Fascinating chart via Jack Ablin of BMO:

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I would modify Jack’s rule: In a bear market sell off, you want to buy for the trade in the 15-20% zone, not 5%.

I haven’t backtested the reverse, but I would guess thats true too — selling into a 20% pop over the 200 day moving average in Bull markets.

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Source:
Playing a Sideways Market
Jack Ablin
BMO, October 31, 2008
U.S. Portfolio Strategy

Category: Investing, Markets

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

30 Responses to “The Lost Decade”

  1. jmborchers says:

    What I had used on my 401K was to get out when S&P500 goes -15% of peak. Put the money in bonds but then had to move it back to stocks and got stuck with the LEH catasrophe. I still like that better than owning $0 valued bonds.

  2. jmborchers says:

    This chart also shows why it’s important to invest now. If the return over the last 10 years is 0% it means the market should be undervalued by 10% each of those years. In effect this chart already shows depression.

  3. jmborchers says:

    This is the smartest guy at the Fed:

    *DJ Fed’s Pianalto: Recession Length Tied To Market Recovery

  4. Whammer says:

    Mannwich, you got that right.

  5. jmborchers says:

    Na nebermind about Pianalto wrong market.

    My theory is as soon as the stock market goes up / stabilizes the economy recovers. It has always been this way.

    I think the market goes higher from lower oil and improved retail.

  6. jmay says:

    Does it matter that we were not experiencing deflation at any other point on this chart? I’m not being glib, I honestly want to know.

    I think the Nikkei 1990-1995 chart might be the best guide, curious to know how that chart fits this hypothesis.

  7. jmborchers says:

    Jmay I think Japan’s problem is socialism. They have also removed the depended quality in their products to manufacture in other areas of Asia thus losing their edge. Their workers work some 12-14 days including exercising in the morning. How productive can you be like that?

  8. DP says:

    @I-man: tech is getting killed because of Nokia warning about Q4 and 2009 shipments.

    Anecdote for you here, I saw you mention RIMM yesterday. My employer laid off about 15 people from an operations/support department of 45 last week. The remaining 30 were all given Blackberries “to maintain coverage levels”. With their hold on the corporate side, I’d rather be RIMM than any other handset manufacturer right now.

    If companies aren’t hiring their shipments will be lower, and things might not look good for the Storm (aimed more at consumers), but when budget reductions have forced you to cut staff to the bone you want those that are left connected 24/7.

    No long term position in RIMM, just trading the volatility, but I tend to trade on stocks I don’t mind holding for a while if I screw up.

  9. Mannwich says:

    Price cuts or no price cuts, retail is NOT pulling us out of this any time soon. There’s no confidence and rightfully so. People are hunkering down en masse.

    From American Research Group, Inc.: Shoppers Cut 2008 Christmas Spending Plans in Half from 2007

  10. I-Man says:

    Thanks DP…

    Dont know how I missed the NOK warning… but it goes right along with everything else we’ve heard recently.

    Yeah, I have to fess up about RIMM… its a sore spot for me. A bad trade turned investment. Not I-Man’s preferred strategy. I picked some up after the big gap down post earnings… thought it was a steal at 60. Should have followed my own rule that gaps are usually followed in trend by the direction of the gap.

    Oh well, there are shittier stocks to hold, that’s for sure. I have been intrigued by the rumors floating around of late about RIMM being a takeover target by someone like MSFT or HPQ… Definitely not saying that I believe that, but it makes sense I guess looking at the cash on the books of both, and the rise in importance of the mobile smart phone market, and both companies probably wanting a snatch of that pie. Unless of course MSFT is planning on a Zune Phone release for 2009 :)

  11. Byno says:

    [Please don't let this come across stidently. Please, please, please....]

    May I humbly suggest that this chart is cherry picked, both in time period and in index selection.

    On the first charge, had one bought and sold based on 5% +/- the 200 Day SMA from, say 1/1/1987 through 1/1/2000 SIGNIFICANTLY underperformed buy and hold on a gross percentage basis, to say nothing of the effects of fees and taxes.

    And, on the second charge, using the NDX instead of the SPX, yeah, you would have beaten the indices during this the 2000-2003 bear market, losing only 60%-ish instead of 80%-ish, but all those “not-losses” would have been eaten up in the subsequent bear market by SIGNIFICANT underperformance.

    I have no doubt that Dr. Simons, Mr. Soros, Mr. Paulson, etc (caught them on C Span last night while my wife was watching Grey’s Anatomy. Fascinating stuff) have gained an appreciable edge. The difference is, they’re not broadcasting it. Or, to paraphrase Citadel’s CEO, if they did, it would be like Coke giving away the secret formula.

    Am I saying there aren’t some things out there can be exploited? No. Is this strategy one of them? No.

    Off topic: The institutions are absolutely sitting this out today. Really, really abysmal action all day so far.

  12. Mannwich says:

    This table ought to sober up anyone who think that retail is going to lead us out of this morass any time soon:

    Year Average Spending Percent Change

    2008 $431 -50%
    2007 $859 -5%
    2006 $907 -4%
    2005 $942 -6%
    2004 $1,004 +3%
    2003 $976 -6%
    2002 $1,037 -1%
    2001 $1,052 + 9%
    2000 $968 + 3%
    1999 $939 + 1%
    1998 $928 + 34%

  13. Byno says:

    And, to add to the Greek chorus, I’m very excited about preview coming. As someone who has served as both a ghost writer and ghost editor, going back and reading my first drafts is painful. Witness above.

  14. Mannwich says:

    FYI – The above table is planned holiday spending if anyone is wondering.

  15. Byno says:

    Mannwich

    Don’t tell my wife that [ducks]

  16. Mannwich says:

    Kashkari is getting pummeled by Congress right now. It’s a wonderful life, isn’t it?

  17. Pat G. says:

    Yep!! Looks like some good bargains this year. Deals on vehicles are much improved and will get better.

  18. Mannwich says:

    Byno: Thankfully my wife (who, ironically enough, works in retail) is even more frugal than I am, which says a lot, since I maybe go to the mall once/year and actually shop for goods less than 3-4 times/year.

    So the economy isn’t missing our consumption because we don’t consume much anyway. However, the enormous sales this holiday season may entice me/us to actually buy something for a change. Maybe that will help a little?

  19. batmando says:

    @ Byno et. al.
    “going back and reading first drafts is painful” as a tech writer I know.
    Until or unless a Preview function is added, there’s always composing off-line on NotePad or other WP app on your desktop, then edit and re-write to yourheart’s content before copy-and-paste to TBP Comments

  20. Mannwich says:

    Just busting chops, I-Man. I enjoy the third person reference. Reminds me of “Jimmy” and “George likes his chicken spicy”. Just makes me chuckle a bit.

  21. batmando says:

    @ mannwich
    “the enormous sales this holiday season may entice me/us to actually buy something for a change”
    Ditto.
    Having just re-gained FT employment last month at good salary plus ultra-ne-plus bennies after years of under- and un-employment and non medical insurance, I remain in the downwardly mobile mode so far as expenditures go.
    Yet, as my bank balances balloon (6 months-to-year of living expenses already on tap now), I’m already making a list of items formerly considered “luxury”, a new wardrobe for a bigger waistline, a plasma screen (but not an SUV), that I might snap up as post-Xmas sales start happening pre-Xmas.

  22. Bruce in Tn says:

    http://www.economist.com/world/unitedstates/displaystory.cfm?story_id=12608223

    Government finances

    Interesting if peeps think California is going to get out of their mess anytime soon. Buried in this article is the notion that 1/2 of all general tax revenues for the state come from 144,000 of the richest people at the top of the food chain, and that this year, these 144,000 are in the toilet…at least in regards to previous tax revenues…

    Interesting that when you tax such a slim portion of your population, and that group has taken a hit, that it (a very small number of people) will have a massive effect on what happens to the entire state..

  23. rwbil says:

    I do not listen to Rush, but I do not know why it is such a shock that the government might confiscate your 401K. As far as not being legal tell that to the people who owned Fannie Mae Stock. The government is taking my money to bail out home owners. I actually paid CASH for my home, so were is my bailout. When you have a government that is insane enought to justify taking money from me and other individuals who responsible bought homes they could afford in order to reduce someone else mortgage or interest rates what else can they justify. After all there are people not saving and spending every cent they make (and then some). They can not afford to retire. We must help them and I have all that 401K money that I saved (evil me) that they can use to help out the less fortunate.

  24. DL says:

    Bruce in Tn @ 2:26

    The problem is even more acute in NY City.

    (All those Ferrari-driving, cocaine-snorting, subprime mortgage shysters were good for something, after all).

  25. VennData says:

    The Wall Street Journal Editorial page picked up on the loony “Democrats will take your 401(k)” meme. Their carefully worded innuendo, half truth, and conspiratorial vibe are right out of their drivel during the Clinton years.

    I wish that instead of burying it, all the nation news, headlines, bloggers everybody would report that the Wall Street Journal claims the Democrats will definitely take away your 401(k) We could have a “Steal” watch, clocks, daily updates reminding everyone that the Wall Street Journal actually claimed this.

    Their editorial page writers do not hesitate to lie and deceive. They deserve mockery and derision.

  26. Bob_in_MA says:

    VennData, I canceled my online subscription, they are definitely positioning the entire publication to be the print equivalent of Fox news. Barron’s is a complete joke. If you look at their covers for the last year, the disconnect from reality would lead you to believe you were at Onion.com.

    In times like these, the rumor mongers will have a field day. Americans are sheep and right now they are in a panic.

  27. Winston Munn says:

    This just in from Rutters.com

    “The Japanese government has announced that “The Lost Decade” was not really lost at all but had only been “misplaced”. According to a spokesman for Nippon Enterprises, the lost decade was, of course, “in the very last place we looked.”

    In anticipation of the find, the Japanese government announced the Nikkei will open Monday at the 39,000 level.”

    Good thing I closed that Toyota short today.

  28. dctag says:

    While it underperformed during the bubble days this is a good model. Using closing data only from 10/18/1950 to 11/13/2008 here is what I got.

    Percentage Returns

    Buy and hold 4454.17%
    Model 8381.75%

    If you had invested $10,000

    Buy and hold $458,164.91
    Model $848,175.10

    Almost any good long term model will under perform from time to time. What a good long term model does is to preserve gains and eliminate huge drawdowns. I will take the occasional 10% drawdown any day over the occasional 40%+ drawdown.

  29. Zignals says:

    We have an alert which allows the user to set for a % move from the 200-day E/SMA:

    It’s listed under [Price] in the drop-down menu and the alert can be sent to email, SMS, iPhone, iGoogle and Vista widget:

    http://www.zignals.com/main/alerts/tryoutmarketalerts.aspx

    Best wishes,
    DJF

  30. mstokes says:

    Test of this system relative to the simpler (no 5% band) version at MarketSci Blog:

    http://marketsci.wordpress.com/2008/11/18/test-of-ablin-trend-following-strategy/