Get ready. Our top stock market signal is just about to flash a "buy."
And this is big news because going back to the 1920s, this signal's track record is fantastic...
In fact, the last time this signal flashed was December 2007. Back then it said "GET OUT OF STOCKS." It hasn't wavered since... The signal has stood its ground, saying "stay out of stocks," since 2007. Don't you wish you had paid attention to it?
Here's the secret to the market-beating success of this signal: It has a history of keeping you out of the big downturns in stock prices. The signal captures most of the uptrend as well.
Let me share this signal's incredible track record. Our "baseline" is the overall stock market – the S&P 500 Index. This index has compounded at 5% a year since 1926, not including dividends. (Yes, it's true... Most people think the stock market has done better than that. But the recent bear market reduced the historical return.)
When the signal said "be in stocks" – two-thirds of the time – stocks rose at a compound rate of 11% per year (again, not including dividends).
The other third of the time, when the signal said "be OUT of stocks," stocks actually compounded at a negative 6% per year.
This incredibly simple idea comes down to one question: Are stocks above or below their recent average prices?
If stocks are above their recent average, then you want to own them. If they're below it, then you don't want to own them.
When the S&P 500 Index is above its 45-week moving average, stocks compound at an astounding 11% annual rate. And when stocks are below it, they lose money at 6% per year.
Here's a simple graph showing how much money you'd have made since the beginning of 2000 following this system, versus the index. We own stocks above the moving average and move to cash earning 3% (just to keep the math easy) when stocks are below the moving average.
The blue line is the money in our little "system." You're in cash when the blue line goes "straight." The black line is your money if you just held the market (not including dividends).
You can see a few things right away...
The first is, you did significantly better than buy and hold. Most importantly, you cut your losses in the two big falls – the one from 2000 to 2003 and the one from 2007 to today.
With results like these, why doesn't everyone simply own stocks when they're above the line?
Before I go on... there is one small issue here that can eat into your returns... something called "whipsaws." That's when the market crosses over the line one week and then crosses back the next week. The argument goes that the transaction costs associated with jumping in and out on these false signals would eat up your excess gains.
This worry has merit, but you can nearly get rid of whipsaws quite easily by increasing the threshold it takes to get into a trade. When you raise the threshold to enter the trade to 2% above the moving average, you cut the whipsaws down by over 80%.
And even though you've made it tougher to get into a trade, the amazing part is, you don't affect your results much. In this example, not only would you have ended up with more money, but you'd have had far fewer transactions, meaning lower costs.
You might disagree with this system. You might say it's too simple or dumb. But it's worked darn well over the last 80 years... and over the last decade.
And right now, this signal is about to say "buy" – because the old high data points are about to drop out of the 45-week average, and low ones will replace them.
Remember, when it says "buy" stocks rise at 11%+ a year... Ignore it at your own risk.
Good investing
And this is big news because going back to the 1920s, this signal's track record is fantastic...
In fact, the last time this signal flashed was December 2007. Back then it said "GET OUT OF STOCKS." It hasn't wavered since... The signal has stood its ground, saying "stay out of stocks," since 2007. Don't you wish you had paid attention to it?
Here's the secret to the market-beating success of this signal: It has a history of keeping you out of the big downturns in stock prices. The signal captures most of the uptrend as well.
Let me share this signal's incredible track record. Our "baseline" is the overall stock market – the S&P 500 Index. This index has compounded at 5% a year since 1926, not including dividends. (Yes, it's true... Most people think the stock market has done better than that. But the recent bear market reduced the historical return.)
When the signal said "be in stocks" – two-thirds of the time – stocks rose at a compound rate of 11% per year (again, not including dividends).
The other third of the time, when the signal said "be OUT of stocks," stocks actually compounded at a negative 6% per year.
This incredibly simple idea comes down to one question: Are stocks above or below their recent average prices?
If stocks are above their recent average, then you want to own them. If they're below it, then you don't want to own them.
When the S&P 500 Index is above its 45-week moving average, stocks compound at an astounding 11% annual rate. And when stocks are below it, they lose money at 6% per year.
Here's a simple graph showing how much money you'd have made since the beginning of 2000 following this system, versus the index. We own stocks above the moving average and move to cash earning 3% (just to keep the math easy) when stocks are below the moving average.
The blue line is the money in our little "system." You're in cash when the blue line goes "straight." The black line is your money if you just held the market (not including dividends).
You can see a few things right away...
The first is, you did significantly better than buy and hold. Most importantly, you cut your losses in the two big falls – the one from 2000 to 2003 and the one from 2007 to today.
With results like these, why doesn't everyone simply own stocks when they're above the line?
Before I go on... there is one small issue here that can eat into your returns... something called "whipsaws." That's when the market crosses over the line one week and then crosses back the next week. The argument goes that the transaction costs associated with jumping in and out on these false signals would eat up your excess gains.
This worry has merit, but you can nearly get rid of whipsaws quite easily by increasing the threshold it takes to get into a trade. When you raise the threshold to enter the trade to 2% above the moving average, you cut the whipsaws down by over 80%.
And even though you've made it tougher to get into a trade, the amazing part is, you don't affect your results much. In this example, not only would you have ended up with more money, but you'd have had far fewer transactions, meaning lower costs.
You might disagree with this system. You might say it's too simple or dumb. But it's worked darn well over the last 80 years... and over the last decade.
And right now, this signal is about to say "buy" – because the old high data points are about to drop out of the 45-week average, and low ones will replace them.
Remember, when it says "buy" stocks rise at 11%+ a year... Ignore it at your own risk.
Good investing
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