With volatility on the rise, you may be reminded by many advisors that it is not wise to attempt to time the market, that you should invest solely for the long term. Modern portfolio theorists are fond of saying, “There isn’t anyone who can accomplish such a feat and do it consistently.” Of course, that’s true. What they don’t say is that consistency, while important, is not the end-all, be-all that it implies. Yes, we want to win all the time, but that truly is impossible. What is possible is to have a winning ratio of gains to losses and over time, that will suffice. What the advice to stay fully invested all the the time ignores is the need to control downside risk. Most of us want to avoid the next major downturn. Click below to read more.
The longer term chart (10 + years) of the S&P 500 plotted below does not tell us what or when to buy or sell. Using the Alexander Elder impulse system with monthly data, it nevertheless gives us insight. It is a censorship system to tell us what to stay away from at a particular moment in time. Note that every bar is colored: green when its bullish, red when its bearish, and blue when its neutral. When the bars are red, we should NOT be buying. When green we should not be shorting. When they are blue, either is okay. I have drawn the blue circles to put into perspective the similarities between the market in 2006-2007 and that leading up to the highs of mid-2015 followed by the volatility that has ensued until no
w (December 29, 2016). In analyzing performance for 2016 and with the goal of improvement in 2017, we have recently tweaked our system to alert us to when the red or green bars are turning blue using weekly data as a signal that it might be a better time to buy or sell a position. More aggressive investors might want to consider buying when the red turns blue, more conservative when the blue turns green. There are many calculations that go into this chart that determine the color of the bar, but for now simply pay attention to why late 2015 and 2016 were so challenging for so may investors. Before joining the post-election market euphoria, note that the S&P 500 is barely above where it was in mid 2015. We will have more to say about this as time goes on and will show you the weekly chart in a future post. For now, scroll down and leave a comment or question.
December 29, 2016