Are “Sell Signals” Useless In “Mania” Markets?

Posted by Lance Roberts

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A recent Bloomberg article made the case that since 2009 “sell signals” are useless during “mania” markets. To wit:

“If you bailed because of Bollinger Bands, ran away from relative strength or took direction from the directional market indicator in 2021, you paid for it.

It’s testament to the straight-up trajectory of stocks that virtually all signals that told investors to do anything but buy have done them a disservice this year. In fact, when applied to the S&P 500, 15 of 22 chart-based indicators tracked by Bloomberg have actually lost money, back-testing data show. And all are doing worse than a simple buy-and-hold strategy, which is up 11%.” – Bloomberg

Note: “Bloomberg’s back-testing model purchases the S&P 500 when an indicator signals a ‘buy’ and holds it until the system generates a ‘sell.’ The index gets sold, and a short position established, until a buy is triggered.”

See, you should “buy and hold” invest, right?

Investing Based On Hindsight

Bloomberg goes on the clarify essential points.

“Of course, few investors employ technical studies in isolation, and even when they do, they rarely rely on a single charting technique to inform decisions. But if anything, the exercise is a reminder of the futility of calling a market top in a year when the journey has basically been a one-way trip.” – Bloomberg

In the short term, which can even include a 12-year bull market cycle, there are periods where “buy and hold” investing outperforms any other form of asset management. The problem is that you only know for sure that “buy and hold” was the proper strategy in hindsight.

Most only have a limited amount of time to invest for retirement for investors, so “getting it right” largely depends on two factors.

  1. When you start your investing process; and
  2. Avoiding major drawdowns

With the vast amount of individuals already vastly under-saved, the current “bear market” cycle will reveal the full extent of the “retirement crisis” silently lurking in the shadows. The Fed, Government bailouts, and low interest rates can’t fix this problem.

Such isn’t just about the “baby boomers,” either. Millennials are haunted by the same problems as their prospects of “economic prosperity” get set back years.

But here is the real problem for “baby boomers.”

Crashes Matter

Financial advisors regularly tell clients that the market grew 6% annually since 1900. Therefore, that is what returns will be in the future. The chart below shows $100,000 invested at 6% annually from 2000 or 2007.