Trend Prophecies: March 11, 2024
Hi reader,
In this edition, we look at:
- Why missing the worst of what the market throws at you is the key to long-term success (with statistics to prove it!).
- How Trend Prophets is passive investing 2.0: low-cost investing with downside protection.
Market Update
We have heard many times that investing is about time in the market and not about timing the market. The idea here is that humans tend to be terrible at timing the markets and long-term wealth is created by staying invested.
And this makes perfect sense. Humans are terrible at timing the markets because we are emotional and not capable of making rational decisions free from emotional biases. Especially when money is involved. And you would think that if there is anything we should be rationale about, it should be our money.
The classic scenario we are presented with is what were to happen if you miss the 10 best days in the market. Your long-term results would be terrible relative to just buying and holding. But the problem with these analyses is that they assume you are also there for the 10 worst days.
Figure 1 shows the S&P 500 ETF (SPY) with all four scenarios since 2000:
- Blue line: missing the 10 worst days.
- Green line: missing the 10 best days.
- Red line: SPY, buy and hold, experience every day’s return.
- Orange line: missing the 10 best and 10 worst days.
Figure 1: Missing the 10 best and worst days of SPY. As of March 8, 2024. Source: EODHD and Trend Prophets.
he results from the blue and green lines are very intuitive. We know that missing the 10 worst days would create some serious compounded growth, while missing the 10 best days hurts.
What is surprising is that missing the 10 best and 10 worst days outperforms doing nothing (by approximately 30%)!
The lesson here is that missing the worst days is more important than not missing the best days. Yes, in an ideal world we can miss all the bad days and still be there for the best. Sadly, there is no investment system that exists, with AI or without that can help you miss every bad event that the market can throw at you.
ETFs are amazing: they provide low fee access to a single diversified investment. Yet they leave you completely exposed to the severe losses that occur. You are on your own, waiting for the markets to recover. We are talking about recessions, bear markets and severe corrections that can produce a 15% loss or worse. And these events occur at a regular frequency over any business cycle.
What if you could avoid most of those losses while still participating in the upside?
This is what Trend Prophets does.
Figure 2 now includes the Trend Prophets strategy for SPY. Our system shows that by missing many of the worst days of the markets, especially during bear markets, that the buy and hold case doesn’t come close. The graph shows that our strategy has returns over 880% since 2000 while simply buying and holding SPY would have returned 445%. Our return is close to double!
Figure 2: Missing the 10 best and worst days of SPY; the purple line shows the results using the Trend Prophets system with SPY. As of March 8, 2024. Source: EODHD and Trend Prophets.
Understanding the Basics of Trend Prophets
Understanding the basics, and the simplicity of how it works should convince you why your portfolio requires an allocation to quantitative alternative strategies such as Trend Prophets.
Downside protection is nothing new. Everyone wants an investment that can provide all the upside and reduced exposure to the downside. Active management was always touted as being the only way to achieve this. You need to pay someone who has the skill to engineer this return payoff either by focusing on specific segments of the market or by being an amazing market timer.
Sadly, very few managers have demonstrated this skill persistently. This is where signal processing and AI can shine.
Think about it this way: imagine seeing every daily return for the S&P 500 in a way that you can visualize the range of returns that have occurred and at what frequency. Figure 3 shows you every daily return for SPY and SPY with Trend Prophets.
Figure 3: The distribution of daily returns for SPY and SPY with Trend Prophets. Notice that the orange bars (Trend Prophets are less severe and less frequent (returns below zero). Source: EODHD and Trend Prophets.
I know that it might be difficult to see but focus on how the orange lines aren’t as peaked as the blue and that the probability of landing in the negative side is much lower with the orange (Trend Prophets). Figure 4 will make this more evident. Figure 4 focuses only one the worst events: events that occur at most 5% of the time (and bad events occurring 5% of the time are extremely significant! You don’t want that).
Figure 4: The distribution of the worst daily returns (that occur at most 5% of the time). Notice the orange bars are lower and shifted to the right. This means the magnitude of the losses is lower and they occur less frequently. Source: ibid.
We can see in Figure 4 that the orange lines don’t extend to the far left where the worst daily returns occurred, and the count of all the other bad events are lower than the blue (buy and hold). This means we have fewer bad events. The magnitude of the loss is lower and they occur less often.
And this is precisely what we do: shift the distribution of returns to the right and reduce exposure to the bad stuff.
And for those of you who love numbers, let me quantify this for you: The bad events for SPY, those that occur at most 5% of the time begin at a -1.92% return. This means that only 5% of the time should you expect to lose -1.92% or worse. There were 305 days since 2000 where the S&P 500 lost more than -1.92% in one day. With Trend Prophets, there were only 231 days below this level.
At this point, you might be saying that we are looking at daily data only and that looking at weekly or monthly returns is necessary.
Figure 5 shows the worst events that occur at most 5% of the time using weekly data. The shift of the distribution to the right, with lower frequencies is evident.
Figure 5: The distribution of the worst daily returns (that occur at most 5% of the time). Notice the orange bars are lower and shifted to the right. This means the magnitude of the losses is lower and they occur less frequently. Source: ibid.
Figure 6 shows the same thing for monthly data. Yes, as we increase the frequency of the returns, the shifts become less pronounced, but the beneficial effects have not changed. That’s how you get the results seen in Figure 2.
Figure 6: The distribution of the worst monthly returns (that occur at most 5% of the time). Notice the orange bars are lower and shifted to the right. This means the magnitude of the losses is lower and they occur less frequently. Source: ibid.
Trend Prophets with Nasdaq (QQQ)
Thus far I have only shown you our results with SPY. Imagine what we can do for more volatile ETFs, such as QQQ.
Figure 7 shows the left tail distribution of QQQ with and without Trend Prophets.
Figure 7: The distribution of the worst daily returns (that occur at most 5% of the time). Notice the orange bars show that the bad returns are much less severe and occur much less often. Source: EODHD and Trend Prophets.
Once again you can see how we shift the frequency of returns to the right and with fewer occurrences. And the more volatile the investment, the greater the shift of the return distribution.
This is how we protect against the downside and create significant long-term growth.
Convinced yet?
Conclusion
This was an incredibly technical newsletter today, but I really wanted to demonstrate what we do and why every portfolio can benefit from our system. And we haven’t even shown you how successful Trend Prophets is when using leveraged ETFs (for those comfortable with them). Please visit our site to see all of our strategies and performance.
I love what we have built, and I want everyone to have access to it for a fraction of the cost of other services.
We have a promotion for the month of March where a monthly subscription gets a free month, and the yearly gets two free months (instead of the regular one month free). Visit https://trendprophets.com/pricing for more information.
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That’s it for this edition of the Trend Prophets newsletter! Please contact us at info@trendpophets.com for any questions.
Cordell L. Tanny, CFA, FRM, FDP
President & Founder
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Disclaimers: Past performance is no guarantee of future results. This newsletter should not be considered as investment advice and is intended for information purposes only. Please see our Terms and Conditions for all disclaimers.