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Best Market Exit Strategy?

 February 19, 2013 02:35 PM


Over the last 110 years the market has experienced a bear market on average of every 4.4 years.

But some bull markets have lasted much longer than that, with only intermediate-term corrections but no bear markets. The records were the 1920's when the bull market ran on for a then record nine years, and in the 1990s when that bull market lasted for a new record of ten years.

Obviously then, some bear markets also must come along more quickly than the average of every 4.4 years. For instance, it was only 1.7 years between the 1973-74 bear market and the 1976-78 bear market. It was only 3.2 years between the 1976-78 bear market and the 1981-82 bear, and only 2.8 years between the 1987 crash and the 1990 bear market.

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And during bull markets there are frequently intermediate-term corrections of 15% to 20% that don't quite qualify as bear markets, but can cause almost as much damage depending on how they're handled. Many investors seeing the market top out but not expecting more than a brief pullback, become fearful after paper losses reach 15% or 20% and sell out at that point. Even if they quickly get back in which is unlikely, after experiencing a 20% loss it takes a 25% rally just to get back to even. A couple of experiences like that can easily exceed the losses of a full-fledged bear market.    

Obviously a strategy that times the intermediate-term rallies and corrections with some consistency should also have high odds of avoiding bear markets, whether they arrive every three years or every ten years. That's simply because they are liable to on an intermediate-term sell signal for a correction when such a correction worsens into a bear market.

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That has been the record of our Seasonal Timing Strategy.

The period between 1970 and 1012 saw the market experience 7 bear markets with losses of a much as 54% for the Dow, 78% for the Nasdaq. Yet back-tested to 1970, and used in real-time for 14 years, our Seasonal Timing Strategy's worst period was during the 2008-2009 financial meltdown, when it lost only 3.6% in 2008, and 4.2% in 2009. Prior to that it's largest losses were 2.1% in 1973, and 1.9% in 1974, in the 1973-74 bear market the worst since the 1929 crash.

Of course the goal of investing is not only to avoid large losses, but to make profits.

On that score, our Seasonal Timing Strategy has gained 213% over the last 14-years compared to a gain of 93% for the Dow, 49.2% for the S&P 500, and 37.7% for the Nasdaq.

And all with roughly 50% of market-risk due to only being in the market five to seven months a year, and even then only in the conservative stocks of the Dow (leaving plenty of room for more risk tolerant investors to improve on the performance with leveraged positions that only bring overall risk up to 100% of market risk).

Of particular interest, while in each period the popular opinion is that this time is different, the strategy worked at least back to 1970 (academic studies show seasonality has been pronounced for much longer than that). And that means through times of war and peace, rising and falling interest rates, rising and falling inflation, boom times and recessions, through political and financial scandals, and no matter which political party was in power.

So perhaps rather than worrying about the bull and bear market cycles, a better strategy might be to focus on the market's intermediate-term rallies and corrections, and by doing so probably take care of the bull/bear cycles as well.

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