Happy new year! It’s that time again, when everyone with a blog does a wrap up of the previous year. Here’s my look-back.
Many of you follow along with the “+/-30% per quarter wider-market breadth indicator”. Which is too much of a mouthful, so I’ve humbly named it after myself instead. I wanted to provide an update since I’ve been tracking it for awhile.
The premise is this: breadth from the wider universe of stocks (aka the Russell 3000) can give some indication about the market health as a whole, and can be used to time the purchase/sale of the SPY ETF.
The actual details on how this works were discussed exhaustively with this series of blog posts. If you’d like to feel exhausted too, please give them a read.
First off, here’s a comparison graph of buying and selling SPY using the indicator (no commissions deducted) vs buying and holding SPY, over the period 1/1/2000 through 12/31/2016:
As you can see, the indicator avoided the serious crash of 2008. It also made the bear market of 2000 less sucky. It also kept us out of the market during 2015, which was tumultuous. Equity doubled and drawdowns were much less.
|max 30qtr DD||max B&H DD|
How did 2016 look? The indicator didn’t suck, but we missed out on some gains. Does that bother me? No, not so much. It’s not going to out-perform buy and hold every single year. Here’s a graph of just 2016:
Below is a graph of the drawdowns for 2016. Obviously, buy-and-hold took a serious hit at the beginning of 2016. The maximum drawdown was -9.15% vs -3.37% for the breadth-indicator system.
Since the maximum drawdown using the system is 2.8 times less than buy and hold over the long term (and very close to that, 2.7x, during 2016), you could make the argument that leveraging your account 2.8 times would give you superior returns with the same risk as buy and hold. This wouldn’t have made up the difference between the two systems in 2016, but over the long term it’s something to consider.
Here’s another, somewhat weird graph to get your head around, so let me explain it. I’ve taken the data from 2000, and (starting at 2001), looked back over a year. I’ve calculated the maximum drawdown that happened during that one year period, and compared the breadth system to buy and hold. I then showing a rolling maxDD for the year prior.
What does this do? It shows you the drawdown you’d experience if you started investing at various points over the last 17 years. Some years, buy and hold has less of a 1-year drawdown than the breadth system.
Some years – indeed, much of the time – B&H shows a rolling 1-year gain/loss % greater than the breadth system. The breadth system however shines whenever a bear market shows up:
I will continue tracking this indicator for a long time to come, because a) it’s a long-term indicator and b) I think it has value, even though 2016 didn’t outperform.