How to Spot a Correction

One of the things we have been doing well in the Marcus Today newsletter over the last few years has been Timing the Market using ETFs in the Strategy Portfolio.

I don't have a lot of respect for those who believe it's "Time in the Market, not Timing the Market". It is an industry brainwashing that suits advisers who don't ever want to make a decision beyond signing a client up, and putting them in a host of Managed Funds (which they could easily do themselves). Then sitting back and doing Naff All whilst they continue to charge fees for an annual assessment which involves pressing "Print" on the client's platform account, bunging it all in a Powerpoint and fending them off for another year with motherhood statements like "Its Time in the Market" that don't add any value (did I just have a rant?).

Anyway.

We have been timing the market in the Strategy Portfolio since October 31 2018, so this will be our sixth year. This is the performance.

I feel like going on a Roadshow called "You Can Time the Market", but then half the IP is exploiting the herd, and it is better for us if the rest of the world doesn't try. Mass delusion is the meat on which we feed, so why educate outside the Marcus Today community? Let's just keep doing what we're doing and see how long we can keep it up.

The Strategy Portfolio's declared purpose is to exploit bull markets whilst they are on and avoid the precipitous moments. So how do you do that? How do you avoid the precipitous moments like the 1987 Crash, the Asian crisis, the Tech Wreck, the GFC, or by the 2020 pandemic-inspired drop in the market? It’s no fun investing in “fear” of another event, so this is an attempt to teach you an approach that will rid you of the constant worry that the stock market is about to fall over and destroy your financial expectations.

It goes like this:

• When things are going up, leave them alone. Don't worry, even if everyone is saying "it's expensive" or "it'll end in tears" or "we're sellers of the market" and other more sensational statements. They don't matter. Until the market actually listens. Until the market listens. Until the market goes down. When it's going up, leave it alone!
• If you cut out whenever the market loses its head, when it's in a bubble, you will miss all the fabulous exponential, irrational, exuberant bits that make the market worthwhile. Those exponential bits are what make up the long-term average. You should expect them, look forward to them, and enjoy them, not avoid them. On top of that, selling on the way up cuts across the core tenet of all technical analysis which is buy when its going up and sell when its going down. Too many people sell when it's going up and buy when it's going down. You don't sell because something has gone up. You are supposed to sell things that are going down, not up.
• If you give in to fear, you become one of the Finger-Waggers. I hate Finger-Waggers. Finger-Waggers sell on the way up. Finger-Waggers worry about what might happen and many attention-seeking-click-hungry businesses and commentators feed on that. Chickens don’t make money.
• So do not try to sell early. Sell when things start going wrong. There are always a hundred reasons why the market should go down. Save those for the Finger-Waggers and perma-bears. Don't listen ot them until things go wrong.
• Don’t predict the highs, wait for them.
• React don’t Pre-act.
• Watch the herd don't join the herd. Your job is to exploit the herd.
• To keep your head when all about are losing theirs you have to be objective, vigilant, dispassionate, logical not emotional. Be a cold-hearted mercenary.
• Timing the market is not about predicting stock market events before they happen. It's not possible to predict the unknown except in hindsight. It's called making “Grand predictions” and you don’t have to do it.
• Always expect to lose some money before you react to a top. Don't count your profits until you've sold and factor in a drop from the top. Don't look back and say "I could have sold for...". It's a fact of life in the stock market that you will never fluke the top and need to factor in a loss from the top.
• Timing the market (and stocks) is not about predicting things that haven't happened.
• Avoiding a correction is not about selling before the top it's about reacting to a top.
• If you understand that it's about waiting for things to go wrong and reacting to that, you can live without fear, knowing that the market will tell you to sell when.
• The worst thing you can do (if you are bothering to time the market) is do nothing when it tops out.
• To time the market, you must be decisive when the moment comes.
• You won't be able to avoid corrections if you are one of those people who can never sell.
• When do you know it's the top? There are many signs.
• Every major top is different. Every major bottom is different.
• What you do is track all the things that are obsessing the market, and dictating the trend, and watch for a number of them turning at once.

Anatomy of a turning point - At the bottom in November last year (which we timed to perfection) there were a number of indicators (different every time) - the main driver was "peak rates paranoia". That was evidenced by the FOMC Meeting that called the top on rates. Thay led to a sharp two-day rise in the US equity markets (mirrored here), a sharp drop in the VIX, a significant reversal of bond yields, a sharp drop in the US dollar, a rise in the Aussie dollar, a sharp bounce in interest rate sensitive sectors, and a host of technical indicators firing off at once to announce the reversals in equities, bonds, currencies and volatility.

How often is there a “Crash” style event? - Over the last 20 years there has been a tradable correction once every three years and a significant correction once a decade. All were spottable as they developed, and their bottoms showed the same signs as the tops. All major market corrections turn out to be exploitable opportunities in hindsight. Fabulous opportunities. Opportunities to sell and buy back. "Buying back" signals are the same as the "precipitous sell-off coming" signals in reverse.

What will be the anatomy of the next top? Keep reading Marcus Today. It's different every time and we will be all over it. You don’t need to predict the next “precipitous moment”, all you need to do is wait for it and when it comes we’ll be writing all about it for you.

As one of our members (Thanks John W) puts on his email signature, “The trend is your friend until it ends”. When the uptrend is your friend, relax.

For the new Members, let me give you one of our core tenets at Marcus Today. The stock market is not about grand predictions, it is not about fortune telling - leave that to the clickbait commentators - it is about waking up in the morning and making decisions based on what just happened - it is the best you can do.