From the Weekly Market Commentary August 27, 2012 by John P. Hussman, Ph.D., "The Trend is Your Fickle Friend "
John Hussman did some interesting analysis in his latest market commentary. He examined trading crossover strategies for the major market indices. You may have heard of them or even used them at one point or another. Crossover strategies use crosses of the various moving averages to give buy or sell signals. For example the "Golden Cross" occurs when the 50-day moving average (50-dMA) crosses the 200-day moving average. If the 50-dMA crosses below the 200-dMA and the 50-dMA is headed down, it's a sell signal. Conversely if the 50-dMA crosses above the 200-dMA going up, it's a buy signal. Here's what Mr. Hussman has to say about these trend following strategies:
"Certainly, when one looks a chart, extended market advances always break above various moving averages, and extended market declines always break below various moving averages, so simple trend-following strategies seem utterly self-evident. Unfortunately, if you actually take that strategy to historical data, the results typically aren’t nearly as compelling. Moreover, once any amount of slippage or transaction costs are taken into account, the most widely-followed strategies generally underperform a passive buy-and-hold strategy over time, and often don’t even manage downside risk particularly well."
The NTSM system does not use any crossover strategies. I found their signals to be too late for either Buy or Sell signals when I back tested them over 15-years of so. Day/weekly traders seem to have some success with short term crossovers, but that's too much trading for me.
HUSSMAN - STILL EXPECTING A SIGNIFICANT DOWNTURN
Mr. Hussman remains bearish on the market: "...our estimates of prospective market return/risk are presently in the most negative 0.5% of historical data, based on horizons from 2-weeks to 18-months...The phrase “most negative 0.5% of historical observations” reflects both a large magnitude and a low frequency."
Mr. Hussman remains bearish on the market: "...our estimates of prospective market return/risk are presently in the most negative 0.5% of historical data, based on horizons from 2-weeks to 18-months...The phrase “most negative 0.5% of historical observations” reflects both a large magnitude and a low frequency."
MARKET
RECAP
Wednesday the S&P 500
finished UP 1pt to 1410 (rounded). VIX
rose about 3-1/2% to 17.06.
Repeating yesterday’s comments: The S&P 500 seems to be topping out
around 1410. The index first hit 1400 on 7 August. 3-weeks later it is only 9-points higher.
The VIX is at levels that have brought corrections in the past. If the VIX
breaks significantly higher, the VIX indicator in the NTSM analysis would
switch to sell. Whether the entire NTSM
analysis would switch remains to be seen.
Breadth (percentage of stocks
advancing) is going down sharply (today) while the S&P 500 has been nearly
stationary. That’s a bad sign for the
short term. The Smart Money Index isn’t
looking good either because the pros are selling in the last hour of the day
and that trend continued.
The above observations
aren’t in the NTSM system and they represent a level of guesswork. I use the NTSM analysis for determining buy/sell
points. The NTSM is neutral today at the close.
NTSM
The
NTSM analysis remained HOLD Wednesday. The NTSM system is beating the S&P 500 by ½% for 2012. Not much, but 89% of all hedge funds are underperforming the S&P 500 this year (per CNBC) so it could be worse. (NTSM was up 78% from 2006-2011 while the S&P 500 was essentially flat.)
MY INVESTED POSITION
Based on the BUY signal, 6
July, I moved back into the market on 9 July (after the weekend) at S&P 500
1352.
I now have a 50% stock
allocation overall. For my age, that is
what most advisors recommend, however, I am normally much more aggressive. I have less invested in stocks now because
there’s a lot of risk.
