Archive for June, 2018

Methodology Review- SPY 200 Day Month End Model

Saturday, June 30th, 2018

June 30, 2018 for July 1, 2018

I’ve been publishing this blog monthly since August 2010.

The purpose was and is to help protect those in the IRA jungle who have a small to medium nest egg at risk.

I don’t have a license to give advice because a license would give me the legal right to monetize my ” expertise “, and that is not what this is about.

What I can say to justify my opinions is that I have had a formal education in economics and finance including graduate school, three years assisting Wall Street ” higher ups ” focusing on Africa and the Middle East, two years as an overseas operations officer of a global bank, 20 years as CEO of a company founded by my father, and 20 years as the USA Country Manager and CEO of the USA subsidiary of an Italian Conglomerate with branches and subsidiaries worldwide.

That being said, my ” expertise “, in my opinion,  boils down to my confidence that I know the difference between real gold and fools gold.

I recognize that your career may not have given you the inclination and expertise to research what you should know before you put your money into an investment idea.

My first piece of advice would be to eliminate the fees and commissions of as many investment professionals as possible. They are not worth the money unless they prove consistently that they can beat the “market “.  And, what is the market?

For you, the market should be, in my opinion, a basket of stocks which contain the 500 largest companies in the USA stock market.  The basket trades as one stock, SPY and you don’t pay 500 commissions to buy 500 stocks. You pay between $5 and $10 per trade irrespective of whether you buy 1000 shares of SPY  or 10 shares of SPY.

You begin by opening an account at a discount brokerage such as Charles Schwab or TD Ameritrade. The account should give you the option of moving money between their low-interest Money Market Fund and actual investments. one of which is in the symbol SPY.

Now here is where it gets interesting.  Warren Buffett of Berkshire Hathaway and John Bogle CEO of Vanguard say invest in a passive index fund or ETF such as SPY and leave it there.  This investment is in the market and carries market risk.  If you wander into no man’s land and purchase individual stocks or a managed investment, you are adding layers of ” specific risk” on top of your market risk.   Buffett and Bogle say don’t go there. They say that a passive ( not managed ) index investment in the S&P 500 ( SPY ) is all you will ever need.

If you followed their advice without considering whether, at the time of your investment, the market is at low tide or high tide, you are accepting ” timing risk” .

Better to break your investment capital into parts (10 to 20 ) and average your cost to achieve a rational investment price per share.  The goal here is to adhere to rule #1 ….don’t lose money. I don’t care whether the consensus is that the market is on a straight up trajectory. The opposite could be true.

Now, here is where Buffett, Bogle and I part company. I  say it is possible to time the market providing your timing mechanism is not your emotions. During the last major downturn, if you had just held SPY, you would have lost 55% of your money at the bottom.  Very difficult to sit through that without panicking and exiting with a big realized loss. If you held tight for the ride,  you would have had to wait almost 10 years before surfacing with zero realized gain.  Not my idea of a good time.

I subscribe to a backtesting service which allowed me to track SPY from January 1, 2000 to the present. During that time you would have been involved in only six trades of which 5 were winners.

The model I follow which I refer to as the  SPY , month end, 200 day moving average model.

Underpinning the model is the acceptance that you will probably leave some money on the table ( not a lot ) at market tops and bottoms. And, there is the possibility of being caught in a straight down plunge, But, you should never be caught in a grinding downdraft which a bear market typically goes through.

An important factor is that you are allowed to trade only at month end.  To do otherwise, according to the model will involve you in a lot of whipsaws and less acceptable results.  By following the model, history has demonstrated you would have made considerably more money since 2000 than ” Buy and Hold.

SPY is currently in the 566th day of an uptrend which has returned 24% per annum, ( 37.71% since its last buy signal, March 31, 2016).  Want more return than that.  Go ahead. Wander into Wall Street’s No Man’s Land where the counterparty in every trade probably knows more than you and, in fact, may have an edge.

Summary: We continue on a BUY signal for SPY . If you are new to this model I would either be patient and keep my investment in the money market ( park ) until you get an exit signal. You would re-enter ” all in ” at the next buy signal following the exit signal.  I’ve supplied enough data here to allow you to make your next decision a safe decision. And none of the possible choices involve you taking on the Specific Risk of individual stocks

 

Richard Maurice Gore