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Buy, Hold, & Hope (Why the Stock Market Stinks)

April 18, 2005

 

With the US stock market taking a hit last week, we thought this as good of a chance as we'll get to kick it while its down. The "market" as its referred to as if there were no such things as Corn or Crude Oil markets, has not seen new highs as we all know since the fun bubble days in March of 2000. That's over 5 years for anyone who's counting, and after last week, it looks like it could be another 5 years. The merits of the old fashioned "buy and hold" investment strategy just don't look very good.

The majority of investors in America today are unwitting proponents of the buy, hold and hope stock market strategy. They are heavily invested in equities (stocks) on a "long term basis", with most of their investable assets in mutual funds and supposedly "blue chip" stocks.

These investors are generally not concerned about the inevitable ups and downs of the market because they rest easy in the knowledge that the market will go up over the “long term”. With their stock brokers and the supposed experts on television preaching that the market "always comes back", they buy 'em, hold 'em, and hope that everything works out all right.

But how long will it take for the "market" to come back? Would you believe 5 years? 10 years? How about 20 years? What if it wasn't for the rest of your life.

Let's look at some data to try and put this buy, hold, and hope strategy into perspective. The chart and table following this article highlight 5 different periods in the past 100 years during which the Dow Jones Industrial Average took between 5 ad 25 years to "recover" its losses.

The data shows five different periods where the market fell anywhere from 36% to 89%, then required 5 to 25 years to recover the loss. The long term buy & hold investor during those periods had to wait several years just to break even, and required a lot of intestinal fortitude to get there.

The period from 1962 to 1982 is particularly interesting, as the Dow gained just 43 points (5%) in 20 years. Yes, that works out to just one quarter of one percent return per year. If you think this is a phenomenon of the past, look at the last period on the chart. It's right NOW. We are currently at 5 years and counting, waiting for the market to get back to breakeven from the 2000 peak.

Has anyone ever told you that you may have to wait 5 to 25 years to breakeven on your stock market investments? If they did, would you be a willing investor? I doubt it. But that is exactly what millions are doing with their buy, hold, and hope strategy.

There have been 29 bear markets since 1900 as measured using the DJIA. That's an average of one every 3.5 years. While the average bear market decline was just over 30%, there have been 9 declines that averaged nearly 50%. A buy & hold investor will suffer every bit of those declines and every one of them by definition, as they hold no matter what.

Its also important to note that if and when the index does come back, it may not even contain the same stocks. The major stock indices rebalance their indexes at least once a year, as evidenced by the Dow Jones Industrial Average containing only about half the stocks that were in it 10 years ago, so the stocks in your portfolio may take even longer to get back to break-even, if they ever do at all. Now you're hoping not just the index makes it back to break-even, but some of the stocks that were dropped out of it as well.

The uncertainty of the Buy, Hold, and Hope strategy is one reason to consider alternative investments for a portion of your portfolio. Such an investment, utilizing a good trading system or advisor, can not only provide superior returns, but does so through a consistent, mechanical approach which eliminates HOPE from your investment.

- Walter Gallwas

IMPORTANT RISK DISCLOSURE
Futures based investments are often complex and can carry the risk of substantial losses. They are intended for sophisticated investors and are not suitable for everyone. The ability to withstand losses and to adhere to a particular trading program in spite of trading losses are material points which can adversely affect investor returns.

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Chart of the Week : Extended Flat Periods in Stock Market

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A favorite cheer at Attain when the stock market is suffering through 100+ point declines as we saw last week is: "Go to Zero!!" With many trading systems thriving last week on the spike in volatility three straight 100 point declines brought, you can't blame us for wanting these beneficial days to continue indefinitely. Go to Zero!

The aforementioned sell off in stocks saw the VIX volatility indicator shoot up 40.57% for the week, as SP futures lost -3.38%, NASDAQ futures lost -5.29%, and emini Russell futures lost -4.65%. There was also impressive volume, as the CME saw daily contract totals of over 1 million e-mini SP contracts four days in a row.

This huge downward move in the market came despite a significant drop in crude oil prices. May crude futures fell -5.31% for the week as supply forecasts seem to increase every week. Unleaded gas futures are also falling but not quite as quickly as May gas fell -3.44%.

Elsewhere, the bond markets saw a bit of a rally as investors rotated out of stocks, with the US 30 year bond gaining +1.99% and 10 year notes up +1.47% for the week. Surprisingly, the US Dollar remained relatively stable and foreign currencies finished unchanged for the week. In commodity trading sugar futures were the big movers, falling -4.71% after trading in range bound conditions for the last nine months.

**Day Trading**

This week’s sharp decline led to widespread profitability across most of the day trading systems. The extremely tight trading range seen in the week prior gave way to quite the opposite last week - with a fifty point range in the S&P and over a thirty-five point in the Emini Russell.

Leading the pack was that old standby Compass, which made $3,807.25 on four trades last week. The system started the week with a losing trade on Tuesday, but finished strong with three profitable trades (including a ten point winner on Friday). AG Xtreme stayed on the sidelines for most of the week, but did make a very nice +$3025 per contract on a single trade last Tuesday.

Systems trading the emini Russell have struggled for the most part in the early part of the year, but made up some lost ground with strong performances last week. BWT Zones Russell had the most impressive run, making $2225.80 per emini Russell contract. On Thursday and Friday combined, the system made over twenty points on similar short trades.

Similarly, Clipper eRL started its recovery last week by making $1308.30 per emini Russell contract, while Impetus eRL made a more modest $480.20 per contract on three trades.

R-Mesa, meanwhile, was profitable by $1265.50 as a direct result of its reversal logic. The system saw its first trade become a loser on both days it traded, but reversed to the opposite position both times to neutralize the losses and tack on additional profits.

Day Breaker was also profitable for the week, despite being stopped out by a tick on Friday, making $301.50 for the week. BWT Rock N Russell continued its hot streak with additional profits of $655.70 per money management unit.

Helix ES, meanwhile, is looking to repeat its legendary performance from last April and added $757.50 per emini contract. Cipher ES tacked on another $562.50 per contract, while Magnitude SP was profitable on two of five trades but gave back $125(-$125 per ES as well). RC Miracles and Success both took profits of $410 and $255 respectively, while BWT Zones SP struggled through the week losing $842.25.

**Swing Trading**

Up until last week, many swing systems had been struggling to find a market direction, but last week's explosive move lower saw most jump into action.

The trade of the week goes to Axiom Index eMD, which entered short on Wednesday and was earning +$2,675 in open trade profits per emini Mid Cap contract as of Friday’s close. By weeks end, the Axiom Index 4 market portfolio was ahead by $4,144.62 on both open and closed trade profits.

In other index trading, Eclipse and Tzar both bounced back from their recent lows to post substantial open and closed trade profits. Eclipse eRL gained +$1,960 and the Tzar (3 market) gained +$1,963.50. Tzar had been holding short since late March and reversed long early on Friday (one day too early as things turned out).

The index market swing systems were not the only gainers on the week. Both Mesa Bond and Mesa Notes are currently holding long for open profits of $3,731.25 and $1,543.75 respectively. Last week 30 year bonds rallied 1.99%.

**Long Term**

Sugar was the big story last week for trend followers, as it fell -4.71% for the week. Aberration Plus has been holding short since early March and is making +$730.00 per contract.

Elsewhere, the flight to security rally in the bond markets was not kind to Aberration Plus or Andromeda. Aberration Plus was stopped out of short positions in the 10 year notes for a loss of -$2471.87 per contract, the five year notes for a loss of -$768.75 per contract, the two year notes for a loss of -$471.88 per contract, and the Australian 10 year note for a loss of -$2527.22 per contract. The system bounced back with profits of +$950.00 per contract in the Eurodollars. Andromeda was stopped out of a short 5 year note trade for a loss of -$337.50 per contract.

Finally, the grain markets have begun to creep lower once again heading into the summer growing season. SEMA4 Symmetry has had mixed returns in the grains as the system is holding short in corn for profits of +$325 per contract, soymeal for a loss of -$490.00 per contract, and Minneapolis wheat for profits of +$1325.00 per contract. The system is also holding long in KC wheat for a loss of -$2412.50 per contract and in oats for a loss of -$950.00 per contract. Andromeda is holding long soybeans for profits of +$5375.00 per contract after the market moved slightly against the system last week, while Aberration Plus is long in bean oil for a small loss of -$266.00 per contract.

Please Login to: http://www.attainaccess.com for the latest updated statistics.

IMPORTANT RISK DISCLOSURE
Futures based investments are often complex and can carry the risk of substantial losses. They are intended for sophisticated investors and are not suitable for everyone. The ability to withstand losses and to adhere to a particular trading program in spite of trading losses are material points which can adversely affect investor returns.

Feature   |   Week In Review   |   Chart of the Week   |