May

10

This week is a 10-week low in DJIA. Going back to 1929, checked for instances when this week's close was a 10 week low, AND it was the first 10W low in 10 weeks (a dip). Then checked the return going forward, for the next 10W, 20W, 40W, and compared the mean returns for such "dip-buying" with the means of non-overlapping periods of 10W, 20W, 40W.

(This study is not statistically (or politically) correct, as there is overlap with some of the dip-buying and the data is not strictly independent. However assuming an investor bought at all the stated points, comparison of mean return to dip buying vs buying every 10W, 20W, 40W is valid)

Here are the comparisons of mean returns to dip-buying v automatic buying:

Two-sample T for 10W ret vs all 10W

              N    Mean   StDev  SE Mean
10W ret  132  0.0108  0.0915   0.0080  T=-0.15
all 10W   425  0.0122  0.0860   0.0042

Two-sample T for 20W ret vs all 20W

             N   Mean  StDev  SE Mean
20W ret  132  0.022  0.136    0.012  T=-0.15
all 20W   212  0.024  0.121   0.0083

Two-sample T for 40W ret vs all 40W

              N   Mean  StDev  SE Mean
40W ret  132  0.039  0.190    0.017  T=-0.40
all 40W   106  0.048  0.169    0.016

All of the "buy the dips" returns were lower than equivalent auto-buy periods (though not significantly). Note also the stdev of dip buying was higher (though NS, F-tests not shown): the result of buying in declining/more volatile markets.

How could buying after declines give lower returns than buying all the time? By missing periods of high momentum (eg 1990's), when stocks go up for long periods without making many 10W lows. (From a T and A perspective, this is equivalent to missing the returns above long-term moving averages).

If profit were simple we'd all be rich.

Craig Mee comments:

British Politics in hung parliament, US struggling with oil disasters, Aussie politicians trying to bring in a 40% extra mining tax because the miners are making too much dough and should share it, (where was the government, showing gifts when gold and raw materials where going nowhere for 20 years. They want their hand in the cookie jar, after shocking mismanagement) Europe struggling and debt across the board globally, and as Vic said retail accounts coppering a hammering. No doubt anyone close to retirement who rode the last equity wave up will be thinking of any bounce, and I'm going to cash.

I'm all for contrarian trading, but as Larry has outlined once before, wait for the setup, in price, and volality (just as it did on the recent high). Wash outs no doubt provide a key guide. 


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