Buy-and-hold has not been kind to U.S. equity investors over the past decade. The S&P 500 index remains below its level at the beginning of 2000 and it is difficult to predict when this strategy will prevail again. As a result, we have built an investment model to help our subscribers determine when it’s safe to own U.S. stocks vs. when to sell and hold cash. The model is based on an in-depth historical analysis dating back to the early 1930s. Essentially, we have uncovered certain market conditions that have historically been associated with positive gains, and we only recommend investing during these periods in order to protect your capital and avoid large losses. Since the early 1930s, only investing when the conditions are ripe according to our model would have led to substantially better returns than that of the S&P 500 and more importantly it avoided bear markets and corrections.

The graph above shows hypothetical performance vs. the S&P 500 dating back to the early 1930s. Essentially, when our model gives the green light to own stocks, we buy the index (investors can also buy mutual funds, ETFs and individual stocks) and when it recommends moving to the sidelines, we simply hold cash.

To view monthly performance by decade, please click on the links below:

Avoid Bear Markets & Corrections!
Below is our model’s hypothetical performance chart for the last decade, the worst decade on record. Notice how it did not lose money during the two gut wrenching bear markets. Most investors did not see these downtrends coming. In fact, prior to the 2000-2003 bear phase, there were very few investors who predicted the upcoming collapse.

The table below highlights all 16 bear markets and corrections experienced by the S&P 500 index since 1932. With the exception of the 11.8% correction in the summer of 1998, our program outperformed the benchmark during all declines by recommending you sell your stocks before the decline got very ugly. In many cases, the program advocated moving to cash before the market decline even began.

Performance During S&P Bear Markets & Corrections

S&P 500 Bear Markets	S&P	Model
Feb-34Mar-35	-25.7%	-13.3%
Feb-37May-42	-56.2%	-13.3%
May-46Jun-49	-25.3%	-11.4%
Jan-53Sep-53	-11.1%	-5.6%
Jul-56Dec-57	-17.3%	-0.6%
Jul-59Oct-60	-10.1%	0.0%
Dec-61Jun-62	-22.5%	0.0%
Jan-66Oct-66	-17.3%	-0.7%
Dec-68Jun-70	-29.0%	-4.7%
Jan-73Dec-74	-43.4%	0.0%
Nov-80Jul-82	-19.4%	0.0%
Aug-87Dec-87	-26.8%	0.0%
Jun-90Oct-90	-14.8%	0.0%
Jul-98Sep-98	-11.8%	-11.8%
Aug-00Feb-03	-43.7%	0.0%
Oct-07Mar-09	-50.8%	-5.0%
Average	-26.6%	-4.1%

Historical Portfolio Statistics
We mentioned above that the program will pull you out of stocks when the threat of a market decline increases based on our research. Since 1932, the program only recommended being invested 50% of the time. This means it beat buy-and-hold while your money was at risk only half the time. By not always being fully invested, investors have the opportunity to reallocate cash to other assets such as bonds, commodities or even simply collecting interest in a savings account.

Portfolio Statistics: 1932 – Present
(Note: performance numbers exclude dividends. In addition, potential interest earned when the model recommends selling stocks is excluded from the model’s returns.)

*Drawdown refers to the percentage decline from peak-to-trough in portfolio and index performance. For example, the S&P 500 reached a peak of 1539.66 in October 2007. It subsequently dropped to a low of 757.13 in March 2009, which represents a drawdown of 757.13 / 1539.66 = -50.8%.

Model Inputs

The model is comprised of three main components:

Interested in subscribing?
Soon, you will be able to receive our model’s recommendations advising you when it’s safe to own stocks and when to sell them in order to avoid the next bear market. Stay tuned!

Tags: market timing, S&P 500

This entry was posted on Tuesday, February 9th, 2010 at 4:16 PM and is filed under Articles. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.