The Smart Bird: Bottom Calling

A Smart Bird would never attempt to predict a bottom once the market breaks through all support, but the phrase “never catch a falling knife” comes to mind.   What we can do is take a look at the 2011 correction this market’s setup looked almost identical to prior to it finally succumbing.

Once support broke, the market rapidly hit its initial bottom.  It did not recover to previous levels for sometime basically bouncing off lows the entire unfavorable season for equities.  The federal reserves Quantitative Easing ended in June of 2011 a month prior to its free fall.   The Fed announced the next phase of monetary support on 21 September 2011 and a couple of weeks later the market established its final bottom.  The TSP C fund reached a 20% loss from its peak and the TSP S fund over 27%.

2011 Market Correction

2011 Market Correction

Now let’s take a look at the present picture.  If the market was to repeat, the TSP C fund is about two thirds of the way to the 2011 loss as of the close on 25 August.  The TSP S fund is only about half way to its 2011’s initial 24% plunge.  Ouch.

A Federal Reserve talking head just announced that while the rate hike may be delayed beyond September, the next round of QE is way off.  Hmm, maybe another 10%?  While saying the next round of QE is “way off” seems like a negative statement at first, the point is that he referred to another round in the first place. Will the market care at this point?  Probably, but after it finds its bottom.

August 2015

August 2015

The next chart takes a look at the 2007 – 2009 bear market starting at the market peak.  While the losses in the early stages of the bear market were similar to 2011, the descent was not as steep.  In 2011, the floor fell out but in 2007 the market started stepping down.  The market’s support line was also 10% below its peak which is quite different from the current setup.  One point these charts make is that the markets do not always return to their previous highs in short order as we have gotten used to recently.  Also, determining whether the market is just in a correction or the start of a new bear market is very critical to your long term returns.

2007 Bear

2007 – 2009 Bear Market

While in 2007 the market did sustain sizable losses, it did not just roll over and lose 50% in one correction or even within a few months.  I found that in the last two bear markets 75% of those losses occurred during unfavorable period for equities as determined by my baseline strategy.  This means the other 25% occurred in the favorable period for stocks which lead me to an in-depth study of indications of bull market tops and deep corrections in the market.  Based on my findings, I started beating the drum harder about the markets last month as laid out in It Should Come as No Surprise.

The market could find support and not match 2011 loses.  In 2011 the market was still suffering from the shock of the bear market and a deep 2010 correction.  Today the market is full of buy-the-dip investors who are trying to time the bottom.  I prefer catching the larger moves when measures of market risk are much lower.  I have no desire to trade stocks in a market dominated by high-speed computer algorithms and I do not recommend it for anyone’s core retirement funds.

Adopting the best practices for safe, long term index fund investing and specifically the TSP funds is seemed the smart way to go and I hope you agree.   You can review the TSP Smart Investor results page to see how our mechanical strategy navigated the last bear market compared to the buy & hope investor.   Combine this baseline strategy with an understanding of leading indicators that tell you of elevated market risk and maybe you will want to retire early.  In other words, grow and secure a significant nest egg with much lower stress.

Please compare our prices to market losses …and as they say “save”.

Categories: Perspectives, The Smart Bird

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