#73 S2N: Drawdown, is it time?

As it is the start of the month, I wanted to put myself under pressure by making this public. I have dozens of charts and tables that are not mapped to the website and are therefore not visible to you for your browsing pleasure. I am committing to having the information architecture of this site improved and all data updated daily by the end of the month. No excuses!!!

One more message to myself: learn how to watermark your damn charts with a logo, rookie mistake.

S2N Spotlight

I have seen quite a few people asking, when do I think there will be a 10% pullback to add to the market? I have already done some backtesting, which I shared in a previous letter, as to whether that is a good strategy, which it proved not to be. If you want to be in the market for the long haul, then get in; don’t try and time it. To help get some more perspective on the question, it is good to look at things visually. I am quite happy with the way this visualisation came out. My late father always said to me that self-praise is no recommendation; sorry, it slipped out.

I go back 54 years and mark every 10% drawdown, including the date and the number of days since the last drawdown of the DD threshold in question.

There have been 18 drawdowns of 10% in the last 54 years, with an average of one every 1,114 days. The last 10% drawdown was in Feb 2022.

The official definition of a bear market is a 20% drawdown. Let us take a look at the chart. Looking at the 8 occurrences in the last 54 years, it seems to have been a pretty good timer of when to call a bottom.

I thought while I was at it, let me go a notch deeper and see what a -30% DD picture looks like.

I thought, while I am at it, let me contrast a really volatile asset and see what its 30% DD profile looks like. Bitcoin only goes back to 2010 and this is the picture we see. I should add that the price axis of all charts is a log scale. What is clear from this chart is that 30% is not good at call the bottom when Bitcoin is in drawdown.

S2N Observations

There are some who swear by seasonality; I am not one of those. However, seeing as it is the first trading day of the month, I thought I would share what 50 years of data suggests for June. There is a positive expectancy of 0.45% for the SP500. I have presented the chart and the table below.

I have mentioned before that I am allergic to market commentators looking for a headline. Truth be told, we all are. However, this one I needed to call out because it was simply wrong. Firstly, the analyst himself didn’t know what it meant, and there were plenty of others like me who weren’t impressed.

The first point is that just because he is using ETFs with limited history doesn’t mean there isn’t history. I have substituted his ETFs with symbols that have more history and are good proxies for this chart analysis. Does the chart below look anything like a new all-time low?

While we are speaking about ratio’s, this one came up, and I thought I would share it as it is flashing a sell signal. I have created a ratio of the Nasdaq relative to the SP500. When the ratio goes above 3, it issues a sell signal on the SP500.

I have to tell you that I wrote the above 3 hours ago. I was going to send it and then thought to myself. You have such a big mouth, calling out others for headlines, and then you go do the same thing. I was feeling too lazy to spend the time coding a backtest for this ratio. I don’t use a simple tool that just creates the backtest. I have to code a lot of it. Anyway, I decided to make the effort, and then I hit every obstacle in the book. For the love of me, I could not get the data to replicate the ratio and signals. It turns out I was using a different data source; the backtest was using the Nasdaq 100 instead of the Nasdaq Composite I used for the signal chart. After a lot of thinking, I realised that the sell signal based on a ratio above 3 was only factoring in sell orders as opposed to the backtest, which looks at a system that is either long or in cash.

The simple point I wish to make is to be very clear about what you are looking for when doing your analysis. I am not saying the Nasdaq ratio versus the SP500 is not a useful market timing indicator. I am sure I can refine this strategy. The point is that I got sucked into the signal that I saw some commentator pushing as a great sell signal, and I never did the proper research and then nearly sent it out without doing proper research. The whole purpose of Signal2Noise (S2N) is that less is more. Rather go deeper than headlines.

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