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Hi!
I've seen several threads discussing the performance of different bear catchers. One thing however intrigues me: how would one prefer to apply the bear catcher to the market as a whole, and not to each security of a screen itself? Would it yield better results to use a simple MA crossover for example (to avoid big losses) on each security? Or would it perhaps cut gains and decrease overall profit without limiting risk?
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Would it yield better results to use a simple MA crossover for example (to avoid big losses)
on each security? Or would it perhaps cut gains and decrease overall profit without limiting risk?


As far as I know, nobody on this board has found a TA-like individual security stop
loss strategy that is both backtestable and passes the backtest.

The problem is that markets are squiggly, and often lots of things dip at the same time.
You want to sell an individual security not when it dips, as everything
might be dipping, but rather when it stops underperforming its peers.
Just a general comment on why momentum tends to work but stop losses tend
not to work with the type of stock selection methods we use here.

If you think about it, a momentum final-sort screen is a stop loss, but the stop
is when the loss relative to peers is a certain size, not in absolute terms.

One can only answer your question as the answers to the backtests that
have been done (market-wide timing tends to work and stop losses
tend not to work with the sorts of investments we're doing), and
with general speculations as to why that might be.
I guess we can't answer absolutely, as there may be many strategies
for purchasing and holding under specific circumstances, for which
stop losses do add a lot of value. I don't know 'em, all I can say is
that they aren't the strategies that are used and tested here.

Jim
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Jim wrote:
I guess we can't answer absolutely, as there may be many strategies
for purchasing and holding under specific circumstances, for which
stop losses do add a lot of value. I don't know 'em, all I can say is
that they aren't the strategies that are used and tested here.


It is certainly true that I have not found any stop-loss approach applied to MI screens that works consistently well. It has not been for lack of time and effort.

Interestingly, I've spent the last year building a new trading system which I've almost completed which has stop-loss as one of the most important aspects of the system. It is a 4.5% stop-loss. The trading system is invested about 10-12% of the time and is in treasuries the rest. The CAGR is around 45-50%.

As you can see, my focus has been on all but eliminating exposure to the market, and when exposed, limiting drawdown as much as absolutely possible. It was a major under-taking, but very much worth the effort.
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Thanks both, that's interesting. I'm still learning but I am not convinced by the use of market timing as a whole. I would be out of the market in fundamental periods, and often there when huge drawdowns occurred...
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I'm still learning but I am not convinced by the use of market timing as a whole. I would be out of the market in fundamental periods, and often there when huge drawdowns occurred...

That's certainly a valid concern.
With or without using timing you are definitely going to be in the
market during a market fall from time to time.
With timing sometimes you'd be out of the market when thigs do well.

The bigger question is, is it a net benefit?

Imagine you're using an investment strategy similar to the MI practised hereabouts.
Your investing can be thought of as an unending stream of one month
investment periods. Imagine that on each monthly trading date you
simply decide whether or not to be in the market for the next month.
Either you invest according to your usual strategy, or you sit in cash for a month.

One must then decide whether the timing methods you have a good enough
to distinguish the high risk/reward months from the low risk/reward months.
It doesn't have to be right anywhere near all the time; the question
is whether or not you can identify some subset of months for which
the omens are bad enough that it's just not worth being in the market.
That's not really such a tall order.
If three hasn't been a new high in a long time, and breadth is bad
and deteriorating, and the market is falling, and valuations are high,
and interest rates are rising fast, is it really worth betting on a rising market this month?
Probably not.

Jim
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If three hasn't been a new high in a long time, and breadth is bad
and deteriorating, and the market is falling, and valuations are high,
and interest rates are rising fast, is it really worth betting on a rising market this month?
Probably not.



Good summary Most of this is not happening
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If three hasn't been a new high in a long time, and breadth is bad
and deteriorating, and the market is falling, and valuations are high,
and interest rates are rising fast, is it really worth betting on a rising market this month?
Probably not.



Yes. Because most of those factors are emotional, not mechanical. And some are incorrect.

The S&P500 recently hit a new high, and is above both the 50 day and the 200 day SMA. And interest rates are stubbornly stuck low.


Good summary Most of this is not happening
Or were you (Jim) being ironic?

FWIW, in just about all of my market timing backtests, the longer you delayed in calling a bear market and going to cash, the better the average return. You want to be the opposite of hair-trigger on getting out.
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Interesting how we can read something and interpret is differently than others.

I thought Jim was saying that if these factors exist than it is not worth betting on a rising market. My comment was intended to say since these factors do not exist now, that it is worth betting on a rising market. Although my "pucker factor" (very emotional) is making me nervous.

Maybe we need Jim to clarify.
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Interesting how we can read something and interpret is differently than others.

I thought Jim was saying that if these factors exist than it is not worth betting on a rising market. My comment was intended to say since these factors do not exist now, that it is worth betting on a rising market.


Yes. Non-verbal expressions don't come through the written word very well. You can grimace and wink but nobody sees it.
"On the internet, nobody knows you're a dog."

Although my "pucker factor" (very emotional) is making me nervous.
Well, this is where the winners get separated out from the losers.
This has been widely discusssed -- mostly by the people in the 1st camp.

"Bull markets climb a wall of worry;"

"Everything you need to know about successful trading and investing is on the web, gratis. There are no secrets. The rules of the game are known ... Most people simply lack the discipline to follow the rules. There is a huge empathy gap between knowing something and actually applying it. It is just like the difference between knowing how to get in shape and doing it."

"The main edge you need is called discipline. Successful market participation is 80% psychology and 20% knowledge about the market."


"Once a system's algorithms and parameters are established, the system must be followed exactly and religiously. A system cannot be second-guessed or used intermittently. ... The idea is the probabilities in any particular system must be allowed to play themselves out over many trades."

"The key to trading success is emotional discipline."

"More Money Has Been Lost Avoiding Risk Than at the Point of a Gun
Until you realize taking a beating is a normal part of long-term investing, you’ll hurt the overall performance of your portfolio.
Staying with your strategy during a pullback is difficult, and it never gets any easier."

"[re: failing with great strategies is due to] A simple inability of the Humans running them to stay with them whenever there are rising fear levels" (My bolding)

"true bear markets start slowly giving many months to get out"

"Following the path of least emotional discomfort is a road to failure. "

"The challenge is ... in trying to implement [a successful] strategy on an ongoing basis. The problem arises that is always a plausible reason NOT to do something our strategy is telling us to do. The smarter someone is the more plausible a story that can come up with telling them their system is incorrect."
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Interesting how we can read something and interpret is differently than others.

I thought Jim was saying that if these factors exist than it is not worth betting on a rising market. My comment was intended to say since these factors do not exist now, that it is worth betting on a rising market.

Yes. Non-verbal expressions don't come through the written word very well. You can grimace and wink but nobody sees it.


There was no wink, nothing non-verbal, in Jim's comment. He wrote, with a very straight face as far as I can tell, that if all the traditional timing indicators are negative you probably don't want to be in the market. If you misunderstood that, you weren't paying close attention while reading.

Elan
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Elan wrote:
There was no wink, nothing non-verbal, in Jim's comment. He wrote, with a very straight face as far as I can tell, that if all the traditional timing indicators are negative you probably don't want to be in the market. If you misunderstood that, you weren't paying close attention while reading.

Yup... about as simple as they come. Nothing a bit of time spent in Economics 101 won't rectify!

http://ocw.mit.edu/courses/economics/index.htm
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There was no wink, nothing non-verbal, in Jim's comment. He wrote, with a very straight face as far as I can tell, that if all the traditional timing indicators are negative you probably don't want to be in the market. If you misunderstood that, you weren't paying close attention while reading

That is what I understood. And as I look at the timing idicators, the vast majority are positive+,
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If you misunderstood that, you weren't paying close attention while reading

That is what I understood. And as I look at the timing idicators, the vast majority are positive+,


So, no wink, maybe just a little wry smile that I missed.

Indeed the majority of the indicators are positive, but Jim's cmmment said "if [whatever], is it really worth betting on a rising market this month?"

In normal English usage, a statment like this usually implies that the "whatever" is presently the case. And the "is it really worth betting ..." part is being used to contend that it is *not* worth betting.

It's been a really long time since I took the class in formal logic, but this is a statement of the form : If A then B. B is true if and only if A is true. If A is *not* true, that says nothing about the truth or falsity of B.

OTOH, in *informal* usage, "If A then B" is almost always used when and only when A is true. So this type of construct is very confusing. And that's when a non-verbal little eye-roll or wry smile helps to communicate the message as intended.

When he said "this month", the meaning of "this" was ambiguous. On first reading, it's not clear if he meant "this month" as in the month of Feb, 2013 (which is the date of the post) or "this month" as in the month that the "whatever" conditions become true.

Now that I'm paying close attention, it is clear that he meant the latter.

Now that I've explained why I was not "not paying attention", and that my confusion on exactly what Jim was saying is completely excusable and is totally not my fault, I'm done here. [insert wry smile and fletting grimace here] [along will a little eye-roll].
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There was no wink, nothing non-verbal, in Jim's comment. He wrote, with a very straight face as far as I can tell, that if all the traditional timing indicators are negative you probably don't want to be in the market. If you misunderstood that, you weren't paying close attention while reading

That is what I understood. And as I look at the timing idicators, the vast majority are positive+,


Which is 100% irrelevant to the value of a statement that IF all indicators are negative THEN you probably don't want to be in the market.

It's only relevant to the question of whether that situation applies RIGHT THIS MOMENT.
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In normal English usage, a statment like this usually implies that the "whatever" is presently the case.

Gee, I wonder what my native language was, growing up in Seattle, because I never saw that assumption made in the absence of an actual assertion that at least some part of the "whatever" is true.
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"if [whatever], is it really worth betting on a rising market this month?"
In normal English usage, a statement like this usually implies that the "whatever" is presently the case.
...
Gee, I wonder what my native language was, growing up in Seattle, because I never saw that
assumption made in the absence of an actual assertion that at least some part of the "whatever" is true.


Hey, no sweat. What I said was indeed a bit ambiguous.

Instead of saying
"if [whatever], is it really worth betting on a rising market this month?"

It would have been clearer for me to have said...
"if [whatever] is true at the start of any given month, is it really worth betting on a rising market that specific month?"
That was my intended meaning.

Since I said "this month" one might reasonably construe it to mean NOW (end of Feb 2013), which wasn't my intended meaning.

The omens are indeed mostly pretty good at the moment.
Rising market on almost any time frame, good season, good breadth, new
recent high, high liquidity, high profitability. It's even month end.
Valuation is very stretched but that says almost nothing about the near term.
The market is perhaps a little overbought, but a little consolidation isn't to be feared.

Jim
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The market is perhaps a little overbought, but a little consolidation isn't to be feared.

Yesterday we had a 5-yr high and 1-yr low all in the same day. More than just a "little" I say.

gdm
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The omens are indeed mostly pretty good at the moment.
Rising market on almost any time frame, good season, good breadth, new
recent high, high liquidity, high profitability. It's even month end.
Valuation is very stretched but that says almost nothing about the near term.
The market is perhaps a little overbought, but a little consolidation isn't to be feared.


Isn't it a bearish sign when even Mungofitch is bullish?

Elan
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Isn't it a bearish sign when even Mungofitch is bullish?

You're probably right.

But technically I only said the omens were bullish.
I'm actually spending this afternoon leafing through my portfolio looking for things to sell.
I have been quite aggressive lately, so for example I might sell the
single stock futures I picked up a while back.

Once I learned to be perfectly happy to miss out on some price rises, life got much simpler and safer.
I could probably stand to learn it even better.
Maybe a sign over the monitor that says "What would Zee do?"
[as I understand it, he is almost entirely in cash the great majority of the time]

Jim
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Jim wrote:
Maybe a sign over the monitor that says "What would Zee do?"
[as I understand it, he is almost entirely in cash the great majority of the time]


Odd. The post-it-note on my monitor reads, "What would Mungofitch do?"
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Odd. The post-it-note on my monitor reads, "What would Mungofitch do?"

I do not need that sign. Mungofitch would move to where the temperature today is about 12C that is pretty nice in February.
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And the post-it note on my monitor reads: WWJD?....

.....World Without Jelly Doughnuts??



Alan (sorry....couldn't resist)
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Odd. The post-it-note on my monitor reads, "What would Mungofitch do?"

Answer to that one is easy: rubbing my hands together in glee.
4.3% of my portfolio was in Dollar Tree call options (DLTR).
Check the chart.

Jim
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Isn't it a bearish sign when even Mungofitch is bullish?
...
Maybe a sign over the monitor that says "What would Zee do?"


FWIW, here's an article about "Should You Buy at New Lows? Or New Highs?" (Found via Faber's blog.)

http://www.stansberryresearch.com/dailywealth/2337/buy-stock...

Conclusion: History's verdict is clear... You're much better off buying at new highs than at new lows.
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Jim

Amazing call on DLTR. Cheers.

fd
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jim wrote:
Maybe a sign over the monitor that says "What would Zee do?"
[as I understand it, he is almost entirely in cash the great majority of the time]

Odd. The post-it-note on my monitor reads, "What would Mungofitch do?"



Aaaaugh! Divide by zero!
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Amazing call on DLTR. Cheers.

Yup, I'm happy.
Of course I just don't talk about my Intel position these days.
The secret of gurudom is to make lots of predictions. Ignore the losers and brag the winners!

Jim
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Jim,

Do you have any updated thoughts on INTC or LUK?

BLSH
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FWIW, here's an article about "Should You Buy at New Lows? Or New Highs?" (Found via Faber's blog.)
http://www.stansberryresearch.com/dailywealth/2337/buy-stock...
Conclusion: History's verdict is clear... You're much better off buying at new highs than at new lows.


Interesting article.
I thought I'd check their figures. I'm glad I did.

In short, my figures show the reverse effect.
Well, yes, buying at fresh highs is often better than a random purchase date,
but buying at fresh lows is better still, and reliably better.

My study is weekly (as was theirs), from Jan 1931 to date.
A new high was defined as the highest nominal index daily close (Saturday trading removed)
on the S&P 500 and its predecessors. This is a weekly study, so if
a fresh index high or low was hit during a week you'd buy at the end of
that week and hold for exactly one year (not 52 weeks).
Though the highs and lows were determined based on the nominal index level,
the returns are calculated after adjustments for dividends and inflation.

Average 1-year forward real total return on S&P in the study period: 8.52%.
Buy at a fresh 1 year nominal index high, average 1-year forward real total return 9.28% (better)
Buy at a fresh 1 year nominal index low, average 1-year forward real total return 11.31% (better still)

Of course there is nothing magic about one year as the lookback or the look-forward, so for a bit of variety:

Average 3-year forward real total return on S&P in the study period: 8.30%/yr.
Buy at a fresh 1 year nominal index high, average 3-year forward real total return 7.67%/yr (worse)
Buy at a fresh 1 year nominal index low, average 3-year forward real total return 10.02%/yr (better)

Average 1-year forward real total return on S&P in the study period: 8.52%.
Buy at a fresh 2 year nominal index high, average 1-year forward real total return 8.70% (better)
Buy at a fresh 2 year nominal index low, average 1-year forward real total return 17.81% (better still)

Average 3-year forward real total return on S&P in the study period: 8.30%/yr.
Buy at a fresh 2 year nominal index high, average 3-year forward real total return 7.40%/yr (worse)
Buy at a fresh 2 year nominal index low, average 3-year forward real total return 11.14%/yr (better)

My own conclusion:
History's verdict is clear. Though you might or might not do better than
average buying at a fresh index high, buying at fresh lows is much better and more reliable.

Jim
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Jim,
Do you have any updated thoughts on INTC or LUK?


I have meaningful positions in only 19 stocks, and those are two of them.
For neither do I have any particular reason to think they'll rise a lot soon,
but over the next several years I think a buyer today will do well.

I like Wells Fargo a lot at current prices in the $34-35 range.
The more I think about it, the cheaper it looks to me at these levels. I've added a lot this year.
Worth a read http://brooklyninvestor.blogspot.fr/2013/01/wells-fargo-is-c...

Jim
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Hey Jim,

I've been looking at WFC too - do you have any leveraged recommendations on going into them at the moment?
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My own conclusion:
History's verdict is clear. Though you might or might not do better than
average buying at a fresh index high, buying at fresh lows is much better and more reliable.


Y'know I should stop reading stuff like this.
First off, as you say, you need to recheck their figures yourself -- quite often you get a different answer than they did (or that they _said_ they did).

Second off, I don't care about stuff like this. I don't invest that way. I invest mostly with individual stocks traded according to a monthly screen and ETFs traded according to a monthly screen.
I don't invest the way that 99% of magazine & web articles/columns discuss. Near highs, near lows -- I don't care -- I never even look at that. When I do look at prices, I generally look at where the current price is vs. the price 6 months ago.
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more on buying at market highs
http://www.marketwatch.com/story/would-new-dow-record-set-a-...


<<<Calendar days between attainment of new high and eventual market peak Gain between attainment of new high and bull market’s end
Best case 2,711 221.6%
Worst case 132 2.3%
Median of all 13 cases since 1954 417 18.4%
Mean of all 13 cases since 1954 644 40.3%

On average following those 13 cases, according to Ned Davis’s firm, the bull market continued for another 644 days — nearly two years — and, in the process, gained an additional 40.3%.

The accompanying table reflects what they found upon focusing on the 13 instances since the S&P 500 was inaugurated in the 1950s in which, following a bear market, it reached a new high. >>



I don't know how they arrived at those criteria . But it does seem to indicate that you don't have to be in a hurry to leave what has been a bull market so far.
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Please tell me that MIT does a better job than what I found down South. The local major university is just half a step up from reading Henry Hazlitt on the political spectrum, at least from skimming the introductory courses.
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