Timing the market using moving averages - an experiment

Aaaaand… here we go again. We were over the bar by 3 cents yesterday, the exit trigger for the 20D-4 strategy has been crossed today.

Either we rebounce next, or we’ll cross the 200D-10 exit trigger too.

Mood: pretty nonplussed.

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:smile: Back in we go! It didn’t take long, I must say. It’s looking like another net loss for the 20D-4 strategy.

Mood: Confident in the future (my bet is the markets should move up and no trigger get hit in the coming weeks).

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March report and things are getting serious. There has been a big miss on the 20D-4 strategy, which is now greatly behind the other ones who have just bought and held so far. To be transparent, I’ve had some doubts about the sense of this kind of market timing during the month, especially when comparing the time spent following the market’s movements vs logging in once a month to buy with available funds and then hold forever.

These are just a set of circumstances, though, so there’s plenty of time for me to change my mind in the other direction going on if some big downturn happens and I get scared with my invested funds. Even if I fully stoped believing in the strategies I’m using here, I think the experiment would be worth pursuing, be it only to illustrate how vain this endeavour is.

On the other side of the coin, I went into this believing that keeping on despite false positives was the hard part, so I’ll just shrug this off and keep on. I’m curious to see where this all is leading.

Triggers

March was a continuation of the previous drops at first, then an awesome recovery from the 10th onward, starting right after the exit trigger of the 20D-4 strategy was hit, provoking a magnificent rebound right when I went out, without fail. It’s true that it’s hard to time the bottom, because the recovery can come quickly. I’d need a significantly bigger drop for one of these strategies to shine.

Time-weighted returns

Can you spot the laggard? :smiley:

Real data

The difference is significant, though a bit less visible. It’ll compound from now on.

Mood: welcoming the learning experiences: this enlightens my other investments. I have considered switching strategy toward a more buying and holding-ish one with my taxable investments at some point.

20D-4 200D-10 Bench.
TW Returns
CAGR 7.6% 13.0% 13.0%
March 22 -1.1% 3.5% 3.5%
YTD -9.2% -2.7% -2.8%
Max DD
All times -14.1% -12.1% -12.1%
March -5.5% -5.5% -5.5%
YTD -13.7% -11.7% -11.7%

The max drawdown has increased in March as it goes from November 17 2021 to March 9 2022. It could go deeper still yet previous gains were good enough that the annualized returns are still attractive.

As stated before, the 20D-4 strategy does not guarantee a downside protection and could keep falling lower than the other two in the future.

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As an additional personal trivia: an observation I’ve made is that since I’ve started this thread, I’m trying to anticipate the direction in which the market will be moving. While I’m for the time being not too wrong about it, it appears that by the time I’m feeling confident enough to act on it with other investments, other market participants have already acted and it’s hard to make money trading on it.

It’s true that it’s not enough to be right, but that one has to be right before the others. It turns out there’s a reason the proper time for action would be when I’m not yet confident enough so I have to either decide to gamble and act without confidence in my bet, or accept that I’m not quick enough to beat the market.

It’s not intuitive. I really had to experience it to realize that, yes, even when being right and pretty early, it still already is too late to benefit from it. I encourage those who feel they could beat the market to launch a small experiment with a small amount of funds and use it to act on their predictions/beliefs while comparing it to the market performance. It’s been enlightening to me.

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Trendfollowers that reach the stage of first wrong signals generall invest a few years optimizing their models aka adding filters to distinguish noise from „real“ signals.

That path of constant re-evaluation and optimization is full of „why didnt I realize this before…“, you will learn alot and it can take quite some time. This mainly as you may only identify model-shortcommings and optimize things to death when there is volatility. Some never leave their „optimizing the models“ phase and burn significant time and money.

Very promising to read your follow up post about your intuition. Looks like you are well positioned to just skip this stage and realise that trend following was a fun hobby; that like most exciting hobbies was not free but came at a cost - namely muted risk weighted return.

Keep going along the path of enlightment, young Padawan. I had (with about 5-10% of my Portfolio) spent about 7+ years of trend following until I reached the nirvana stage. Trust you will join me there soon as well, with the > Moving Average 1‘000‘000 days strategy (better known as HODL).

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The problem I see with that is that you are really only optimising to take into account the precise specific conditions you have just met, so you shield yourself against those precise conditions, but create other vulnerabilities and/or are still not shielded against other conditions you have not yet thought of.

Whatever you do, you’ll still be at a border: when you get in/out/shift your allocation, you enter a period of vulnerability where you are bound to be on the loosing side if the market doesn’t behave in the way required by your strategy. You can adjust your strategy to shift your window of vulnerability, but there will always be one and there will never be a guarantee that the market will actually go in the direction you need it to when you’re in the vulnerability stage.

The question I still have is in regards to statistics. Sure, you’re bound to loose sometimes but can you expect to get ahead in the end if you play the odds enough time and go through enough diverse conditions that you meet those that are more favourable to your strategy? My bet is on “no”, but I like first hand experience. In the meantime, I’m consolidating my global portfolio strategy to consolidate the building of my emergency fund while still being agressive and get out of momentum strategies for the time being.

Now, if we are being really honest, I feel that the truly hard part is giving up on the idea that we can get better returns than others and get richer than them in a quicker timeframe. Settling for being ordinary, and accepting that other aspects of our life matter more and we should focus on them is very hard (to me, at least).

The real wisdom is in accepting to deal with reality and, rather than clinging on to unrealistic dreams, to build and bring to life realistic ones. That wisdom tends to come pretty late and is faced with the sunken cost fallacy (“I’ve already wasted too much time doing mistakes, I need a quick way moving forward, there’s no time for the proven one!”).

I am very subject to that and still feel that it’s already too late for a few things I’ll never get to do differently in my life. Giving up on them and moving forward is very hard. I am not there yet.

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how is it going with the fluctuations due to the Ukrainian war?

I think this was (unfortunately, accounting that this created deaths and worst crimes that only in a war can come) the best proof that staying invested is always the best option, at least for normal retail investors.

Do you agree on this latest statement?

We’ve gone up bigly and quickly, we are now going down slowly but there’s still a ways to go before hitting a trigger.

I don’t think the Ukrainian war is the main driver of what we’re seeing in the stock market. I think the Fed and inflation expectations (leading to prognostics on the Fed’s future stance) are the main drivers. Investors are flush with cash, so when they adapt to the Fed stance becoming more hawkish and get out of the stock market, they retain their investing power and can get back in biggly when they feel like it. We may be in for some more big volatility and flip flopping until tightening actually occurs and there is less money going around.

Of course, we could say that the war added to inflationary pressures but with the wage-price spiral that had started (and seems to have been tamed for now), the supply chain issues still not sorted (and China going into lockdowns again), transportation firms benefitting from this chaos (so having no incentive to sort it out) and central banks still being very accomodative, we may be in a similar place now even without the war (with a few less ups and downs and maybe energy and food prices a tad lower). We are now going into earnings season, so stock prices could move either way.

I’d say it depends what you are trying to achieve. My main regret during this has been not buying when prices where/are below my average cost basis, but stock prices haven’t gotten really low as of now. I may think differently if we had had some real crash (which could still happen) and I had some assets accumulated already which would have lost face value.

My main conclusion would be that it’s not worth the time spent in it, which would go in the direction of your statement but there again, I believe I’d not mind keeping buying lower and lower if stock prices went down and down and up and down some more for a prolonged period of time but I’ve read enough 2008 threads to know that there are people who felt bad and lost sleep during times like that (though you may argue that 2008 was special since it was the financial system and banks themselves that were in jeopardy) and that they may have slept better with cash on the side (though not above the insured thresold in a bank).

My real take is we ain’t seen nothing yet (not saying we’re going to see a deep crash in the near future, could be years until it happens, or it could never happen at all) and it’s way too early to draw real conclusions for the time being.

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How’d y’all folks like another ride?

Exit trigger hit on the 20D-4 strategy. Let’s see if thrice’s the charm. :smiley:

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April’s numbers are out! If you like red, you will love this. :smiley:

Triggers

It’s been a downward slope all the way, ending with the 20D-4 exit trigger to be hit. The funds have been divested today, so the 3 funds have been invested for the month.

Time-weighted returns

We can see the price of missed timings. Note that the downward protection provided by the 20D-4 strategy is non existent in these circumstances so far.

Real data

The month has mostly eaten up the new CHF 100 input. While it didn’t hurt while dealing with the charts here, it did have me ponder while compiling my net worth to realize that my 3a’s where down for the month (including new inputs). I hadn’t followed the behavior of the funds closely enough to expect it (which is actually good news).

Mood: starting to consider that this downturn counts for something. Bracing for more.

20D-4 200D-10 Bench.
TW Returns
CAGR 4.1% 9.0% 8.9%
April 22 -4.3% -4.3% -4.3%
YTD -13.1% -7.0% -7.0%
Max DD
All times -15.7% -12.1% -12.1%
April 22 -6.1% -6.1% -6.1%
YTD -15.2% -11.7% -11.7%

While the 9% CAGR of the passive strategy is still something, the 4.1% of the 20D-4 is far less impressive. We could get negative time-weighted returns in the near future.

The 15.7% drawdown is hurting a bit too. It could accrue more if the recent exit happens to be a false positive again.

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Well, by my metrics, we have officially reached larger drawdown territory as the 200D-10% SMA exit trigger has been reached. Since the value of the fund share is displayed with a 1 day delay, Monday will be an up day (given todays gains in the US and CH at the very least), but daily swings don’t matter for this strategy. We’ll get to see different results for all 3 strategies from now on. Good times! :smiley:

No emotions attached for now, but active investing on my taxable portfolio is taking my attention away from the numbers of these accounts, so I’m not really emotionally invested in these drawdowns for now.

Mood: serene.