Tango5 Members Update 022209
Reflecting on 2008 Markets and What the Future Holds
This Update is number four in a series. The previous three Updates in this series are posted under NEWS on the Home Page for your review. The broad subjects covered in this series are below.
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.
First some house keeping, there is some missing data in some of the ranking reports on the web site, this will fixed Monday. Also Mike Wilson suggested in an email that I make the distinction between shorting and inverse funds here. In the previous Updates I used the term shorting rather than inverse funds for the TangoETF shorting option we are working on. Mike is correct I should make this more clear, for Mike Wilson's comments on the distinction between shorting an ETF or stock and inverse ETF's or mutual funds click here.
And the TangoETF shorting option has moved to the programmers and we will be testing the output soon.
Now to performance, before I get very far into this several distinctions about the stock market should be made. The first one is there is a definite Bull/Bear cycle that occurs every 4-5 years or so. You all have heard of this cycle as it is well publicised. The second is the "Secular Bull/Bear" stock market cycle which is not so well known and occurs on average every 17 years. This is a valuation cycle and to make a sailing analogy, during the Secular Bull market the wind is at your back, and during the Secular Bear market the wind is in your face making progress much more difficult. The Bull/Bear cycle occurs in time inside the Secular cycle. We entered the Secular Bear cycle in 2000 and will be in it until around 2015 to 2017 (based on avg cycle length), we entered the Bull/Bear stock market cycle in October 2007 and as you know we are still in it. See Dow Jones Industrial chart below, my dates are not exact, for exact dates, but this gives you an indication (green boxes) of the Secular Bear market cycles .
It is timely that John Mauldin speaks of this Secular Market Cycle in his newsletter this weekend. An excerpt in blue from his letter:
In all cases, throughout the years, the level of returns correlates very highly to the trend in the market's price/earnings (P/E) ratio.
This may be the single most important investment insight you can have from today's letter. When P/E ratios were rising, the saying that "a rising tide lifts all boats" has been historically true. When they were dropping, stock market investing was tricky. Index investing is an experiment in futility.
You can see the returns for any given period of time by going to http://www.crestmontresearch.com/content/Matrix%20Options.htm . (I highly recommend you visit this site for details on Secular Markets - Don)
Now let's visit a very basic concept that I discussed at length in Bull's Eye Investing. Very simply, stock markets go from periods of high valuations to low valuations and back to high. As we will see from the graphs below, these periods have lasted an average of 17 years. And we have not witnessed a period where the stock market started at high valuations, went halfway down, and then went back up. So far, there has always been a bottom with low valuations.
My contention is that we should not look at price, but at valuations. That is the true measure of the probability of success if we are talking long-term investing.
Now, let me make a few people upset. When someone comes to you and starts showing you charts that tell you to invest for the long run, look at their assumptions. Usually they are simplistic. And misleading. I agree that if the long run for you is 70 years, you can afford to ride out the ups and downs. But for those of us in the Baby Boomer world, the long term may be buying green bananas.
Since the TangoETF trading systems started (various dates) on 08/21/06 (Aggressive) to 01/07/08 (Endurance) we launched into a big headwind. It is what it is, but what I say about Tango's Manged Risk Investing (MRI) is that "most of the time" MRI will keep you in the right funds and on the right side of the market. Not "all the time but most of the time", no person or trading system can do this all the time. The charts below show the performance of the Tango MRI in back test from 1989 and real time since 08/21/06, and real time for 2008. First keeping you on the right side of the market. This chart shows the MRI signal back to 1989. The red line in the upper pane is Russell2000 small cap, the red and green line in the lower pane is the trading results Long/Cash if you were trading the Russell2000 with the Tango6x MRI signal. You can see it keeps you on the right side of the market most of the time and over 20.48 years a gigantic increase in return with less risk than buy and hold with the Russell2000.
The next chart is represents buying all TangoETF positions from the inception of each four ETF trading systems in real time. This chart is derived from the real time Fidelity brokerage accounts of each sample portfolio. Investing in all trading systems from inception starting with Aggressive on 08/21/06 to 02/20/09, this would have returned 18.35% over that period.
Real time returns from each trading system from inception:
Aggressive 08/21/06 24.81%
Moderate 04/02/07 - 4.17%
Conservative 09/18/07 - 16.69%
Endurance 01/08/08 6.68%
S&P500 08/21/06 - 40.65%
The next chart shows real time returns for year 2008, Aggressive -3.13%, Moderate -4.64%, Conservative -11.19%, Endurance from 01/08/08 +6.68%, S&P500 -38.49.
All charts above by www.fasttrack.net
Considering the markets not bad but I expect better for the future.
John Mauldin has stats and comments on the European Banks in crisis and more on the markets. For his full report While Rome Burns
John Mauldin http://www.frontlinethoughts.com
In the next update I will talk about the future and more on new ETF developements and how to take advantage of these developments with new trading systems. If you have any questions please don't hesitate to email me. I appreciate the support from all TangoETF subscribers in these difficult times.
Prepare for the worst and hope for the best, Don
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