Article #545) Avoiding crashes - Participating in rallies - Stocks vs Bonds

Updated: Nov 3


As I showed yesterday, a cumulative look at the volatility markets now shows a dip below the 50th percentile line for my Volatility Barometer.  It's taken an abnormal amount of time to get there, the longest in it's history, but it did finally move the Tactical Balanced out of IEF Bonds and into MDY Stocks this week.  


- Higher percentage readings indicate high volatility

- Lower percentage readings indicate low volatility



In hindsight, it would have been nice if the volatility markets settled back down at their normal speed which would have meant getting into stocks a couple weeks ago, but it is what it is.  Not all market cycles behave the same.  Sometimes volatility settles down too quick and it feels like it's way to early to enter stocks.  I still do because I'm entirely data dependent, but sometimes it's uncomfortable if it's too quick.  This time around though, volatility was slow and my entry felt a little late.

That's the nature of investing my friends, no two cycles are ever the same.  Sometimes they rhyme, but they don't repeat

Overall though, the long held IEF Bonds position was what I would call a smashing success.  Yes I could definitely nitpick and say the last 2 weeks was too conservative, but I for one am not complaining.  Making a nice return and avoiding the entire -20% drawdown has to be considered a success.

IEF Bonds vs MDY Stocks since I entered IEF on Oct. 5, 2018:


Remember, at some point markets are going to crash a lot further than -20%.  That's why I'm conservative and follow volatility markets.  In my opinion it's the only metrics out there that have a chance of avoiding the next recession.  Following "price action" doesn't do it.  Here's why:

When stocks are down -10%, do you exit?  Most of the time they recover around that level, so you'd feel foolish exiting at a 10% loss only to see stocks recover right?

So what about down -20% like they were last quarter?  Surely then, out of pure self preservation, that's the right time to cut losses and exit?  But now it's even more likely they will recover and you'd feel extra foolish to sell at the bottom.

So then it goes -30%.  Now you really can't exit because you'd be locking in your -30% loss right?

Then -40%.  Then down -50%.  At what point does the "price action" tell you to get out of the trade?  The answer for most people  (and most professional fund managers by the way)  is likely never.  They just hold through the whole thing.  It's excruciating and the drawdown usually lasts for several years, but that's unfortunately what most people do.

If they don't have a set of signals to tell them to get out or when to get back in, then when do they?  How do they?  Instinct?  Personal predictions?  How reliable is that in a crisis?

There is an unbelievable amount of people on Twitter lately bragging their stocks are up 10% in 2019 so far.  I guess they are going to just completely ignore the fact they were also down far more than that just a couple months ago...

Hold and hope is not a strategy.  I don't know why so many investors seem happy recently that they rode stocks all the way down and likely didn't sleep much for 2 months, to now riding them most of the way back up.  Do they not know that next time, they may not recover?

Do those people not know that when adjusting for inflation, a buy and hold investment on the S&P 500 took over 15 years to recover from the crash in 2000?

In my opinion, the only way to succeed in the long run is to follow a process.  I'm not saying mine is the best, or the only process that works.  It's served me very well over the years but I'm sure there are other valid ways to invest as well.  It's up to each individual to decide what's best for them.  But having a process to follow is absolutely vital.  It has to be emotionless, systematic, and consistent over different market cycles. 

We've seen both sides of my process in the last 4 months.  When and why I exit positions and how that can save an awful lot of stress.  That's the fun part.  And on the flip side, my process of waiting to get back into the market until my signals allow it.  That can also be stressful, especially when it appears to have been too late. 


It's a very strange psychology, but studies show that investors feel more negative feelings over not making money when other people are, rather than losing money when others are.  For some reason they feel better being part of the crowd, even if that crowd is losing. 

Which is worse?

a)  You lose 20% when nearly everybody else did as well.

b)  You make 1% when nearly everybody else made 10%

Which feels worse to you?  If you answered b, you're in the majority, but that's clearly the wrong answer right?  Person a lost money.  Person b made money.  Yet most people feel more comfortable joining the crowd, even if the crowd is losing.  Funny how that works.  The human mind is a fascinating thing!


Anyway, my longest cumulative IEF Bonds position I've ever held ended this week.  It was a profitable run with nearly no drawdown at all, but I fully understand the last few weeks has been hard to follow.  I want to genuinely thank everybody for the vote of confidence that you trusted me through this.  It's not always obvious why I trade the way that I do.  If viewed in small weekly or monthly increments it can easily give the impression that opportunities are lost.  But when viewed from 30,000 feet so to speak, it all starts to make sense. 



Have a fantastic weekend everyone!

No new trades today



VTS Tactical Balanced Strategy:

-  Currently Long MDY Stocks     (since Feb. 21, 2019)

Today's Signal:  NO NEW TRADE

Maintain current MDY Stocks




----------------------------------------------------------------------------------------- Choose the volatility strategy that matches your risk tolerance -----------------------------------------------------------------------------------------

VTS Conservative Vol Strategy:

*  Volatility Strategy for investors with lower risk tolerance

-  Currently Long ZIV     (since Feb. 19, 2019)

Today's Signal:  NO NEW TRADE

Maintain current ZIV position




VTS Aggressive Vol Strategy:

*  Volatility strategy for investors with higher risk tolerance

-  Currently Long SVXY     (since Jan. 31, 2019)

Today's Signal:  NO NEW TRADE

Maintain current SVXY position




VTS Tactical Volatility Strategy:

*  Volatility strategy using stock replacement through options

-  Currently in Cash     (since Oct. 5, 2018)

Today's Signal:  NO NEW TRADE

Maintain current Cash position




-------------------------------------------------------------------------------------- Feel free to use a paper trade account to learn about options --------------------------------------------------------------------------------------

VTS Discretionary Strategy:

25,000 Model Portfolio reset annually   (current:  25,000)

-  Currently in 3 positions

Today's Signal:  NO NEW TRADE

Maintain current position #32b Maintain current position #32c Maintain current position #36




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