I found your blog and have been listening to some of your awesome podcasts. I’ve already found them inspirational. I’ve been using a trend following strategy with my portfolio for 2 years now because trend following just fits my personality better than buy and hold, but I’ve always had a bit of a worry in the back of my mind that it didn’t work well during the 1937-41 period. It had a -50% drawdown during that period due to some really ugly whipsaws, especially the May 1940 mini-crash. Anyway, other than 1937-41, it performed really well historically, and I tested it out of sample on other countries’ markets since 1970 and it performed well there too, especially Japan, and I’ve been concerned about a “Japan scenario” where markets could go sideways or down for decades.
Anyway, my strategy generated a sell signal in October, I sold, then it generated a buy signal (just barely) at the end of November and I bought. Of course I’m sitting on big whipsaw losses now and my strategy will very likely generate a sell signal at the end of this month to lock in the loss. But I’ve been thinking this month about what would have worked during that 1937-41 choppy sideways market. One thing that worked was using an economic indicator like the unemployment rate as a confirming signal before selling, since the worst drawdowns have happened in recessions (at least in the U.S.). Using unemployment rate to confirm the trend-following sell signal, you avoided about half the loss of the 1937-38 recession and were fully in the market during the 1938-41 volatility and avoided locking in those whipsaw losses, which helped a lot compared to just using the trend following signals. However, I found that using unemployment rate hasn’t worked so well in other countries like Japan and Italy since 1970 where the unemployment rate didn’t even start to increase appreciably until the market was already down over 30%.
If I decided to start using the unemployment rate as a confirming indicator for 25% of my trend-following portfolio, then I wouldn’t have a sell signal this month since the unemployment rate hasn’t started rising yet, and I wouldn’t have to lock in that whipsaw loss. I also really think the bottom is in for this correction and it’s just going to be a whipsaw like the 2015-16 and 2011 corrections, but I know I need to take thinking and gut instincts out of this entirely.
Would you add an economic indicator as a confirming signal if it improved results a lot for 1937-41? I haven’t really found anything else that helped much during that period, it was so choppy and volatile. I know it’s not investment advice, I’m not looking for that, just what you would do?
Thanks for reading and I appreciate your time.
1. Why the fundamentals?
2. Why one market alone?