As an extremely simplified example, I have included a chart (log and linear scale) showing the price of the S&P500 in blue and the 40 week average in pink.
As you can see the blue line is currently below the pink line. This is a rudimentary way to define a downtrend. You can see this current crash, covid, 2008, dot com, 87, the crashes of the 70s, and many others. In most of them, the price drops below the line before falling to much lower levels. For this reason and many others, I believe the odds are higher than normal for 2023 to be a bad year – for stocks. However, the average weekly return is positive whether the blue line is above OR below the pink line. The average weekly return is 0.18% when it is above and 0.09% when it is below. Those equate to about 9.8% and 4.8% annualized. So, statistically speaking it could be worth moving out of stocks and into other assets if the estimated return was above 4.8% annualized. This is the type of logic going on within the strategies I run that are active. While one asset is trending down you may have another that is trending up offering an alternative. For example, when stocks are trending down long-term US treasuries often trend up. This year is one of the rare years that stock, bond, crypto, gold, and many other markets are simultaneously in downtrends – by most metrics. There are of course exceptions, but most assets that make sense to consider over long periods of time have not done well this year. Therefore, the algorithms have had a very tough time.
Some signals are starting to occasionally flash buy signals, but most are quickly reversing back causing losses. This whipsaw is a major downside of active trading, but in my opinion, it is a worthwhile risk. It is completely possible that various markets could continue to move in tandem for a long time or start to move asynchronously relatively quickly. No one really knows. My algorithms are designed to monitor many different assets and attempt to rotate into a reasonable mix of whatever has historically done well when a series of different metrics are met. Of course, past returns are not indicative of future returns. Anything could happen and it is entirely possible that the returns could be worse than passive investing or holding cash.
Despite the many risks, I believe the best thing to do is simply stick to the systems as designed and allow the algorithms to make the decisions on when to buy in or out. In the long-run I think this is an excellent way to invest but it does require plenty of patience and still has plenty of risks of loss. My hope is that this year is one of the worst we have to experience for a long time. Of course, only time will tell.
Patience to Invest 