Vegas

Finally, someone admits it: It’s hard to beat benchmarks that only go higher. When you include reinvested dividends, it’s damn near impossible.

Before I go any further, I implore you: Don’t take that as some kind of derogatory assessment of active management. It’s not that. And I certainly don’t mean to suggest that exploiting tactical opportunities for outsized gains isn’t possible. It most assuredly is. And, depending on who you are, employing some form of active management may be unavoidable.

With those caveats out of the way, it’s self-evidently true that a one-way market which can be tracked for as little as three or four basis points, is almost impossible to outperform when the one-way character of the ascent is underwritten by an implicit (and, if you conceptualize of last year’s Fed support for investment grade credit as an indirect mechanism for bolstering equities, explicit) guarantee from central banks.

Sure, you can make hyper-concentrated bets on things like Tesla and Bitcoin and reap absurd gains that dwarf any benchmark, but anybody who does that successfully and fails to attribute at least a portion of the gains to luck is being disingenuous. Nobody that I’m aware of has ever been able to return triple-digits annually over the long-term. Anyone who tells you they can infallibly deliver Tesla-like gains every year is probably a liar, a criminal or both.

It’s with the above in mind that I wanted to highlight a brief passage from an amusing Bloomberg article published over the weekend. The excerpt, below, is from Lu Wang:

It’s a testament to the straight-up trajectory of stocks that virtually all signals that told investors to do anything but buy have done them a disservice this year. In fact, when applied to the S&P 500, 15 of 22 chart-based indicators tracked by Bloomberg have actually lost money, back-testing data show. And all are doing worse than a simple buy-and-hold strategy, which is up 11%.

The gist of the piece is straightforward: Market-timing based on purportedly useful technical indicators has been an even more perilous proposition in 2021 than it always is.

I’ve mentioned a few of these signals lately. The figure (below) shows the S&P trading 16% rich to its 200-day moving average, for example.

Last year (and also earlier this year), equities retreated when the premium reached 16% (blue-shaded area in the figure). Suffice to say it’s not clear that’s a reliable signal one way or another. There’s nothing special about 16% on that metric. Stocks could catapult to a 25% premium in some kind of wild bout of euphoria, or they could crash to a discount in a month.

The 14-day RSI stalled above 70 (figure below) and some attempted to attribute last week’s stumbles to overbought conditions, despite two obvious macro triggers (India’s COVID crisis and details around Joe Biden’s planned capital gains tax hike).

Regular readers are well apprised of my disdain for technical analysis and “chart-based indicators,” as Bloomberg put it. Some of those indicators can be helpful in divining what systematic strategies are likely to do next, but outside of that, they’re mostly, if not entirely, useless. Always have been, always will be.

If you think otherwise, or are persuaded by folks who insist they can reliably beat the market using technical signals, here’s what I recommend: Spend a month reading the “best” and most “respected” literature on technical analysis you can find, then spend the next six months trading based on what you “learned.” After that, send me an email and let me know how you did.

It never seems to occur to proponents of “chart-based indicators” that the “signals” they’re getting are just indicative of a market that’s been going up for a while, and that typically, those conditions coincide with elevated multiples and asset prices overshooting fundamentals.

Anyway, the point here isn’t to malign “chart-based indicators.” Rather, the point is that the spirit of the excerpt (above, from Bloomberg) could apply to any year, at least as it relates to average, everyday investors.

It’s almost never advisable for everyday people to engage in market timing.

In the same article, Wang observed that the S&P hasn’t had a pullback in excess of 5% this year. The figure (below) is a simple illustration.

In itself, that isn’t particularly notable, but what Wang said next is damning for those who would have you believe that actively trading the market is advisable for average folks. “Absent the top five sessions, the index’s 11% gain dwindles to 2%,” he noted.

Needless to say, attempting to time the market puts you at considerable risk when it comes to accidentally being “out” on large up days. What Bloomberg doesn’t mention is that, in practice, that’s often compounded by accidentally being “in” on big down days.

If you string together too many instances of being out for rallies and in for selloffs, it’s alarmingly easy for an average investor to woefully underperform the market by doing something as ostensibly harmless as trading in and out of SPY, an activity which, on the surface, doesn’t sound all that risky.

Commenting on the situation in the same linked article, the CEO of one fund management firm said simply “Guess[ing] that this is the right time to be out of the market, you may as well go to Vegas.”

What was it I said earlier this year about gamblers?

Read more: Gamblers