What’s working in this slumping stock market?
Everything seems to be getting hit, no stock looks safe, and suddenly investors care about risk again. It’s because central bank direct asset purchases were slashed in January! This is what normal markets look like. Ours also just so happened to be extremely overvalued because of that fake demand from central banks, so extra degrees of volatility exist.
Normal market conditions are a welcome sight; depending on fake money is not a healthy way to grow, but given the material declines recently, investors may need to see something more positive than that right now. The market has been in a long slumber, with virtually no volatility, and now we have an environment that is not too unlike what we feel like after a midday nap. It can be painful, unless you are proactive.
At least, proactive strategies have the ability to perform no matter what happens. In 2012 and 2013 the influence of central bank stimulus was still largely uncertain, but after a couple years we could see that the influence created an institutional piggybacking, where they jumped on the “buy” side too.
This kept sellers from selling, compounding the actual effect of stimulus. But now that central bank asset purchases have declined enough to balance the natural demand levels identified by The Investment Rate, our macroeconomic work that defines the natural demand for assets, those sellers who did not sell before, and those piggybacking institutions, are unwinding positions.
Have they finished unwinding?
That’s the wrong question, but the answer is probably that they are close. Our outlook for 2018 called for a process to unfold, and the first step of the process was to break the unyielding bullish arrogance on Wall Street. That has happened, and the markets have declined to a level from which they are capable of bouncing back. But how do we handle it?
Ultimately, that’s the better question. If the market is returning to normal, and more volatile conditions exist, but we can’t be sure if the next aggressive leg of direction will be up or down, what do we do?
Our Strategic Plan is a good example.
It is proactive, and it can work in any market, but it also requires a little work. The mind set shift that investors should undergo now should be to transition to strategies that can protect their wealth, and traders should be looking for opportunities in both directions. Our Strategic Plan can satisfy aspects of both.
Established in January 2009, almost at the lows of the 2008 crash, our Strategic Plan is a proactive strategy that has beaten the performance of the S&P 500 Index SPX, -0.44% from those ultimate lows. From the strategy’s inception date, the S&P 500 returned about 179%.
The strategy is up solidly in 2018, despite this week’s convulsions. That can change, of course, and past performance is no guarantee of future results, but the metrics and the raw data for the Strategic Plan have been excellent. It has a beta near 0, meaning it doesn’t correlate with the broader stock market, and it has a great track record. However, it is not a buy-and-hold strategy.
The Strategic Plan uses longer-term inflection levels and trades only periodically when those levels are tested. It uses ETFs related to the Dow Jones Industrial Average DJIA, -0.63% to make money in both up and down markets, and it follows a simple set of rules.
Here it is:
If support levels are tested or resistance breaks higher, buy ProShares Ultra Dow30 DDM, -1.17%
Otherwise, if resistance is tested or support breaks lower, buy ProShares UltraShort Dow30 DXD, +1.37%
Implement risk controls for all trades.
The Strategic Plan is far more active than buy and hold, but it is not a day-trading strategy. The added activity versus buy-and-hold is something investors will need to get used to now that the markets are moving more normally again, but the first step is asking the right questions.
The best question to ask is: How should I change my approach given the changes in market conditions that are now obvious? If you are watching the Strategic Plan, you realize that you don’t need to change anything. It can work no matter where the market goes, even if it decides to start going straight up again. The strategy follows rules, it trades periodically, it requires more work that investors have had to do for years, but it is an exceptional example of what is working too.
One more material added value: When you engage a proactive strategy like this, you no longer need to guess where the market is going and you never need to change according to fluctuating market conditions. All you need to do is keep doing the same thing, because strategies like this can adapt by themselves. They guide you naturally as market conditions change. That’s ultimately what proactive strategies are designed to do — adapt — and that’s why they are good right now.
Thomas H. Kee Jr. is a former Morgan Stanley broker and founder of Stock Traders Daily.