The Problem With Listening To The Financial Press
As someone who trades alot, I am highly suspect of alot of "indicators" touted in the press. Today in the New York Times, Mark Hulbert has an article about such secret sauce.
While I tend to agree that the future of equities is bleak and we are almost certainly going to experience a very dramatic global economic slow down, let me remind people that we had a 400% rally in the Great Depression so economics and equity markets are not what I would call statistically correlated. And, while I use economic data as anecdotal information to develop my risk management strategy, in no way do I use economic data to determine if I am in or out of the equity markets. To do so has proven historically foolish. And by historically, I mean over the last one hundred years of equity performance.
This chart looks mighty fine in retrospect....sometimes. So, it appears from approximately mid 1995 to 2000 when the Nasdaq was up 800%, this model would have you in cash. Yet, in 2000, when equities peaked, it would have you buying stocks just in time for an 80% correction in the Nasdaq. And, guess what? Indeed Mark Hulbert had a similar article talking about the same model in November of 2000. Here's the link.
http://tinyurl.com/pvjsq
or
http://www.nytimes.com/2000/11/05/business/
05STRA.html?ex=1150862400&en=a243a3a469d29088&ei=5070
There are two problems with this as I see. First and foremost, never invest in a newsletter or service or advisory that is not trading right along with you. Be it a short term trader or a long term investor. If they aren't trading or investing, their advise is worth very little in my opinion. They aren't going to feel the trepidation or pain you feel if they are wrong or experience the losses. It's awfully easy to talk about buying and selling but when it comes to believing in your model because back testing and soundness of capability has made it a high probability time to be in the market, well, that is totally different all together.
Today, as we speak, many market pundits are calling the bottom here. HaysMarketFocus.com has posted on their site as of June 14th the following:
I Believe!!
The Environment is Finally—after 6 months—Setting Up for Healthy Bull
6/14/06
Now I have tremendous respect for Don Hays but as I recall seeing him on TV, he is a "long" only investor and not a market timer, per se. So, that means he is invested at all times including the massacre from 2000-2003 and should we ever repeat the 1930s or anything similar, he would again remain invested. I simply to not believe in that philosophy. How does one know when markets are coming back up? We lost nearly $13 trillion in global equity markets in the fall from 2000. That is why market timing is a key competency one should look for in my opinion. Ask the Japanese about the Nikkei. Down for 17 years just as they were christened the heir apparent to America's economic mantle. Don is not the only well respected advisor who has called a bottom here. So has Barry Ritholtz. Another very pragmatic advisor whom I have the utmost respect for. The good news is both trade with their recommendations so Barry in particular will get out with minimal damage if his call is wrong. And don't be terribly concerned if a call is wrong. Most will be right. I relate to Barry's style. And, while no one likes to lose money, would you rather lose 2% on a short term loss or ride the markets down for an 80% loss as in 2000? Just a possible scenario not a prediction.
Me? Well, my models are built to make money. In both rising and falling markets. And they've been refined with gut wretching losses. We may yet be near a bottom but my models are not giving me a buy. And, while there is no such thing as 100%, since 2000, they have picked off every major bottom as a great time to buy. That is the problem with anticipation. No one wants to miss a great rally because we are oversold. But, the problem is you can stay oversold for a long time. It is something we are not used to given the bull market of the 1990s is all most people know.
So, let's wait and see how this market shakes out before we jump back in. Maybe it will be this week. Maybe it will be next month.