Trend Tracking And The S&P 500

With the S&P; 500 having finally closed above the 1,500 level for the first time since Sept. 7, 2000, let’s look at a bit of recent history. Incidentally, that date occurred just 1 month prior to our Trend Tracking Index giving an all out sell on Oct. 13, 2000.

This broad based index made its all-time high of 1,527 on March 24, 2000. The markets whip-sawed sharply throughout the remainder of the year until all major indexes slid into bear market territory which lasted until the lows were established. This happened in October 2002; about 2 years after our sell signal had moved us to the safety of the sidelines.

Why bring it up?

The press has been reporting about the incredible recovery as the S&P; 500 rallied 93% since the low made on Oct. 9, 2002. This does not mean that anybody recognized that low point, invested 100% of their money into the S&P; 500 and actually gained 93%. It’s simply a number—but a misleading one.

Let’s look at something more realistic as far as portfolio history is concerned. If you had held on to the S&P; 500 when we sold on Oct. 13, 2000, you would have gained (via Buy & Hold), from that moment in time, until May 3, 2007 a grand total +9.33%! That is over a 6-1/2 year period.

Not very often will you read numbers in the press that include bear markets when looking at long-term performances. All you ever hear are figures that reflect recoveries from an index’s low point. No one can identify a low point as it occurs; it can only be recognized after it actually has happened.

This is the problem I have with the Buy & Hold scenario. Most investors don’t realize that their financial life is much shorter than their physical life. There’s a good chance that you may live to your 80s, but you only work maybe some 45 years. Wasting a large part (some 14% in the above example) of your financial life on simply trying to make up what you lost makes no sense to me.

That’s why my emphasis (via trend tracking) has always been on bear market avoidance rather than measuring to see if I’m ahead of S&P; 500 performance every quarter or every year. If I can avoid the worst part of a bear market scenario, I will automatically be ahead of the S&P; 500 as the most recent 7 years have shown.

That’s my view, what’s yours?

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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