My trend following strategy and experience

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BlueEars
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Re: My trend following strategy and experience

Post by BlueEars » Tue Jun 18, 2019 5:07 pm

This might be of interest. I notice that volatility could be a problem for trend following techniques. For example, trend following in general worked great in the initial stock market decline of 1929 to 1932. But then the volatility increased tremendously month to month. We have never seen volatility as was seen in the early 1930's in post WW2 markets. It turned out for what I've looked at trend following still beat buy-hold but not as much and with plenty of whipsaws.

With this in mind I took the SP500 data since 1950 and added a "volatility factor". Specifically I added a return in odd months and subtracted a similar return in even months such that the product was the same as with no factor. So perhaps more clearly:
if a = odd month return
and b = even month return
and c = increased volatility
then choose "d" so that (a + c) * (b + d) = a*b

What I find is that for a trend following system somewhat along the lines of this thread (but not exactly the same) that the CAGR goes down somewhat as the volatility factor goes up. For example, the CAGR for years 1950-2019 of one trend following approach I studied was reduced by 0.5% per year with a volatility factor = 1%. For a volatility factor = 5% the CAGR declined by 2.1%. The CAGR still beat buy-hold by 2.0% in the latter case.

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Re: My trend following strategy and experience

Post by Lee_WSP » Tue Jun 18, 2019 5:12 pm

abc132 wrote:
Tue Jun 18, 2019 5:04 pm
Lee_WSP wrote:
Tue Jun 18, 2019 4:51 pm

Again, I reiterate that I personally agree with Mr. Bogle. For 99% of people, trying to be more than average is a loser's game. To get great reward, one must take on a disproportionate amount of risk.
It seems we agree.

Now go read the original post and tell me if this strategy has been sold as taking on additional risk.

It was surely cited that it beat the market.
It's been changed since the OG OP. But I generally agree that the additional risk of the timing signal being wrong is kind of glossed over, but I also wouldn't say OP says it was just as risky as B&H.

To reiterate, I'd just say it wasn't mentioned and leave it at that.

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Re: My trend following strategy and experience

Post by Lee_WSP » Tue Jun 18, 2019 5:15 pm

BlueEars wrote:
Tue Jun 18, 2019 5:07 pm
This might be of interest. I notice that volatility could be a problem for trend following techniques. For example, trend following in general worked great in the initial stock market decline of 1929 to 1932. But then the volatility increased tremendously month to month. We have never seen volatility as was seen in the early 1930's in post WW2 markets. It turned out for what I've looked at trend following still beat buy-hold but not as much and with plenty of whipsaws.

With this in mind I took the SP500 data since 1950 and added a "volatility factor". Specifically I added a return in odd months and subtracted a similar return in even months such that the product was the same as with no factor. So perhaps more clearly:
if a = odd month return
and b = even month return
and c = increased volatility
then choose "d" so that (a + c) * (b + d) = a*b

What I find is that for a trend following system somewhat along the lines of this thread (but not exactly the same) that the CAGR goes down somewhat as the volatility factor goes up. For example, the CAGR for years 1950-2019 of one trend following approach I studied was reduced by 0.5% per year with a volatility factor = 1%. For a volatility factor = 5% the CAGR declined by 2.1%. The CAGR still beat buy-hold by 2.0% in the latter case.
You've put some numbers & mathematical theory behind what I've noticed! This is interesting.

Yes, when there are huge spikes or just spikes that cross that trend threshold, the trend strategy does not work as the increased costs of going in & out negate the benefits.

If I were to follow a trend strategy, it would have to be heavily biased towards B&H and only pull the rip cord when it's pretty darned likely a bear market is happening. However, based on my research, if that bear market is shorter than a year, the buy back in point is always at a higher valuation, which makes B&H equally viable as a strategy and a heck of a lot easier to implement.

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BlueEars
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Re: My trend following strategy and experience

Post by BlueEars » Tue Jun 18, 2019 5:36 pm

Lee_WSP wrote:
Tue Jun 18, 2019 5:15 pm
BlueEars wrote:
Tue Jun 18, 2019 5:07 pm
This might be of interest. I notice that volatility could be a problem for trend following techniques. For example, trend following in general worked great in the initial stock market decline of 1929 to 1932. But then the volatility increased tremendously month to month. We have never seen volatility as was seen in the early 1930's in post WW2 markets. It turned out for what I've looked at trend following still beat buy-hold but not as much and with plenty of whipsaws.

With this in mind I took the SP500 data since 1950 and added a "volatility factor". Specifically I added a return in odd months and subtracted a similar return in even months such that the product was the same as with no factor. So perhaps more clearly:
if a = odd month return
and b = even month return
and c = increased volatility
then choose "d" so that (a + c) * (b + d) = a*b

What I find is that for a trend following system somewhat along the lines of this thread (but not exactly the same) that the CAGR goes down somewhat as the volatility factor goes up. For example, the CAGR for years 1950-2019 of one trend following approach I studied was reduced by 0.5% per year with a volatility factor = 1%. For a volatility factor = 5% the CAGR declined by 2.1%. The CAGR still beat buy-hold by 2.0% in the latter case.
You've put some numbers & mathematical theory behind what I've noticed! This is interesting.

Yes, when there are huge spikes or just spikes that cross that trend threshold, the trend strategy does not work as the increased costs of going in & out negate the benefits.

If I were to follow a trend strategy, it would have to be heavily biased towards B&H and only pull the rip cord when it's pretty darned likely a bear market is happening. However, based on my research, if that bear market is shorter than a year, the buy back in point is always at a higher valuation, which makes B&H equally viable as a strategy and a heck of a lot easier to implement.
I would only use the trend strategy for tax advantaged accounts. The strategy and the periods I studied still point to the trend strategy as very viable. If I can beat a buy-hold strategy by 2% per year on average (the higher injected volatility case above), then that is a decent result for me. I'm quite willing to do the extra work. I think over a period of 10 to 20 years this can work out.

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willthrill81
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Re: My trend following strategy and experience

Post by willthrill81 » Tue Jun 18, 2019 5:38 pm

Lee_WSP wrote:
Tue Jun 18, 2019 4:21 pm
abc132 wrote:
Tue Jun 18, 2019 2:26 pm
Wisdom tells us to learn from the past, and that says the backward trends used forward have a poor history of success, even if it is trivial to find a successful trend from the past.
This is most likely true, however, are there published studies on this? What was the methodology? Was the goal of the funds to beat the S&P 500 or just limit losses?
Actually, there are published academic studies indicating that trend following has been an effective strategy.
In this article, the authors study the performance of trend-following investing across global markets since 1880, extending the existing evidence by more than 100 years using a novel data set. They find that in each decade since 1880, time series momentum has delivered positive average returns with low correlations to traditional asset classes. Further, time-series momentum has performed well in 8 out of 10 of the largest crisis periods over the century, defined as the largest drawdowns for a 60/40 stock/bond portfolio. Lastly, time series momentum has performed well across different macro environments, including recessions and booms, war and peacetime, high- and low-interest rate regimes, and high- and low-inflation periods.
https://papers.ssrn.com/sol3/papers.cfm ... id=2993026
We examine the effectiveness of applying a trend following methodology to global asset allocation between equities, bonds, commodities and real estate. The application of trend following offers a substantial improvement in risk-adjusted performance compared to traditional buy-and-hold portfolios. We also find it to be a superior method of asset allocation than risk parity. We believe the discipline of trend following overcomes many of the behavioural biases investors succumb to, such as regret and herding.
emphasis added
https://papers.ssrn.com/sol3/papers.cfm ... id=2126478
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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willthrill81
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Re: My trend following strategy and experience

Post by willthrill81 » Tue Jun 18, 2019 5:41 pm

Lee_WSP wrote:
Tue Jun 18, 2019 5:12 pm
abc132 wrote:
Tue Jun 18, 2019 5:04 pm
Lee_WSP wrote:
Tue Jun 18, 2019 4:51 pm

Again, I reiterate that I personally agree with Mr. Bogle. For 99% of people, trying to be more than average is a loser's game. To get great reward, one must take on a disproportionate amount of risk.
It seems we agree.

Now go read the original post and tell me if this strategy has been sold as taking on additional risk.

It was surely cited that it beat the market.
It's been changed since the OG OP. But I generally agree that the additional risk of the timing signal being wrong is kind of glossed over, but I also wouldn't say OP says it was just as risky as B&H.

To reiterate, I'd just say it wasn't mentioned and leave it at that.
I've repeatedly said that whipsaws (i.e. timing signal(s) being wrong) will occur; it's an inevitability of any trend following system over the long-term, just as deep drawdowns are an inevitability of buy-and-hold.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Lee_WSP
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Re: My trend following strategy and experience

Post by Lee_WSP » Tue Jun 18, 2019 5:48 pm

BlueEars wrote:
Tue Jun 18, 2019 5:36 pm
Lee_WSP wrote:
Tue Jun 18, 2019 5:15 pm
BlueEars wrote:
Tue Jun 18, 2019 5:07 pm
This might be of interest. I notice that volatility could be a problem for trend following techniques. For example, trend following in general worked great in the initial stock market decline of 1929 to 1932. But then the volatility increased tremendously month to month. We have never seen volatility as was seen in the early 1930's in post WW2 markets. It turned out for what I've looked at trend following still beat buy-hold but not as much and with plenty of whipsaws.

With this in mind I took the SP500 data since 1950 and added a "volatility factor". Specifically I added a return in odd months and subtracted a similar return in even months such that the product was the same as with no factor. So perhaps more clearly:
if a = odd month return
and b = even month return
and c = increased volatility
then choose "d" so that (a + c) * (b + d) = a*b

What I find is that for a trend following system somewhat along the lines of this thread (but not exactly the same) that the CAGR goes down somewhat as the volatility factor goes up. For example, the CAGR for years 1950-2019 of one trend following approach I studied was reduced by 0.5% per year with a volatility factor = 1%. For a volatility factor = 5% the CAGR declined by 2.1%. The CAGR still beat buy-hold by 2.0% in the latter case.
You've put some numbers & mathematical theory behind what I've noticed! This is interesting.

Yes, when there are huge spikes or just spikes that cross that trend threshold, the trend strategy does not work as the increased costs of going in & out negate the benefits.

If I were to follow a trend strategy, it would have to be heavily biased towards B&H and only pull the rip cord when it's pretty darned likely a bear market is happening. However, based on my research, if that bear market is shorter than a year, the buy back in point is always at a higher valuation, which makes B&H equally viable as a strategy and a heck of a lot easier to implement.
I would only use the trend strategy for tax advantaged accounts. The strategy and the periods I studied still point to the trend strategy as very viable. If I can beat a buy-hold strategy by 2% per year on average (the higher injected volatility case above), then that is a decent result for me. I'm quite willing to do the extra work. I think over a period of 10 to 20 years this can work out.
I've got a trend strategy all worked out, but have yet to pull the trigger. Not sure if I ultimately will, but so far the criteria hasn't been triggered either way.

The idea of a leveraged 60/40 portfolio also has some appeal to risk one year's worth of SIMPLE/SEP IRA contributions. Could also be combined with a trend strategy to reduce the bear market risk.

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Re: My trend following strategy and experience

Post by willthrill81 » Tue Jun 18, 2019 5:51 pm

Lee_WSP wrote:
Tue Jun 18, 2019 5:48 pm
BlueEars wrote:
Tue Jun 18, 2019 5:36 pm
Lee_WSP wrote:
Tue Jun 18, 2019 5:15 pm
BlueEars wrote:
Tue Jun 18, 2019 5:07 pm
This might be of interest. I notice that volatility could be a problem for trend following techniques. For example, trend following in general worked great in the initial stock market decline of 1929 to 1932. But then the volatility increased tremendously month to month. We have never seen volatility as was seen in the early 1930's in post WW2 markets. It turned out for what I've looked at trend following still beat buy-hold but not as much and with plenty of whipsaws.

With this in mind I took the SP500 data since 1950 and added a "volatility factor". Specifically I added a return in odd months and subtracted a similar return in even months such that the product was the same as with no factor. So perhaps more clearly:
if a = odd month return
and b = even month return
and c = increased volatility
then choose "d" so that (a + c) * (b + d) = a*b

What I find is that for a trend following system somewhat along the lines of this thread (but not exactly the same) that the CAGR goes down somewhat as the volatility factor goes up. For example, the CAGR for years 1950-2019 of one trend following approach I studied was reduced by 0.5% per year with a volatility factor = 1%. For a volatility factor = 5% the CAGR declined by 2.1%. The CAGR still beat buy-hold by 2.0% in the latter case.
You've put some numbers & mathematical theory behind what I've noticed! This is interesting.

Yes, when there are huge spikes or just spikes that cross that trend threshold, the trend strategy does not work as the increased costs of going in & out negate the benefits.

If I were to follow a trend strategy, it would have to be heavily biased towards B&H and only pull the rip cord when it's pretty darned likely a bear market is happening. However, based on my research, if that bear market is shorter than a year, the buy back in point is always at a higher valuation, which makes B&H equally viable as a strategy and a heck of a lot easier to implement.
I would only use the trend strategy for tax advantaged accounts. The strategy and the periods I studied still point to the trend strategy as very viable. If I can beat a buy-hold strategy by 2% per year on average (the higher injected volatility case above), then that is a decent result for me. I'm quite willing to do the extra work. I think over a period of 10 to 20 years this can work out.
I've got a trend strategy all worked out, but have yet to pull the trigger. Not sure if I ultimately will, but so far the criteria hasn't been triggered either way.

The idea of a leveraged 60/40 portfolio also has some appeal to risk one year's worth of SIMPLE/SEP IRA contributions. Could also be combined with a trend strategy to reduce the bear market risk.
Have you considered doing a split, such as 50% BAH and 50% TF?
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Lee_WSP
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Re: My trend following strategy and experience

Post by Lee_WSP » Tue Jun 18, 2019 6:27 pm

willthrill81 wrote:
Tue Jun 18, 2019 5:51 pm

Have you considered doing a split, such as 50% BAH and 50% TF?
Depending on what triggers the TF strategy, yes. Since taxable would incur taxes, it doesn't behoove me to do frequent trades. At the same time, I'd also like to keep a toe in the water so to speak. So if I were to execute the strategy, I think I'd do 80/20 trend/stay the course. With a very strong bias to get back in at 40/60 if it looked like the trend was bucking.

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Re: My trend following strategy and experience

Post by Forester » Wed Jun 19, 2019 1:28 am

Lee_WSP wrote:
Tue Jun 18, 2019 5:15 pm
BlueEars wrote:
Tue Jun 18, 2019 5:07 pm
This might be of interest. I notice that volatility could be a problem for trend following techniques. For example, trend following in general worked great in the initial stock market decline of 1929 to 1932. But then the volatility increased tremendously month to month. We have never seen volatility as was seen in the early 1930's in post WW2 markets. It turned out for what I've looked at trend following still beat buy-hold but not as much and with plenty of whipsaws.

With this in mind I took the SP500 data since 1950 and added a "volatility factor". Specifically I added a return in odd months and subtracted a similar return in even months such that the product was the same as with no factor. So perhaps more clearly:
if a = odd month return
and b = even month return
and c = increased volatility
then choose "d" so that (a + c) * (b + d) = a*b

What I find is that for a trend following system somewhat along the lines of this thread (but not exactly the same) that the CAGR goes down somewhat as the volatility factor goes up. For example, the CAGR for years 1950-2019 of one trend following approach I studied was reduced by 0.5% per year with a volatility factor = 1%. For a volatility factor = 5% the CAGR declined by 2.1%. The CAGR still beat buy-hold by 2.0% in the latter case.
You've put some numbers & mathematical theory behind what I've noticed! This is interesting.

Yes, when there are huge spikes or just spikes that cross that trend threshold, the trend strategy does not work as the increased costs of going in & out negate the benefits.

If I were to follow a trend strategy, it would have to be heavily biased towards B&H and only pull the rip cord when it's pretty darned likely a bear market is happening. However, based on my research, if that bear market is shorter than a year, the buy back in point is always at a higher valuation, which makes B&H equally viable as a strategy and a heck of a lot easier to implement.
One way to reduce trading would be to wait for a double confirmation. Both 12mo moving average & 12mo time series momentum need to be negative.

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BlueEars
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Re: My trend following strategy and experience

Post by BlueEars » Wed Jun 19, 2019 1:53 am

Are you saying wait for the price to be below the 12 month moving average and for the 12 month return to be below maybe the 3 month tbill return?

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Re: My trend following strategy and experience

Post by abc132 » Wed Jun 19, 2019 1:54 am

Lee_WSP wrote:
Tue Jun 18, 2019 5:12 pm
To reiterate, I'd just say it wasn't mentioned and leave it at that.
I think you can read through the thread and conclude the risk is viewed (inappropriately) as far less than buy and hold, despite the timing risk, lack of diversification risk, and implementation risk.

I wouldn't mind someone wanting to chase performance for potentially better/worse returns, but I can't say this is necessary for anyone with a good savings rate.

I hope nobody that is risk averse takes up this strategy as implemented, as it was sold as something far different than it really is. Being 15% below the market several months after sharing the method is pretty good evidence that this is not a good idea for the risk averse.

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Re: My trend following strategy and experience

Post by Forester » Wed Jun 19, 2019 5:23 am

abc132 wrote:
Wed Jun 19, 2019 1:54 am
Lee_WSP wrote:
Tue Jun 18, 2019 5:12 pm
To reiterate, I'd just say it wasn't mentioned and leave it at that.
I think you can read through the thread and conclude the risk is viewed (inappropriately) as far less than buy and hold, despite the timing risk, lack of diversification risk, and implementation risk.

I wouldn't mind someone wanting to chase performance for potentially better/worse returns, but I can't say this is necessary for anyone with a good savings rate.

I hope nobody that is risk averse takes up this strategy as implemented, as it was sold as something far different than it really is. Being 15% below the market several months after sharing the method is pretty good evidence that this is not a good idea for the risk averse.
No question it was a rough period - but is 100% US stocks the correct benchmark? Most people are switching between US, non-US & bonds. The 2010s have been poor to mediocre for equity index trend following, yet the models have kept up with the 3 fund portfolio.

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Re: My trend following strategy and experience

Post by abc132 » Wed Jun 19, 2019 10:32 am

Forester wrote:
Wed Jun 19, 2019 5:23 am
No question it was a rough period - but is 100% US stocks the correct benchmark? Most people are switching between US, non-US & bonds. The 2010s have been poor to mediocre for equity index trend following, yet the models have kept up with the 3 fund portfolio.
A portfolio that is 100% stocks and non diversified is more risky than a 100% stock portfolio.

One that includes market timing is more risky (not less risky) than one that does not introduce market timing.

A diversified portfolio of stocks and bonds is guaranteed to drop less than a 100% stock portfolio. It's hard to argue rationally that you are taking on less risk by time dividing the market, as we can easily say that you can not make this same guarantee.

Given the additional diversification and timing risks, the most appropriate benchmark would be something a little bit riskier than a 100% stock portfolio, unless one has some sort of permanent portfolio separate from their timing portfolio.

Leveraging a diversified portfolio of stocks would be similar risk/reward to using non diversification in hopes of better performance.
Last edited by abc132 on Wed Jun 19, 2019 10:37 am, edited 1 time in total.

Barsoom
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Re: My trend following strategy and experience

Post by Barsoom » Wed Jun 19, 2019 10:36 am

willthrill81 wrote:
Thu Jan 17, 2019 7:16 pm
I use a nearly identical version of that advocated by the Philosophical Economist and detailed here. (He also provides an excellent overview to why trend following works here.)
When I first came across these articles about six months ago, I was interested because I was going to retire later this year and was concerned about retiring into a down market. I wasn't so much interested in timing the market per se, as I was about getting into the market in the first place with a significant lump sum pension distribution. Secondarily, I had a large position in Megacorp stock that has served me well but would need to be diversified as well. So, for me it was about holding onto my cash, and timing when to first enter the market if storms were signaling on the horizon. Go now or wait.

To that end, I began tracking the trigger metrics listed in the linked articles, as well as a few more that I came across from other publications. For reference and discussion purposes, I thought I'd share the current values of these triggers. Most metrics are sourced from FRED.

S&P 500
I am using a 9-month moving average as a proxy for a 200 day moving average. The trigger is when the S&P 500 moves below the 9MMA AND other triggers fire. In May, the S&P 500 was approximately 5.65% above the 9MMA.

Unemployment
According to the articles, the unemployment signal contributed 1.4% return over the B&H strategy. The trigger is when the unemployment rate moves above its trailing twelve month average. In May, the unemployment rate was 5.68% below the TTM average. This trigger fired in January 2019.

YoY Job Growth
This trigger contributed 1.2% return over B&H. It fires when the YoY Job Growth % is negative. In May, YoY job growth was 0.97%.

YoY Industrial Production Growth
This trigger contributed 1.1% return over B&H. It fires when YoY Industrial Production Growth is negative. In May, YoY Industrial Production Growth was 2.05%.

YoY Retail Sales Growth
This trigger contributed 0.9% return over B&H. It fires when YoY Retail Sales Growth is negative. In May, YoY Retail Sales Growth 1.33%. This trigger fired in December 2018.

YoY Personal Income Growth
This trigger contributed 0.9% return over B&H. It fires when YoY Personal Income Growth is less than 3%. In April, YoY Personal Income Growth was 2.38%. This trigger has been firing every month since 2016, and I am treating it as noise.

YoY New Housing Starts
This trigger contributed 0.8% return over B&H. It fires when YoY New Housing Starts is below -10%. In May, YoY New Housing Starts was -5.3%. This trigger fired in February and March 2019.

In no intentional order, below are the additional interesting "early warning signs" I began tracking after reading other articles on recession leading indicators. These were not correlated to B&H strategy returns.

YoY Small Business Hiring Sentiment
This metric supposedly leads unemployment by about four months. It is a survey index measure, so YoY percent change is used, suggesting that a negative result indicates an upcoming hiring downturn. In May, the result was 16.7%. It was negative in January, February, and March 2019 due to stronger sentiment over the same months in 2018.

New Jobless Claims and Growth from Lowest Point
This is a 4WMA of weekly new jobless claims. This is supposedly a leading indicator of unemployment when it is above 300K. In June, it was 215,000 and holding fairly steady.

Growth in New Jobless Claims is a supposed leading indicator of unemployment when it reaches 69K over its lowest point. The lowest claims in the past two years was 212,500, which occurred in September 2018 and again in April 2019. It is currently 2,500 above the two-year low point.

"Temp" Workers Employment
This tracks the YoY change in employment of workers in temporary job positions. The idea is that temporary workers are the first to be laid off in a downturn, sort of the proverbial canary in the coal mine. In May, this metric was 1.48% and trending down.

"Breadwinner" Employment
This is a YoY change in employment for people between 25-54 years old. In May, this metric was 0.54% and trending down.

Industrial Capacity Utilization
Along with Industrial Production, this metric indicates how full the industrial pipeline is. It is a supposedly leading indicator of recession when it is above 80%, suggesting an overheating economy. In May, Industrial Capacity Utilization was 78.07% and holding fairly steady. In the past two years, it peaked at 79.57% in November 2018.

PMI
This is a survey of manufacturing Purchasing Managers sentiment, based on expectations of new purchase orders for manufacturing supplies, raw materials, etc. Scores above 50 indicate optimism, below 50 indicates pessimism in future ordering.

In essence, this is a leading indicator of the manufacturing supply chain. Supposedly, Taiwan PMI is a six-month leading indicator of USA PMI, and Singapore PMI is a four-month leading indicator as these countries are at the front-end of the global supply chain. When these countries turn pessimistic, it suggests that USA manufacturing will show a downturn in four to six months, with Europe somewhere in between.

Here are the June PMI results for key indicator countries:
  • China (#2 economy) - 50.2 (50.2 six months ago)
    Japan (#3 economy) - 49.8 (52.2 six months ago)
    Taiwan - 48.4 (48.4 six months ago)
    South Korea - 48.4 (48.6 six months ago)
    Singapore - 49.9 (51.5 six months ago)
    Germany (#4 economy) - 44.3 (51.8 six months ago)
    France - 50.6 (50.8 six months ago)
    Italy - 49.7 (48.6 six months ago)
    Eurozone (#2 economy) - 47.7 (51.8 six months ago)
    USA (#1 economy) - 50.5 (58.8 six months ago)
Inflation
Inflation has been fairly steady. YoY CPI in May was 1.8%, down from a high of 2.95% in July 2018. Core Inflation (ex food and energy) is 1.99%, down from 2.35% last July.

Yield Curve
An inverted yield curve sustained for three months supposedly leads a recession by 9-18 months. The 1-month and 3-month yield curves have been inverted for May and June.

Bottom Line
Take this FWIW...

The linked articles' leading indicators are currently NOT signaling a retreat. Jobless claims are low, but temps and breadwinners are close to contracting. Manufacturing is starting to slow down but is still close to peak capacity. Asia-Pac manufacturing sentiment is pessimistic and Europe is already in decline. This hasn't reached the United States yet, but USA PMI is borderline.

-B

abc132
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Re: My trend following strategy and experience

Post by abc132 » Wed Jun 19, 2019 10:47 am

Barsoom wrote:
Wed Jun 19, 2019 10:36 am
willthrill81 wrote:
Thu Jan 17, 2019 7:16 pm
I use a nearly identical version of that advocated by the Philosophical Economist and detailed here. (He also provides an excellent overview to why trend following works here.)
When I first came across these articles about six months ago, I was interested because I was going to retire later this year and was concerned about retiring into a down market. I wasn't so much interested in timing the market per se, as I was about getting into the market in the first place with a significant lump sum pension distribution. Secondarily, I had a large position in Megacorp stock that has served me well but would need to be diversified as well. So, for me it was about holding onto my cash, and timing when to first enter the market if storms were signaling on the horizon. Go now or wait.
I get that feeling that this thread is going to be very harmful for those that think timing the market is a good idea.

Barsoom - you have no idea where the market is headed, and all those indicators won't accurately tell you when to jump into or out of the market.

There are some strategies that don't involve timing indicators, such as using several years of cash and investing those if a downturn happens during your prime sequence of returns risk.

Please find a strategy that doesn't depend on market timing. Your will fool yourself into taking inappropriate actions when you believe your ability to time the market is far better than it actually is.

Let's say you get the first signal right. Do you really believe your confidence in your ability to time the market would not go up, even though your ability to time the market would be unchanged? Market timers generally misprice their ability to time the market, and this is dangerous to good decision making.

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Re: My trend following strategy and experience

Post by Barsoom » Wed Jun 19, 2019 11:26 am

Do you get the feeling that you're pissing into the wind?

You know the OP posted this as an experiment with recorded observations right? Why don't you let him have his thread?

If you feel so strongly about this, then start your own thread on the harm of following non-Bogle strategies and concentrate your efforts there. The readers if this thread know exactly what it is, and casual readers will get the point before recklessly putting their own portfolios at risk (if the easily susceptible find it at all).

Let this be a research thread, with experiment, observation, and conclusions, as Will intended it to be.

-B

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Re: My trend following strategy and experience

Post by BlueEars » Wed Jun 19, 2019 11:41 am

I agree with Barsoom. In many posts here you have made your point abc132. Anyone reading this thread is now fully and abundantly aware of your concerns and contrary views. We are all adults here and capable of making up our own minds.

Yes, let's stick to the thread title "My trend following strategy and experience".

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Re: My trend following strategy and experience

Post by abc132 » Wed Jun 19, 2019 11:45 am

Barsoom wrote:
Wed Jun 19, 2019 11:26 am
Do you get the feeling that you're pissing into the wind?

You know the OP posted this as an experiment with recorded observations right? Why don't you let him have his thread?

If you feel so strongly about this, then start your own thread on the harm of following non-Bogle strategies and concentrate your efforts there. The readers if this thread know exactly what it is, and casual readers will get the point before recklessly putting their own portfolios at risk (if the easily susceptible find it at all).

Let this be a research thread, with experiment, observation, and conclusions, as Will intended it to be.

-B

This thread is the appropriate place to discuss the risk of THIS non boglehead strategy, even if it is not appreciated.

We've had a number of risk averse people stopping in and thinking this was a good idea, and not everybody reads all 15 pages of a thread. They actually believe they can get better returns with less risk, because that's what Will implied. This method should be held accountable to criticism.

This thread is far more valuable for the psychological errors as stated by peoples comments.

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Re: My trend following strategy and experience

Post by Barsoom » Wed Jun 19, 2019 12:07 pm

Regarding value, the OP linked to a series of articles that contained analysis of half a dozen indicators.

In my post, I simply showed the current values of this these indicators to give a reference to everyone's personal perceptions of the likelihood of a recession occurring. That's what the psychological discussion is, right, the perceived correctness of these metrics as leading indicators of a perceived upcoming recession, and context to hedge against rash actions?

Furthermore, I included additional leading indicators of the leading indicators included in the articles. If the question is about how accurate these indicators are at forecasting an impending recession, as well as providing additional clues to whether observations are whipsaws or the beginnings of true trend changes, then it's useful to review the values themselves and not just the theory of the indicators as esoteric concepts.

-B

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Re: My trend following strategy and experience

Post by sergeant » Wed Jun 19, 2019 12:13 pm

OP has made it clear that he recommends that no one else try his trend following strategy. Also, I thought we established the benchmark as 85/15 to compare his system. I remember he said he was going to list his returns in the original post. I don't see it there but my estimate is he his down about 15% from his 85/15 benchmark. Not a whole lot of naïve newbies are going to be jumping on a scheme that has below market returns.
Lincoln 3 EOW! AA 40/60.

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Re: My trend following strategy and experience

Post by Barsoom » Wed Jun 19, 2019 12:13 pm

abc132 wrote:
Wed Jun 19, 2019 11:45 am
This thread is the appropriate place to discuss the risk of THIS non boglehead strategy, even if it is not appreciated.
Yes, if the risks you are discussing are the risks of the strategy misidentifying a recession, or the risk of too many whipsaws canceling the gains if the Big One comes, or the risk of transaction costs and taxes eating up the gains, or the risks of missing the peak or missing the bottom, etc.

But you're focusing on the "risk" of someone doing this at all because they don't understand it. You could have that discussion on ANY thread regardless of the subject matter. That's not a risk of the strategy, that's a risk of a novice getting in above their heads on something they haven't fully researched.

In my opinion, that's not germane to the discussion.

-B

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Re: My trend following strategy and experience

Post by Barsoom » Wed Jun 19, 2019 12:26 pm

sergeant wrote:
Wed Jun 19, 2019 12:13 pm
I thought we established the benchmark as 85/15 to compare his system.
I don't know if this was directed at my post regarding the trigger metrics, but let me include this information about how the original articles compared the strategy yields from specific metrics to B&H (for those who didn't read that far).

Each trigger metric was modeled by itself. Based on historic data, the author determined what percent of the time the signal indicated staying in the market versus getting out of the market. If, for example, the strategy stayed in the market 75% of the time and was out 25% of the time, the author tested a B&H portfolio made up of 75% stock and 25% bonds, assuming that this was the equivalent of being in equities 75% of the time. The 30 year annualized returns from the timing strategy is compared to the 30 year annualized returns from the constructed B&H strategy, and the excess is attributed to the value of the signal metric.

-B

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Re: My trend following strategy and experience

Post by tadamsmar » Wed Jun 19, 2019 12:28 pm

Barsoom wrote:
Wed Jun 19, 2019 11:26 am
Do you get the feeling that you're pissing into the wind?

You know the OP posted this as an experiment with recorded observations right? Why don't you let him have his thread?

If you feel so strongly about this, then start your own thread on the harm of following non-Bogle strategies and concentrate your efforts there. The readers if this thread know exactly what it is, and casual readers will get the point before recklessly putting their own portfolios at risk (if the easily susceptible find it at all).

Let this be a research thread, with experiment, observation, and conclusions, as Will intended it to be.

-B
Do you mean that no one but the OP should post to this thread?

You don’t need to risk your own money to run an experiment.

Backtesting constitutes an actual experiment.

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Re: My trend following strategy and experience

Post by Barsoom » Wed Jun 19, 2019 12:33 pm

tadamsmar wrote:
Wed Jun 19, 2019 12:28 pm
Barsoom wrote:
Wed Jun 19, 2019 11:26 am
Do you get the feeling that you're pissing into the wind?

You know the OP posted this as an experiment with recorded observations right? Why don't you let him have his thread?

If you feel so strongly about this, then start your own thread on the harm of following non-Bogle strategies and concentrate your efforts there. The readers if this thread know exactly what it is, and casual readers will get the point before recklessly putting their own portfolios at risk (if the easily susceptible find it at all).

Let this be a research thread, with experiment, observation, and conclusions, as Will intended it to be.

-B
Do you mean that no one but the OP should post to this thread?
No, I meant that the person I responded to posted a directed comment to me imploring me to do something else, implying that I shouldn't be posting to this thread. That was out of line.

-B

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Re: My trend following strategy and experience

Post by tadamsmar » Wed Jun 19, 2019 12:59 pm

This is no more an experiment than is anyone else’s investing.

This is not an experiment, call it what it is, the OP is investing.

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Re: My trend following strategy and experience

Post by Barsoom » Wed Jun 19, 2019 1:17 pm

Call it investing, but it is investing following the strategy laid out in the links provided in the first post. Those links are to a series of articles with lots of backtesting analysis of the concepts.

At least as far as my postings go, I've been elaborating of the findings of the linked articles, not the OP's personal investing.

-B

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Re: My trend following strategy and experience

Post by willthrill81 » Wed Jun 19, 2019 2:47 pm

sergeant wrote:
Wed Jun 19, 2019 12:13 pm
OP has made it clear that he recommends that no one else try his trend following strategy. Also, I thought we established the benchmark as 85/15 to compare his system. I remember he said he was going to list his returns in the original post. I don't see it there but my estimate is he his down about 15% from his 85/15 benchmark. Not a whole lot of naïve newbies are going to be jumping on a scheme that has below market returns.
Yes, several of us did determine fairly early on that 85/15 would likely be an appropriate AA to compare my strategy to. Upon further reflection, the equities should probably be split between U.S. and international since my strategy is not limited only to the U.S. I've actually spent a significant portion of the year in EM in my single biggest account.

My returns through the end of May were about 5%, compared to 8.3% for a U.S./international portfolio or 10% for U.S. only, so I've definitely made up some of the lost ground from the whipsaw earlier this year. But yes, any novice reading through this thread would see that my warning in the OP of whipsaws was not for nothing.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: My trend following strategy and experience

Post by willthrill81 » Wed Jun 19, 2019 2:49 pm

Barsoom wrote:
Wed Jun 19, 2019 10:36 am
willthrill81 wrote:
Thu Jan 17, 2019 7:16 pm
I use a nearly identical version of that advocated by the Philosophical Economist and detailed here. (He also provides an excellent overview to why trend following works here.)
When I first came across these articles about six months ago, I was interested because I was going to retire later this year and was concerned about retiring into a down market. I wasn't so much interested in timing the market per se, as I was about getting into the market in the first place with a significant lump sum pension distribution. Secondarily, I had a large position in Megacorp stock that has served me well but would need to be diversified as well. So, for me it was about holding onto my cash, and timing when to first enter the market if storms were signaling on the horizon. Go now or wait.

To that end, I began tracking the trigger metrics listed in the linked articles, as well as a few more that I came across from other publications. For reference and discussion purposes, I thought I'd share the current values of these triggers. Most metrics are sourced from FRED.
Have you formed a system for taking all of this information into account, or are you attempting to subjectively incorporate all of it?

Between the PMI data and the inverted yield curve, I'd subjectively say that a U.S. recession is likely to occur within the next 18 months or so, but I'm sticking with my strategy and not acting on my prediction.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: My trend following strategy and experience

Post by Barsoom » Wed Jun 19, 2019 3:22 pm

willthrill81 wrote:
Wed Jun 19, 2019 2:49 pm
Barsoom wrote:
Wed Jun 19, 2019 10:36 am
willthrill81 wrote:
Thu Jan 17, 2019 7:16 pm
I use a nearly identical version of that advocated by the Philosophical Economist and detailed here. (He also provides an excellent overview to why trend following works here.)
When I first came across these articles about six months ago, I was interested because I was going to retire later this year and was concerned about retiring into a down market. I wasn't so much interested in timing the market per se, as I was about getting into the market in the first place with a significant lump sum pension distribution. Secondarily, I had a large position in Megacorp stock that has served me well but would need to be diversified as well. So, for me it was about holding onto my cash, and timing when to first enter the market if storms were signaling on the horizon. Go now or wait.

To that end, I began tracking the trigger metrics listed in the linked articles, as well as a few more that I came across from other publications. For reference and discussion purposes, I thought I'd share the current values of these triggers. Most metrics are sourced from FRED.
Have you formed a system for taking all of this information into account, or are you attempting to subjectively incorporate all of it?

Between the PMI data and the inverted yield curve, I'd subjectively say that a U.S. recession is likely to occur within the next 18 months or so, but I'm sticking with my strategy and not acting on my prediction.
Not formally, as I'm just observing at this point.

I built a tracking spreadsheet that I update each month, and color-code the cells using conditional formatting to show the emerging trends (redder when the metric is close to triggering, greener when the metric is receding).

I started out by sequencing the triggers by contribution to yield, and decided to ignore the personal income growth as a signal since it was the lowest add and always fired.

As you pointed out, yield curve and PMI indicate that a recession is looming but not imminent. That's what I attempted to see with my spreadsheet with the indicator of indicators. If long-term indicators move to the red, then I would expect to see the short-term indicators from the linked articles to fire at some time in the future. I see this as a way of subjectively filtering out whipsaws that aren't predicated on longer leading indicators (such as the December 2018 whipsaw).

Following the PMI and long-term lending rate decreases, I'd expect to see a slowdown in YoY Industrial Manufacturing (an original trigger), followed by a reduction in capacity utilization. I wouldn't necessarily believe the manufacturing trigger if capacity wasn't also going down and PMI was down.

Concurrent with this, if I were to believe the unemployment vs TTM average, I'd want to see a related increase in claims, a decrease in temp hires, and a decrease in 18-54 hires. In fact, I'd want to see these first and then see the unemployment cross the average. The claims growth from low is a measure of the speed of change of the employment measures, as this is actually a weekly metric averaged over four weeks.

I guess the bottom line for me is to not programmatically act on the initial triggers, but to validate them against the longer-term indicators first to ensure that they're all aligned. That way, the trigger is not unexpected. I wouldn't necessarily act on just one trigger, either. I'd want to see a few related triggers move directionally. Balance this with time such that it doesn't become avoidance to act.

For the reverse at the bottom, I'd probably get back in when the immediate triggers clear and not wait for the longer term indicators, since those are intended for knowing when coming off the peaks. Instead, those should confirm once bought back in that the recession is over and the market is set to grow again. Worst case at this point is that the market tests a new low, but I avoided most of the fall from the peak.

As to my specific situation, I'm only in the market as far as my 401(k) holds MegaCorp stock. When I retire in a few months, I will get a sizable pension lump-sum to invest. At that point, my question is whether to invest the lump sum cash in equities or hold them in bonds for the interim if I see a recession looming. That's my market timing - timing initial entry. My MegaCorp stock will ride out the initial entry, as I intend to use a phased sell strategy to move portions of it into the diversified portfolio at high selling points until it's all diversified. Any amount that I hold in the interim will still pay me about 4% in dividends even if its price fluctuates.

-B

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Re: My trend following strategy and experience

Post by willthrill81 » Wed Jun 19, 2019 3:31 pm

Barsoom wrote:
Wed Jun 19, 2019 3:22 pm
willthrill81 wrote:
Wed Jun 19, 2019 2:49 pm
Barsoom wrote:
Wed Jun 19, 2019 10:36 am
willthrill81 wrote:
Thu Jan 17, 2019 7:16 pm
I use a nearly identical version of that advocated by the Philosophical Economist and detailed here. (He also provides an excellent overview to why trend following works here.)
When I first came across these articles about six months ago, I was interested because I was going to retire later this year and was concerned about retiring into a down market. I wasn't so much interested in timing the market per se, as I was about getting into the market in the first place with a significant lump sum pension distribution. Secondarily, I had a large position in Megacorp stock that has served me well but would need to be diversified as well. So, for me it was about holding onto my cash, and timing when to first enter the market if storms were signaling on the horizon. Go now or wait.

To that end, I began tracking the trigger metrics listed in the linked articles, as well as a few more that I came across from other publications. For reference and discussion purposes, I thought I'd share the current values of these triggers. Most metrics are sourced from FRED.
Have you formed a system for taking all of this information into account, or are you attempting to subjectively incorporate all of it?

Between the PMI data and the inverted yield curve, I'd subjectively say that a U.S. recession is likely to occur within the next 18 months or so, but I'm sticking with my strategy and not acting on my prediction.
Not formally, as I'm just observing at this point.

I built a tracking spreadsheet that I update each month, and color-code the cells using conditional formatting to show the emerging trends (redder when the metric is close to triggering, greener when the metric is receding).

I started out by sequencing the triggers by contribution to yield, and decided to ignore the personal income growth as a signal since it was the lowest add and always fired.

As you pointed out, yield curve and PMI indicate that a recession is looming but not imminent. That's what I attempted to see with my spreadsheet with the indicator of indicators. If long-term indicators move to the red, then I would expect to see the short-term indicators from the linked articles to fire at some time in the future. I see this as a way of subjectively filtering out whipsaws that aren't predicated on longer leading indicators (such as the December 2018 whipsaw).

Following the PMI and long-term lending rate decreases, I'd expect to see a slowdown in YoY Industrial Manufacturing (an original trigger), followed by a reduction in capacity utilization. I wouldn't necessarily believe the manufacturing trigger if capacity wasn't also going down and PMI was down.

Concurrent with this, if I were to believe the unemployment vs TTM average, I'd want to see a related increase in claims, a decrease in temp hires, and a decrease in 18-54 hires. In fact, I'd want to see these first and then see the unemployment cross the average. The claims growth from low is a measure of the speed of change of the employment measures, as this is actually a weekly metric averaged over four weeks.

I guess the bottom line for me is to not programmatically act on the initial triggers, but to validate them against the longer-term indicators first to ensure that they're all aligned. That way, the trigger is not unexpected. I wouldn't necessarily act on just one trigger, either. I'd want to see a few related triggers move directionally. Balance this with time such that it doesn't become avoidance to act.

For the reverse at the bottom, I'd probably get back in when the immediate triggers clear and not wait for the longer term indicators, since those are intended for knowing when coming off the peaks. Instead, those should confirm once bought back in that the recession is over and the market is set to grow again. Worst case at this point is that the market tests a new low, but I avoided most of the fall from the peak.

As to my specific situation, I'm only in the market as far as my 401(k) holds MegaCorp stock. When I retire in a few months, I will get a sizable pension lump-sum to invest. At that point, my question is whether to invest the lump sum cash in equities or hold them in bonds for the interim if I see a recession looming. That's my market timing - timing initial entry. My MegaCorp stock will ride out the initial entry, as I intend to use a phased sell strategy to move portions of it into the diversified portfolio at high selling points until it's all diversified. Any amount that I hold in the interim will still pay me about 4% in dividends even if its price fluctuates.

-B
Given your apparent knowledge about all of this, let me just add one thing: it's much more difficult, emotionally and cognitively, for most investors to move back into stocks than it is to move out of stocks. This has been a noted problem among many of the most vocal proponents of market timing. YMMV. Good luck!
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: My trend following strategy and experience

Post by Barsoom » Wed Jun 19, 2019 3:51 pm

willthrill81 wrote:
Wed Jun 19, 2019 3:31 pm
Given your apparent knowledge about all of this, let me just add one thing: it's much more difficult, emotionally and cognitively, for most investors to move back into stocks than it is to move out of stocks. This has been a noted problem among many of the most vocal proponents of market timing. YMMV. Good luck!
Here's the thing...

I'm talking about a $4M portfolio, probably 65/35 for now. That's a lot of trading to do ($2.6M of equities) to get out and in, if I were to do it.

My fear was retiring into a down market. I would either wait for it to bottom before getting in, or get in if I thought the recession were still far, far out and act later.

The article talks about strategies for getting out other than selling, such as futures or shorts that avoid the taxes that come with sells. I don't know... that's above my pay grade.

For me, I don't think I'd want to absorb all the deferred taxes that would come with selling all of it from my rollover IRA. So, it's all academic for me right now, except to see if a recession is closer than others might think, in which case I might hold onto the cash in short-term securities before fully investing when a recession bottoms out.

-B

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Re: My trend following strategy and experience

Post by abc132 » Wed Jun 19, 2019 3:52 pm

Barsoom wrote:
Wed Jun 19, 2019 12:13 pm
abc132 wrote:
Wed Jun 19, 2019 11:45 am
This thread is the appropriate place to discuss the risk of THIS non boglehead strategy, even if it is not appreciated.
Yes, if the risks you are discussing are the risks of the strategy misidentifying a recession, or the risk of too many whipsaws canceling the gains if the Big One comes, or the risk of transaction costs and taxes eating up the gains, or the risks of missing the peak or missing the bottom, etc.

But you're focusing on the "risk" of someone doing this at all because they don't understand it. You could have that discussion on ANY thread regardless of the subject matter. That's not a risk of the strategy, that's a risk of a novice getting in above their heads on something they haven't fully researched.

In my opinion, that's not germane to the discussion.

-B
I offered an alternative to market timing if you are worried about adding money.

You could go research it if you were to take the post as intended - and it would probably be beneficial to you.

I did say your ability to predict the future is limited, which has been proven in general for investing. This is true for all of us and a general statement rather than a personal slight - it does include you, however.

You posted here seeking help or guidance, and it will be up to you if you take it.

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Re: My trend following strategy and experience

Post by abc132 » Wed Jun 19, 2019 4:00 pm

tadamsmar wrote:
Wed Jun 19, 2019 12:28 pm
Barsoom wrote:
Wed Jun 19, 2019 11:26 am
Do you get the feeling that you're pissing into the wind?

You know the OP posted this as an experiment with recorded observations right? Why don't you let him have his thread?

If you feel so strongly about this, then start your own thread on the harm of following non-Bogle strategies and concentrate your efforts there. The readers if this thread know exactly what it is, and casual readers will get the point before recklessly putting their own portfolios at risk (if the easily susceptible find it at all).

Let this be a research thread, with experiment, observation, and conclusions, as Will intended it to be.

-B
Do you mean that no one but the OP should post to this thread?

You don’t need to risk your own money to run an experiment.

Backtesting constitutes an actual experiment.
Thank you for your post tadamsmar.

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Re: My trend following strategy and experience

Post by Lee_WSP » Wed Jun 19, 2019 4:08 pm

willthrill81 wrote:
Wed Jun 19, 2019 3:31 pm
Given your apparent knowledge about all of this, let me just add one thing: it's much more difficult, emotionally and cognitively, for most investors to move back into stocks than it is to move out of stocks. This has been a noted problem among many of the most vocal proponents of market timing. YMMV. Good luck!
I've seen this quoted often. I must be wired differently because I get excited when prices start dropping and start scrounging for more money to pour into my taxable.

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Re: My trend following strategy and experience

Post by willthrill81 » Wed Jun 19, 2019 4:20 pm

Lee_WSP wrote:
Wed Jun 19, 2019 4:08 pm
willthrill81 wrote:
Wed Jun 19, 2019 3:31 pm
Given your apparent knowledge about all of this, let me just add one thing: it's much more difficult, emotionally and cognitively, for most investors to move back into stocks than it is to move out of stocks. This has been a noted problem among many of the most vocal proponents of market timing. YMMV. Good luck!
I've seen this quoted often. I must be wired differently because I get excited when prices start dropping and start scrounging for more money to pour into my taxable.
It's a different for a buy-and-hold person who never gets out of stocks completely.

But maybe you're an exception. Enjoy being exceptional! :wink:
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: My trend following strategy and experience

Post by Lee_WSP » Wed Jun 19, 2019 6:57 pm

willthrill81 wrote:
Wed Jun 19, 2019 4:20 pm
Lee_WSP wrote:
Wed Jun 19, 2019 4:08 pm
willthrill81 wrote:
Wed Jun 19, 2019 3:31 pm
Given your apparent knowledge about all of this, let me just add one thing: it's much more difficult, emotionally and cognitively, for most investors to move back into stocks than it is to move out of stocks. This has been a noted problem among many of the most vocal proponents of market timing. YMMV. Good luck!
I've seen this quoted often. I must be wired differently because I get excited when prices start dropping and start scrounging for more money to pour into my taxable.
It's a different for a buy-and-hold person who never gets out of stocks completely.

But maybe you're an exception. Enjoy being exceptional! :wink:
I still get that gut wrenching punch to the gut feeling when I see my "net gains" read -5%, but then I get over it and try to find stuff to sell so I can buy more equities. But if it doesn't show a net loss, I don't really care too much. I just keep on chugging.

90% of my eggs are in a different basket.

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Post by hdas » Tue Jun 25, 2019 10:17 am

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Last edited by hdas on Wed Jan 29, 2020 7:58 pm, edited 1 time in total.
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Re: My trend following strategy and experience

Post by One Ping » Tue Jun 25, 2019 11:56 am

hdas wrote:
Tue Jun 25, 2019 10:17 am
There's an interview with your guru where he rightfully admits his "system" is a over-fitting joke.
Reference for this unsubstantiated claim, please?
"Re-verify our range to target ... one ping only."

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Re: My trend following strategy and experience

Post by Carol88888 » Tue Jun 25, 2019 12:25 pm

I cannot understand half of the posts. I guess that means I have no business trying to implement this strategy. Didn't someone (Warren Buffett maybe?) say that you should have a strategy that you could easily explain to a 7- year old?

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Re: My trend following strategy and experience

Post by Forester » Tue Jun 25, 2019 2:19 pm

hdas wrote:
Tue Jun 25, 2019 10:17 am
willthrill81 wrote:
Thu Jan 17, 2019 7:16 pm
For the first part of this strategy, whether to be in stocks or fixed income (i.e. 100% in or out; this isn't necessary, but I prefer it), I use a nearly identical version of that advocated by the Philosophical Economist and detailed here. (He also provides an excellent overview to why trend following works here.)
There's an interview with your guru where he rightfully admits his "system" is a over-fitting joke. There's a learning experience for some here about formulating their investment plans on flimsy evidence provided by dubious characters confirming one's biases. Good Luck. :greedy
https://podcasts.apple.com/gb/podcast/i ... 0442665587

He did not say that. He said there could be concerns with overfitting, using his recession indicators. He is also concerned that the V-shaped market crashes which trend following profits from, may be less common in the future. Bottom line is he does not know.

Why do you say he is a "dubious character" ? He is trusted to work with OSAM's data and has co-authored pieces with the top guys there. He has his own career outside of finance. Your post is mean spirited.

My take from all the debate on Twitter and the blogs; use TF alongside stocks & bonds, don't lean too heavily on it. Use different lookback periods, don't use one implementation which looked good in the past.

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BlueEars
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Re: My trend following strategy and experience

Post by BlueEars » Tue Jun 25, 2019 2:52 pm

Mean spirited posts, dumb posts, only-my-way posts. I must remind myself that this is the internet and low standards prevail. :wink: :oops: :happy

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Re: My trend following strategy and experience

Post by abc132 » Tue Jun 25, 2019 4:44 pm

Forester wrote:
Tue Jun 25, 2019 2:19 pm
My take from all the debate on Twitter and the blogs; use TF alongside stocks & bonds, don't lean too heavily on it. Use different lookback periods, don't use one implementation which looked good in the past.
Given this, are you are against Wills implementation?

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Re: My trend following strategy and experience

Post by Godot » Tue Jun 25, 2019 4:54 pm

Word, Bunny. I've been reading BH forum and associated wiki articles for the last few years in an effort to deepen my knowledge about investing and retirement, and willthrill81's posts are invariably lucid and useful, and often add something new to the conversation, such as this discussion of TF. I look forward to them.
Estragon: I can't go on like this. | Vladimir: That's what you think. | ― Samuel Beckett, Waiting for Godot

abc132
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Re: My trend following strategy and experience

Post by abc132 » Tue Jun 25, 2019 5:05 pm

Godot wrote:
Tue Jun 25, 2019 4:54 pm
Word, Bunny. I've been reading BH forum and associated wiki articles for the last few years in an effort to deepen my knowledge about investing and retirement, and willthrill81's posts are invariably lucid and useful, and often add something new to the conversation, such as this discussion of TF. I look forward to them.
I would consider heeding the author of the method that recession signals might be over fitted, and that V shaped trends may be less common moving forward.

If this method can't predict recessions, it meets none of the goals of the original post - the results being under performance without limiting downside.

As implemented here, it's 0/1 so far and turned a 20% downturn into a 15% additional loss, while experiencing the entire downturn.

When using the past to gain insight into the future, there has to be a really strong reason to expect a trend to continue.

Do you think this method meets this criteria, given the author's own words?

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Forester
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Re: My trend following strategy and experience

Post by Forester » Tue Jun 25, 2019 11:01 pm

abc132 wrote:
Tue Jun 25, 2019 4:44 pm
Forester wrote:
Tue Jun 25, 2019 2:19 pm
My take from all the debate on Twitter and the blogs; use TF alongside stocks & bonds, don't lean too heavily on it. Use different lookback periods, don't use one implementation which looked good in the past.
Given this, are you are against Wills implementation?
Corey Hoffstein speaks of specification risk & strategy risk. Specification risk - some lookback periods made money in 2018. Strategy risk - ALL lookback periods lost money in 2015.

Gary Antonacci disagreed somewhat and said that one should instead diversify with other assets such as bonds, since the 12mo lookback always has the best odds of success.

Jesse Livermore has some reservations about the overfitting issue of using trend filters which performed well in the past (to be fair, he said we have limited historical data for -all- investing approaches, Bogleheads would agree). And he is concerned that V-shaped market drops will be less prevalent in the future, so even "intelligent trend following" using a filter would get whipsawed and buy back at a higher price.

Therefore, if the objective of trend following is protection rather than outperformance I would also own bonds. I would own B&H stock indexes. I would use at least two lookback periods/methods, for example 12mo time series & 10mo moving average. At the end of the day we know that boring old stock & bond funds, rebalanced will work. In the long run I think that TF will work, I hope it works, but I can't have the same confidence or allocate such too much to it. There is an element of performance chasing.

Filtered or "smart" trend following has whipsaw risk and failure risk - it just doesn't get triggered if all indicators agree. The topic author uses a 7mo lookback presumably because that tests best. Otherwise it's an odd number to use because in the research the lookbacks are usually 200 days, 10 month or 12 month.

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Re: My trend following strategy and experience

Post by abc132 » Wed Jun 26, 2019 2:58 pm

Forester wrote:
Tue Jun 25, 2019 11:01 pm

Therefore, if the objective of trend following is protection rather than outperformance I would also own bonds. I would own B&H stock indexes. I would use at least two lookback periods/methods, for example 12mo time series & 10mo moving average. At the end of the day we know that boring old stock & bond funds, rebalanced will work. In the long run I think that TF will work, I hope it works, but I can't have the same confidence or allocate such too much to it. There is an element of performance chasing.
We are in agreement.

Putting all ones eggs in a single trend strategy is risky, even if it is being sold in the original post as something that provides safety.

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Re: My trend following strategy and experience

Post by BlueEars » Wed Jun 26, 2019 3:02 pm

I tend to agree with most all of Forester's observations. Perhaps 7 months was optimal for Will's study. I'd tend to use the optimal parameters simply because that would be the best guess going forward. One should test the sensitivity of the result to reasonable variations in any parameters chosen. Extreme sensitivity would be a case for rejecting a method. So one might check for 5, 7 and 9 month intervals and if the 7mo CAGR is not too different choose value.

Another observation on choosing parameters in TF: I mentioned early on in this thread that I think the data on employment is somewhat noisy so one should choose a value for unemployment increasing beyond the moving average which is not likely to be just due to noise. I think this would have avoided the December 2018 whipsaw. Of course, if there is a next time around (unemployment ticking up just slightly) this threshold may prove to be early in a good way.

FWIW, I'm retired and have a good helping of bonds even though over several 10 year periods, TF has consistently beaten bonds by a healthy margin. But if I were younger I might think differently.

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Re: My trend following strategy and experience

Post by Rowan Oak » Wed Jun 26, 2019 5:54 pm

Interesting from Wes Gray today (Alpha Architect)
Trend Following: The Epitome of No Pain, No Gain

What we find in this analysis is the following:
  • Trend-following “works” in the sense that one has historically been able to capture a vast majority of the upside in a stock market, while simultaneously minimizing the threat of monster drawdowns.
  • Trend-following is fraught with behavioral challenges. The strategy can deviate wildly from buy-and-hold benchmarks and so-called whipsaws are commonplace.
  • The behavioral challenges associated with trend-following are so severe that it is recommended that many investors should avoid trend-following strategies.
Welcome to the realities of equity trend-following. An open secret that is simple, but not easy.
https://alphaarchitect.com/2019/06/26/t ... n-no-gain/
“If you can get good at destroying your own wrong ideas, that is a great gift.” – Charlie Munger

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Re: My trend following strategy and experience

Post by patrick013 » Wed Jun 26, 2019 8:10 pm

A former guru of economic indcators I often could appreciate a trend and I think ackowledgement of a trend is good business analysis. But sector rotation and other market timing is not very consistent. Each business cycle is different. This one consumer staples may crash and others the whole market may depend on it.

Intl bonds are the worse. They'll never beat domestic bonds when interest rates are near normal. So a number of things need to be identified but not particularly quantified. More success to be obtained being very basic. What are the 500 earnings ? As the 500 goes so does the market. Rule number 1. Objectivity.

The DOW theory as a concept but what is the trend ? DOW is a shipping dock.
Industrial production up, capacity utilization up, inventory levels down, will enforce an earnings bull market. You'll go nuts following sectors because they are nuts. More info is available for the 500 than any other investment on earth. Perfect information.

There's no master plan. Chart fully diluted EPS. Determine the normal PE. This is not a semester course in technical analysis. I view the 500 as one big stock. Treat it like a lady.

Sectors vs. factors vs. 500 ? I think I'd keep track of the 500 info wise. Passive investing dislikes us Fed watchers and stock watchers but ultra-high PE's are a sell signal, earnings optimism related. Eliot Wave Theory is actually on some finance certification tests with little pragmatism IMHO.

The equity value of production, we never talk about that.

I can't see the info for the OP system.
age in bonds, buy-and-hold, 10 year business cycle

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