Don’t Tell Me What to Buy, Tell Me When to Buy

“Don’t tell me WHAT to buy, tell me WHEN to buy” is an old stock market “saw” that has survived the test of time. The reason it’s true is because a rising tide tends to lift all ships. So, in March of 2009 all you really need to know was “when” to buy not “what” to buy. Another old stock market axiom is nobody can consistently “time” the market; and, we agree. But, if you listen to the message of the market you can often determine if you want to be “playing” hard, or not “playing” so hard. For example, there was a Dow Theory “sell signal” on September 23, 1999. We wrote about it and told participants to raise cash and to not let any position to go very far against you. There was a Dow Theory “buy signal” in June 2003. We wrote about that as well. Here’s the killer, we wrote about the Dow Theory “sell signal” of November 21, 2007 right before the ~55% bone-crushing decline into March 2009 where we turned bullish. That’s actually not true for we turned bullish in October 2008. The reason was because on October 10, 2008 92.6% of stocks made new annual lows. We have never seen that and do not believe it has ever happened before. That is a 7 or 8 standard deviation event, which is not supposed to occur in your lifetime! Ladies and gentlemen, the majority of stocks bottomed in October of 2008, not in March of 2009 and we were bullish.

Another old market mantra is, “If you missed the 20 best stock market days your total returns fall dramatically, therefore you should stay in the market and take the bad with the good.” I guess this is probably true if you live long enough. However, the ~48% stock market decline between January 1973 into the December 1974 bottom took the D-J Industrial (INDU/26719.13) until 1982 to get back to where it was in January 1973. So, here the truth. If you missed the best 1% stock market sessions your returns decline from 7% to ~4.9% per annum. Yet if you missed the worst 1% sessions, your stock market returns soar to ~19% per year. That proves that if you can manage the risk and learn when to play hard and when to not play so hard, and to raise some cash from time to time, your returns explode. Moreover, you will sleep better at night. Fast forward to recent history, our models identified the trading top around the beginning of October 2018. Likewise, they spotted the trading bottom in late-December 2018. The subsequent rally carried the S&P 500 (SPX/2950.46) higher into early-May where again our models “said” a negative downside polarity-flip was due and then we issued a trading flash on June 3, 2019 stating a bottom had been formed. For the record, we have also made some bad trading calls, but our redeeming feature is that when we are wrong, we say we are wrong, and say it quickly, for a de minimis loss of capital. So, what now?

Well, as stated on June 3rd, we said a bottom was formed with the SPX at ~2729 and that the SPX was going to trade to new all-time highs. Three sessions later, with the SPX at 2852, we wrote the stock market was probably going to stall into mid/late-June, but that new all-time highs were still coming. The stock market did indeed stall, but only for about 5 sessions followed by a breakout to new all-time highs. Indeed, “Don’t tell me what to buy, tell me when to buy!”