“The basic math shows that the vast majority of up AND down days occur when the market has already been declining.”
– Mebane Faber
Mebane Faber has a post from April of last year titled, “Where the Black Swans Hide.” He makes the point that most of the big up and down days in stock market history have occurred below the 200-day moving average.
He also posts this table:
Since 1929 the annualized median return for the Dow when it was above the 200-day moving average has been 13.98%. The annualized median return below the 200-day moving average has been zero.
Even though the fact that the market does much better when it’s trending up than when it’s trending down is not exactly breaking news, it did cause me to think about how it applies to market history and to our strategies.
It occurs to me that all the really bad things that have ever happened (at least since 1929) in the stock market have happened below the 200-day moving average. The Crash of 1987? Below the 200-dma. The 1998 Russian bond default? Below the 200-day moving average. The big sell off after the 9/11 attack? Below the 200-dma. The 2008 asset meltdown? The entire year was spent below the 200-dma. Even the 1929 crash occurred below the 200-dma.
It’s not that only bad things happen in the world when the stock market is below its long-term trend line, it’s just that the market has a much more extreme negative reaction to unfavorable world events when it is already trending down. For example, the Kennedy assassination occurred while the Dow was above the 200-dma. The result was that terrible event had a surprisingly mild effect on the market. The Dow sold off about 5-10% and was making new highs within weeks.
It affects our strategies as well. For example, with the RSI Reversal Strategy I wondered if it does better above the 200-dma than below. And if it does better above, is the difference significant?
The latest “Blees numbers” have been posted.
Today’s activity…
I want to buy two MF stocks…
“If a speculator is correct half of the time, he is hitting a good average. Even being right 3 or 4 times out of 10 should yield a person a fortune if he has the sense to cut his losses quickly on the ventures where he is wrong.”
– Bernard Baruch
In reading Bernard Baruch’s quote from many decades ago I got to thinking: When did “speculator” become a pejorative word? In the old days market participants often referred to themselves as speculators. But now it’s “traders.” And a speculator is somehow akin to a gambler.
In fact, InvestorWords.com defines speculation as “Taking large risks, especially with respect to trying to predict the future; gambling, in the hopes of making quick, large gains.”
“Trying to predict the future.” Taking large risks.” “Gambling.” I somehow don’t think the great “speculators” of the past looked at themselves that way. I think they thought they were prudent business men intelligently engaged in a perfectly legitimate enterprise. And I don’t think they would have become as successful as they were if they were merely gambling.
And if I felt like getting into it — which I don’t right now — what’s the difference between a trader and an investor? Everybody seems to think they know the difference. But if you Google it you’ll find there are different opinions about what defines investing and trading. I don’t see any point in making a distinction, but I seem to be in the minority.
Anyway, all of that is neither here nor there. I just think it’s interesting how the meaning of words change over time and how the same words mean different things to different people.
On to our strategies.
This week’s Blees numbers are posted.
Today’s activity…
There is a new trade for the ATR Trading Strategy…
Today’s activity…
There is a new trade for the ATR Trading Strategy…