Judging by the emails I have received over the years, selling short when the markets tank has quite some attraction for aggressive investors.
I have commented before that looking at historical price points with the benefit of hindsight and determine that some of our sell signals would have provided a good shorting opportunity, does not tell the entire story. It does not account for the tremendous volatility, which would have stopped you out on several occasions assuming that you used a sell stop in the first place.
Reader Larry took it upon himself to test the shorting theory by using some of my sell signals to enter a short position and exit upon receiving a new buy signal. This is what he found:
I can’t say thanks enough for what you share with us readers in your weekly letter and daily blog.
Below is a back test I did for my own curiosity regarding using bear funds during your T.T.I. sell signals.
Using the sell dates on your chart that you publish each Friday and Yahoo Finance historical adjusted prices for splits and dividends I came up with the following results. A $10,000 original investment for example only was used in this back test.
Compounded annual growth rate 2.71% over the approx. 8.65 years.
While some cycles produced good results, others did not. Of course, Larry did not use any sell stop discipline, so it’s unknown if the weaker results might have turned out better or if the better results would have turned out worse.
In other words, he strictly used buy and hold in between the sell and buy dates. As I mentioned above, the results do not show the volatility or the DrawDown your portfolio would have experience to get to some of these gains.
Overall, the losses were fairly small, although three in a row over several years might have discouraged an investor to continue with this strategy. Nevertheless, I found Larry’s test very interesting and the overall positive result surprising.
Thanks for your efforts, Larry.