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Market Lab Report - Human Innovation Always Trumps Fear - 120 Year Chart of the Stock Market

Published : March 20 2017 at 21:38 ET

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It just goes to show that human intelligence, creativity, and innovation has outdone fear in every case so far. That said, while markets have always recovered, it can take years to breakeven if you bought at a peak. This is yet another reason why buy-and-hold is NOT a safe bet nor is dollar cost averaging especially when it comes to multi-year sideways markets.

That said, only if each year was a day in the above chart which spans 120 years, would it be a relatively safe bet to buy-and-hold, dollar cost average, or buy on the dips. From trough-to-peak, a 697-fold gain or 69,600% gain would have been achieved in just 120 days (instead of 120 years).

Speaking of innovation, this is somewhat reminiscent of bitcoin except it took much longer to achieve and still does not come close to the price rise in bitcoin since it was created in 2009.

If you bought a dollar worth of bitcoin in 2009 at an average price of 0.001, it would be worth just over $1 million today. If you bought closer to the lows of 2009, or 0.0001, it would be worth more than $10 million today. There is nothing that even comes close to this price rise over that brief span of time.

Contrast that with VIX Volatility Model (VVM) which, in backtests, has achieved triple digit percentage returns every year since 2009 (VXX began in 2009 which was used in the testing period):

TOTAL 2009-2016 = 14911.7-fold gain, or 1,491,070%. $10,000 becomes $149.1 million (before taxes, no slippage, no commissions). 

As you can see, the power of compounding at even the slower-than-bitcoin rate is quite astounding.

It explains how a select few have taken a small sum, such as $10,000 and run it up into more than a million after taxes over a period of several years. In working with legendary investor William O'Neil for a number of years, it confirmed that there is always method the madness. One colleague at O'Neil's firm, Dan Morris, retired at age 33 after averaging high double digit percentage gains for nearly a decade.

But keep in mind that markets can change in material ways. As one of several significant examples, quantitative easing from 2009 onward rendered obsolete many relied upon indicators.

The key is to remain fluid when it comes to market strategy. So while trading your core strategy or strategies, always be ready to make adjustments if necessary. If I'm making any material adjustment to any of my strategies, I first make sure the adjustment will increase reward while keep risk at similar or lower levels across multiple market cycles. This means your testing period should span many years. Using VVM as one example, I've done continuous backtests since early 2009 as well as spot tests in prior market cycles including 1999-2002 and 2008.

While the Vix Volatlity Model (VVM) is up around +50% in real-time trading as of this writing on 3-21-17, the question is whether the market will continue to behave as it has with respect to volatility. Volatility is a fear gauge so when volatility is low, the market tends to trend, and when volatility spikes, that can be a prelude to a further slide or something more brief. VVM does best when volatility spikes to high levels (indicative of a correcting market) or when it's quiet (indicative of a trending market). Go here for complete results: http://www.virtueofselfishinvesting.com/market-timing-results/dr-k-vix-volatility-model/0 

Unless human nature changes, we should continue to see similar patterns emerge. Of course, to paraphrase what Mark Twain once said, the market never repeats but often rhymes, thus the self-learning aspect of the model will always remain ever vigilant to material changes in the markets. There is no such thing as an easy path when it comes to investing. The key is to stay focused and aware so you remain in sync with changing markets.

This information is provided by MoKa Investors, LLC DBA Virtue of Selfish Investing (VoSI) is issued solely for informational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. Information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of available data. VoSI reports are intended to alert VoSI members to technical developments in certain securities that may or may not be actionable, only, and are not intended as recommendations. Past performance is not a guarantee, nor is it necessarily indicative, of future results. Opinions expressed herein are statements of our judgment as of the publication date and are subject to change without notice. Entities including but not limited to VoSI, its members, officers, directors, employees, customers, agents, and affiliates may have a position, long or short, in the securities referred to herein, and/or other related securities, and may increase or decrease such position or take a contra position. Additional information is available upon written request. This publication is for clients of Virtue of Selfish Investing. Reproduction without written permission is strictly prohibited and will be prosecuted to the full extent of the law. ©2017 MoKa Investors, LLC DBA Virtue of Selfish Investing. All rights reserved.