Tango5 Members Update 020109
Reflecting on 2008 Markets and What the Future Holds
Below are the topics I promised to cover. I will begin cover these at length and this will probably take several Updates to get it all in. I will archive these Updates on the home page so you can refresh any past Updates in this series.
1. Is 2009 going to be Better, the Same, or Worse than 2008?
2. How are we doing in terms of Performance from Inception and during
the 2008 Bear Market Period?
3. Trading systems changes needed if any. I think we need the ability to
go Short at times and Expand Endurance's capability. More on this and
my research later.
Topic number one, do I think the market in 2009 will be the same or worse than 2008! I am a positive guy, a glass half full guy so I hate to be negative. My current stance is Prepare for the Worst and Hope for the Best to protect myself from repeating 2008 again. It was a tough year for almost everybody, even most of the brightest and best performing institutional houses on Wall Street lost money. I read many reports and listen to many Wall Street pundits and there is great contradictions. There seem to be two camps, one that the GDP growth will return in the third Qtr and the Stock Market will be much improved in the second half of 2009. The second camp is that GDP growth won't be until 2010 and slow muddle through growth for several years after that. I recently have seen a report on Dupont, the CEO had just returned from a meeting where they were forecasting dire economic growth and just days after that Dupont's daily requisitions (from auto builders) for auto paint stopped coming in. Dupont supplies paint to the auto manufacturer's on a just in time (no inventory) basis and they depend on these daily requisitions to make and deliver this paint daily. Long story short, Dupont has now activated 17 Crisis Management Teams all over the world to deal with this recession. There are more of these stories, lots more. Microsoft is laying off people? Ten's of thouands of people are currently being laid off adding to the millions already out of work. The housing crises, the financial credit crisis. This week's Business Week front page, Broken Banks - the Bailout is a Bust (and the sooner we realize it, the better). I could go on for pages but you have already heard it.
I have been through a number of recessions and studied several depressions and I don't like what I see ahead of us. I hope I am wrong and we do see the market put this behind it in the second half of 2009. I will be ready for the best or the worst scenario. On the bright side I remember the Mexican Peso, Russian Ruble, Indonesian Banking, and the Latin American credit (Brady Bonds) crisis's and what amazed me was how quickly these were resolved. Economies have wonderful staying power and an ability to right themselves. That's the good news.
This Bear Market Has Created Problems for Investors
There have been two major problems with the Stock Market that has made Tango trading systems return poor profits.
1. High volatility has been unprecedented as shown in the chart 1 below, this peak in volatility is greater than the recessions of 1974, 1980, and the 1987 crash. This extreme volatility (peak 80) has caused premature Buy Signals and once we are in the trade, causes stops to be hit premature resulting in rapid position rotation and uptrend's to be cut short resulting in more losing trades than normal.The volatility is coming down but not low enough to correct the above conditions. From the chart you can see how extreme the peak was in 2008.
Chart 1
The chart 2 shows a shorter time frame and you can see that the peak in the 2002 Bear Market (45) is about where we are down to today. If you recall 2002,and I'm sure you do, that was bad enough, so we have a way to go for normal to return.
Chart 2
2. Volume has been low, especially in the up trends. Just not enough buyers to sustain longer profitable uptrend's as shown in the chart 3 below. Notice in the uptrend's the volume is dropping in most cases, we need volume increasing during these uptrend's. There is one trillion in cash on the sidelines, at some point this volume picture will change, just don't know when.
Chart 3
There are other market metrics that have been negative since October 2007. So market conditions have been poor at best. Normally this would clear out and we could get back to normal trades, which will been shown in later charts. This clearing out has not happened yet and as I look out into the future the odds are good that these poor conditions will continue for some time.
To deal with the above conditions I have developed a Long/Short Option which will be introduced as soon as possible. This is needed to take advantage of some of the downtrends in Bear Markets. The delivery of the product to you is the next step. Also, I have developed and am trading Endurance2. This is a Asset Class Rotation system which does not use a market signal. The advent of ETF's has brought us many more asset classes that we can trade, this has made this concept possible. This is Asset Allocation with Rotation. The caution is, these ETF's don't have much history so you can expect some surprises.
Back to the Long/Short Option, I have completed most of the trading system work (and it was a lot of work) and it looks very good. Of course hindsight is great, it would have made 2008 completely different and profitable for all systems. Both of these trading systems will take a lot of explaining and this will be done in future Updates. Here is a chart of TangoETF Moderate Long/Cash compared to Moderate using the Long/Short Option. Notice the Green tick mark at the bottom of the chart. This is where the switch from Bull State to Bear State is made. During the Bull State you use Long/Cash on the normal Tango6x signal, in the Bear State you use Long/Short on the normal Tango6x signal. The short used in the chart is ETF MYY which is SP mid cap 1X inverse. This Bull State Bear State concept eliminates much of the short trades during the Bull State which was my objection to the Long/Short system in the past. With this concept you are only shorting in the prime time for success.
Chart 4
You can see from the chart there is a price to be paid in shorting. This is not for everyone, it increases the volatility which increases the risk. In that red equity curve during 2008 there was a lot of draw-down. You can reduce the risk and draw-down to your comfort level by leaving part of your short position in cash. In the above I could use 1/2 Cash and 1/2 MYY and cut the risk and draw-down in half. This is more suitable for most people. You could reduce it further by using more cash, 2/3 cash, 3/4 cash as an example.
Enough for this Update, we have assessed the market and what we have in front of us. What problems it has caused, what we are going to do about it. For the next Update I will cover past Bear Markets and how Tango would have faired in those past bear markets, details on the performance of TangoETF's trading systems during 2008 and from each inception date, and more details on the new trading systems.
Prepare for the worst and hope for the best, Don
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