Saturday, March 7, 2009

Too Late to Panic?

This chart shows a picture of several bear markets. The bear market of 2007-09 is already the second most severe in history. And it is still well above the levels where the bear market of the 1930s eventually found support. To my eye, it appears that significant downside risk remains.

It is probably too late to panic because the market down trend is well extended past the mean. Because the model has detected poor market conditions, the portfolio has been in a net-short allocation for 7 out of 10 weeks YTD, and has profited from the market's decline.

There is a possibility that the market will bounce and perhaps rally strongly off the new lows set this week. If so we will give back some of our gains. But whether the market gives us a bounce or not, we must be prepared for the possibility that the market may decline much further before reaching the ultimate bear market low.

Rather than speculate on when the market trend will reverse, we rely on the data-driven Thrust / Trend Model to determine prevailing market conditions and then we align our capital to take advantage of the model's statistical edge. The model doesn't attempt to anticipate trend reversals. The market will tell us what it is doing and we will use our statistical edge to systematically generate returns over time.

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