Tuesday, October 1, 2013

How to detect market plunges



No one including all the Federal Reserve chairmen and all the Nobel-Prize winners (actually many of them drove the economy to the brink of bankruptcy by betting wrongly) in economics can predict market plunges. The chairman gave a speech saying how rosy was the economy and in a few weeks, the housing market crashed. Many predicted correctly market crashes by pure luck and some even received Nobel Prizes and became famous. There is no model and formula to predict market plunges except this simple chart described in this book.  It is so simple that I do not claim credit but the credit in publicizing and tuning it.

It works for the last two market plunges and hopefully it will work to the next market plunge. The chart depends on the falling stock prices, so it will not detect the bottoms and peaks precisely, but it will prevent further losses and reenter the market for larger gains. The chart is very simple to use and there is nothing to buy or subscribe. It WILL predict the next market crash, but it may not give us ample time to prepare to exit and/or how far away from the peak as the last two. It also tells us when to reenter the market for the best time to make money.


How to detect market plunges
(Hit Enter on the Chart to display it full screen)



 Exit the market when S&P 500 index is below the red line and reenter the market when it is above the red line.
.
Market Plunge
Peak
Bottom
Exit
Reenter
2000
08/28/00
09/20/02
10/01/00
06/01/03
2007
10/12/07
03/06/09
02/01/08
09/01/09



08/01/11
11/01/11

I was shocked by the incredible return by using simple market timing (exit and reenter the market only 3 times from 2000 to 2013).

Summary info:
.
S&P 500
1-2000 to 9-2013
With Market Timing
Without Market Timing
Better
400%

Gain
1,000
167
Gain %
68%
11%
Annualized gained
5%
1%
Days
4,959
4,959

Click here on how I calculated the returns. Actually it is far better than 400% by buying contra ETFs in existing the stock market. How many fund managers and/or investment newsletters can achieve the same performance? The above does not even spend time in evaluating stocks and dividends are not included in calculating performance.

To return to the market is important. With the chart and other hints (10 hints in my book), I returned to the market in 2009 and made 80% in my largest taxable account (I have the statement for proof).

It will not be as effective if many follow the same chart. Order the book before everyone follows the same technique.

Update 1/2017

From 2000 to 2010, there is only one false alarm as indicated as above. From 2011-2016, there are more false alarms. We can change the parameter to reduce them at the expense of detecting the plunge a little late.

The market before 2000 is quite different from the market today. Hence, I do not use the data before 2000.


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This is one chapter of my book "Complete the Art of Investing". If it helps you, envision how 820 pages will help you. 

For more of my reasoning, check out the book described next. The Kindle has 850 pages (6*9) for $9.99. It could be the best $10 you ever spend. Paperback is also available.

The above is an abstract from my book "Complete the Art of Investing" which is available from Amazon.


My other book on this topic is Profit from 2017 Market Crash.

I challenged to have the best-performed article in Seeking Alpha history, an investing site, for recommending 5 or more stocks in one year after the publish date. The concepts for that article are discussed in this book.

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Sunday, September 29, 2013

Incredible return with simple market timing



This table is similar to the table in the Chapter 5 on A Tale of Two Plunges. The dates are set up to be the first of the month to get the monthly data instead of daily data from Yahoo!Finance. In addition, I add one more exit and reenter point for the blur.

Detecting market plunges (Chapter 6) detects the exit point and reentry points from 2000 to 9-2013 as follows.

Table: Vital Dates

Market Plunge
Peak
Bottom
Indicator
Exit
Indicator
Reenter
2000
08/28/00
09/20/02
10/01/00
06/01/03
2007
10/12/07
03/06/09
02/01/08
09/01/09



08/01/11
11/01/11


As of 09/03/2013, my chart (simple to get from Yahoo!Finance) still indicates to invest fully in the market from 09/03/2013 on. Run the simple chart once a month. When it indicates a potential market plunge is closer, run the chart (Chapter 6) once a week.

It is based on stock prices so it may not identify the peaks and bottoms precisely, but so far it has never failed to avoid big losses and ensure big gains. Hope it will give us enough time to act in the next market plunge as the last two.

Unbelievable return with market timing

Calculate how much you made if you followed the above exit points and reenter points from 2000 to today. I bet you will make a good fortune. 

I calculated the return of S&P 500 with and S&P 500 without market timing from 1-2000 to 9-2013 to test the effect of market timing. There are many assumptions due to considering the compound effect for a fairer comparison. In general, dividends are not considered.

I was shocked by the incredible return by using simple market timing (exit and reenter the market only 3 times from 2000 to 2013. Actually it is far better than 500% by buying contra ETFs in existing the stock market.

Summary info:

S&P 500
1-2000 to 9-2013
With Market Timing
Without Market Timing
Better
500%

Gain
1,000
167
Gain %
68%
11%
Annualized gained
5%
1%
Days
4,959
4,959



Calculations:


S & P 500
With Market Timing
Without Market Timing
1-2000
1,4691
1,4691
Exit    10/01/00
1,0412
1,041
Enter 06/01/00
1,041
9644
Exit    02/01/08
1,4893
1,3794
Enter 09/01/09
1489
1,0205
Exit    08/01/11
1,888
1,293
Enter 11/01/11
1,888
1,251
          09/03/13
2,469
1.638



Gained
2,469 – 1,469=1,000
1,638-1,469=167
Gain %
1000/1469 = 68%
167/1469 = 11%
Annualized gained
68% * 365/4959=5%
11%*365/4959=1%
Better
(1,000-167)/167 = 500%



Portfolio with Market Timing:
1 Both starts with S&P 500 of 1,469 on 1-3-2000.
2 10/01/00. The market timing portfolio exits the market and remains same value of 1,041 until 6/1/00.
3 02/01/08. The market timing portfolio exits the market and remains same value of 1,489 until 9/1/09.
    1,489 is calculated as follows:
    1,041 * (1 + Rate) = 1,041 * (1 + 1,379-964)/964) = 1,489
    where S&P 500 is 964 on 6/1/00 and 1,379 on 2/1/08.

The other calculations are based on S&P 500 is 1,020 on 9/1/9, 1,293 on 8/1/11, 1,251 on 11/1/11 and 1,636 on 9/3/13.

Portfolio without Market Timing:
1 Both starts with S&P 500 of 1,469 on 1-3-2000. We could use the 9/3/13 S&P 500 value, but it will not account on some compounded interest consideration.
4 S&P 500 is 964 in 6/1/00 and 1,379 on 2/1/08.
5 02/01/08. The portfolio value is calculated to be 1,020 as follows:
    1,379 * (1 + Rate) = 1,379 * (1 + (1020-1379)/1379) = 1,020
    where S&P 500 is 1,379 on 2/1/08 and 1,020 on 9/1/09.

The other calculations are based on S&P 500 is 1,293 on 8/1/11, 1,251 on 11/1/11 and 1,636 on 9/3/13.


I cannot believe the shocking return with market timing. I checked my calculation and there was nothing wrong but do not hold me on this. The compound rate of return not considered in all periods should be minor. If you have time, send me your e-mail address to pow_tony@yahoo.com, so I can send you the spreadsheet to check any error.

Even if I made a mistake somehow and got 100% instead of 500%, it still doubles the return without market timing! Ask any fund manager what it means to his or her fund performance and his / her career.

The values of S&P 500 are obtained from Yahoo!Finance. The entry and exit points are obtained from my simple chart from Yahoo!Finance described in Chapter 4-6 and subject to my interpretation.  



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My e-book Debunk the Myths of Investing could save you a lot of money in investing. The above is one chapter out of 133 and some important chapters will not be included in the blog.
  http://ebtonypow.blogspot.com/2012/12/special-debunk-myths-of-buffett.html

Sample portfolio for the book.
  http://stockportfolios.blogspot.com/2013/03/welcome.html

(c) 2013 Tony Pow

Disclaimer. I'm not responsible for your actions in your investment. Treat this as educational information and past performance does not guarantee future performance.