise for some (who have already rejected this technique out of hand). Perhaps it's my engineering background and please believe I'm not trying to be a know-it-all. I just need something to analyze once in awhile and stock movements are interesting.
You're just trying to warn anybody off that thinks of using the 200 day moving average to buy and sell. Yep, they'd have sold last week, and bought this week - definitely a whipsaw.

Audrey (also an engineer)
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Old 10-22-2014, 07:55 AM   #127
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One lesson I learned as a result of this episode is that when I am having a great year it is time to harvest some profits or sell stinkers to have some cash to invest for when the market swings down.
You're assuming you can tell when the market will swing down. Better to just have some target you reach to rebalance.
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Old 10-22-2014, 09:39 AM   #128
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My theory involves thousands of coin-flipping monkeys.

That said, I don't think this correction is actually done yet. I think we'll have a serious drop pretty soon. I have a feeling we'll see a down 1000+ day in the Dow before the end of the year.

Of course, I felt like that last year, and the year before.

Eventually I will be right and look like a genius.

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I think that the successful traders have the ability to sense the sentiment of the crowd. They may use more than these mechanical methods, and also intangible indicators like the "Wheee", or the number of posts in the "FIRE Milestones" thread for example.

I guess it is not an analytic method, but requires some people skills to sense the investor psychology. They can translate headlines and predict the crowd's action, and front-run them.

Just a theory, because I do not know how they do it.
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Old 10-22-2014, 09:45 AM   #129
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My theory involves thousands of coin-flipping monkeys.

That said, I don't think this correction is actually done yet. I think we'll have a serious drop pretty soon. I have a feeling we'll see a down 1000+ day in the Dow before the end of the year.

Of course, I felt like that last year, and the year before.

Eventually I will be right and look like a genius.
After 1156 posts, it's way too late for that.
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Old 10-22-2014, 09:47 AM   #130
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Eventually I will be right and look like a genius.
You might find someone who disagrees with you and get a wager up on longbets.org. But that bet might not be far enough in the future.
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Old 10-22-2014, 10:55 AM   #131
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My theory involves thousands of coin-flipping monkeys. ...
I do not think successful traders jump all in/all out like the simpleton monkeys often talked about among popular circles. Rather, they realize that the real world is not binary, and the decision to be made is not black and white but probabilistic.

See: Kelly criterion - Wikipedia, the free encyclopedia
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Old 10-22-2014, 11:05 AM   #132
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Audreyh1, Fox Biz channel, Bloomberg, etc. should invite you as a market pundit. You sound so much better than some bozos they invite.
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Old 10-22-2014, 02:34 PM   #133
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Sure, but there are a huge number of traders that think that they been successful but have actually just been lucky. It's actually pretty difficult to determine which is which.

Take poker. Playing in person (live) a marginal player can go on a winning streak that lasts for a year or more. They think that they're a brilliant player, and actually they've just gotten better cards than average that year. Playing live, a player may play about 30 hands an hour, which amounts to only 1200 hands a week, which is a neglible number of hands when talking about long-term probability. Online players talk about win rates over hundreds of thousands of hands. Likewise, it is not unusual for winning players to have losing stretches that are 10s of thousands of hands long.

Say you have 1000 traders that are actually completely breakeven over the long-term. If they all trade for a year, it is pretty likely that a 100 of them will be up a huge amount, 100 will be down a huge amount, and there will be a bell curve with breakeven in the middle.

Those 100 winners will think that they're great traders, but they've actually just gotten lucky. How long does it take to really reach the long-term in trading? I bet it is at least as long as in poker.

I suspect that while there are skillful, successful traders, they are outnumbered by the lucky (or self-deluding) ones by a factor of ten, just like in poker.



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I do not think successful traders jump all in/all out like the simpleton monkeys often talked about among popular circles. Rather, they realize that the real world is not binary, and the decision to be made is not black and white but probabilistic.

See: Kelly criterion - Wikipedia, the free encyclopedia
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Old 10-22-2014, 02:47 PM   #134
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I am not a poker player, but understand that the game or some variations of it involves bluffing, reading the opponent's reaction, etc... So there's skill involved. Other card games may be just like slot machines, i.e., all pure chance.

Regarding investing, I should have been more specific and talk about "active investing" and not "trading", as the latter term implies quickly jumping in/out or day trading. The quicker you buy and sell, the more it looks like a pull of the lever of the slot machines.

Kelly criterion, if anyone cares to read the article, says that the optimal bet size varies with the probability of winning. You increase your bet when the chance is higher, and decrease it when it does not look as good. Applying it to investments, you would increase the bet when a particular asset is on sale, and decrease the bet when it has been on the run. You do not go 100% one way or another, because how can you be sure of anything?

Applying Kelly criterion requires you to increase stock AA when the market goes down, and lower stock AA when the market runs hot. This is hard to do when the average investor has enough trouble maintaining constant AA.
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Old 10-22-2014, 02:54 PM   #135
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By the way, I remember reading some articles saying that even Warren Buffett could be simply lucky, because his history of investing is not long enough to prove that it was due to skill.

But, but, how long is the history of the American stock market for us to be sure that it will always go up? Did the economy of the Roman, the British empire keep on going up?
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Old 10-22-2014, 02:57 PM   #136
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I am not a poker player, but understand that the game or some variations of it involves bluffing, reading the opponent's reaction, etc... So there's skill involved. Other card games may be just like slot machines, i.e., all pure chance.

Regarding investing, I should have been more specific and talk about "active investing" and not "trading", as the latter term implies quickly jumping in/out or day trading. The quicker you buy and sell, the more it looks like a pull of the lever of the slot machines.

Kelly criterion, if anyone cares to read the article, says that the optimal bet size varies with the probability of winning. You increase your bet when the chance is higher, and decrease it when it does not look as good. Applying it to investments, you would increase the bet when a particular asset is on sale, and decrease the bet when it has been on the run. You do not go 100% one way or another, because how can you be sure of anything?

Applying Kelly criterion requires you to increase stock AA when the market goes down, and lower stock AA when the market runs hot. This is hard to do when the average investor has enough trouble maintaining constant AA.
I will read this article. I used the Kelly Criterion extensively in the 70s, when I was a fairly active horseplayer. I think it might be harder to apply to investing, but it is definitely worth a look.

Ha
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Old 10-22-2014, 03:04 PM   #137
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Originally Posted by Lsbcal View Post
I've got a nice spreadsheet to check out the 200 day moving average method. It stinks. Siegel did a good study of it in his book (don't know about his current edition). There are decades like the 1990's where it didn't beat buy-hold. Using this method you get lots of whipsaws. Most people wouldn't like this and you'd have to be very disciplined to use it. A better method is something like a monthly but still some whipsaws.
BTavlin posted this Forbes article in his thread "3 ways to avoid going over a buy and hold cliff". Since you tested and rejected MA approaches, could you please take some time to criticize this one? Are the results falsified by the author, or do you make the data mining or other objections?

I would appreciate your thoughts.

Ha
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Old 10-22-2014, 03:48 PM   #138
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BTavlin posted this Forbes article in his thread "3 ways to avoid going over a buy and hold cliff". Since you tested and rejected MA approaches, could you please take some time to criticize this one? Are the results falsified by the author, or do you make the data mining or other objections?

I am certainly not looking to give anyone a lot of mouth, I would appreciate your thoughts.

Ha
I did a quick search and was not able to find this Forbes article.

I do think that if your objective is to not go over the cliff, a daily moving average approach might do the job. It depends on one being very diligent (sometimes daily) and keeping the faith. Some stats from my 200 day moving average testing:

Set sell at price just hitting 200 SMA, buy back if above 200 SMA by 1%. Tested this for 1950 to present.

sell + buys per year = 3.3 average
total trades = 106
loss avoidance = 18 trades (largest was 36% for June 2009 re-entry)
whipsaws = 88 (worst was -5%)
time out of market = 33%

A decades summary of results:


Here is a better approach using a 10 month moving average and selling when price is -3% below 10 month moving average, buy back when 1% above moving average. While out of the market one is in 5 year Treasuries (for the numbers below). It is better because one uses only monthly data and trades on the 1st of the month. It did not get out in Oct 1987 like the 200 SMA did.

Some version of this seems to be advocated by Mebane Faber:



In the table, 1.161 means a CAGR = 16.1% (compound annual growth) so for example in 2001 through 2010 the SMA CAGR=9.9% but buy-hold was only CAGR=1.3% .

42 trades in this period (or 21 sell-buy pairs)
21% of time out of market
Worst whipsaw was -12.3% in August to Sept 1998. Yep, this would be tough to stomach.

I'm personally not advocating any of this. I've just done the analysis to understand the method. If one employed this it would probably be best in a tax free account.
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Old 10-22-2014, 05:52 PM   #139
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Originally Posted by Lsbcal View Post
I did a quick search and was not able to find this Forbes article.

I do think that if your objective is to not go over the cliff, a daily moving average approach might do the job. It depends on one being very diligent (sometimes daily) and keeping the faith. Some stats from my 200 day moving average testing:

Set sell at price just hitting 200 SMA, buy back if above 200 SMA by 1%. Tested this for 1950 to present.

sell + buys per year = 3.3 average
total trades = 106
loss avoidance = 18 trades (largest was 36% for June 2009 re-entry)
whipsaws = 88 (worst was -5%)
time out of market = 33%

A decades summary of results:


Here is a better approach using a 10 month moving average and selling when price is -3% below 10 month moving average, buy back when 1% above moving average. While out of the market one is in 5 year Treasuries (for the numbers below). It is better because one uses only monthly data and trades on the 1st of the month. It did not get out in Oct 1987 like the 200 SMA did.

Some version of this seems to be advocated by Mebane Faber:



In the table, 1.161 means a CAGR = 16.1% (compound annual growth) so for example in 2001 through 2010 the SMA CAGR=9.9% but buy-hold was only CAGR=1.3% .

42 trades in this period (or 21 sell-buy pairs)
21% of time out of market
Worst whipsaw was -12.3% in August to Sept 1998. Yep, this would be tough to stomach.

I'm personally not advocating any of this. I've just done the analysis to understand the method. If one employed this it would probably be best in a tax free account.
Thanks for your comments.

I meant to cross-post the article:
3 Ways To Avoid Going Off A Stock Market Cliff With The Buy-And-Hold Herd - Forbes

Ha
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Old 10-22-2014, 06:38 PM   #140
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I did a quick search and was not able to find this Forbes article.

I do think that if your objective is to not go over the cliff, a daily moving average approach might do the job. It depends on one being very diligent (sometimes daily) and keeping the faith. Some stats from my 200 day moving average testing:

Set sell at price just hitting 200 SMA, buy back if above 200 SMA by 1%. Tested this for 1950 to present.

sell + buys per year = 3.3 average
total trades = 106
loss avoidance = 18 trades (largest was 36% for June 2009 re-entry)
whipsaws = 88 (worst was -5%)
time out of market = 33%

A decades summary of results:


Here is a better approach using a 10 month moving average and selling when price is -3% below 10 month moving average, buy back when 1% above moving average. While out of the market one is in 5 year Treasuries (for the numbers below). It is better because one uses only monthly data and trades on the 1st of the month. It did not get out in Oct 1987 like the 200 SMA did.

Some version of this seems to be advocated by Mebane Faber:



In the table, 1.161 means a CAGR = 16.1% (compound annual growth) so for example in 2001 through 2010 the SMA CAGR=9.9% but buy-hold was only CAGR=1.3% .

42 trades in this period (or 21 sell-buy pairs)
21% of time out of market
Worst whipsaw was -12.3% in August to Sept 1998. Yep, this would be tough to stomach.

I'm personally not advocating any of this. I've just done the analysis to understand the method. If one employed this it would probably be best in a tax free account.
Some that use similar techniques set a wider band than 1%. You would want to see the NAV pierce the 200dma by 3% on the downside for instance. This reduces the number of false signals.
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