No. of Recommendations: 22
We now have 15 years of data since the Bear Catchers (BCCs) were discovered. According to Zeelotes, 2009 was the first full year that an investor could use all 3 BCCs to time the market. This post looks into two market timing strategies using the BCCs, and compares them to simply buying and holding an S&P 500 index fund or ETF.
If you don't have time to read the below, my conclusion is that one of the two BCC strategies I looked at has been a failure. The other one can be considered either a success or a failure, depending on how you define your success criteria.
Ok, let's dive in.
First, I'm defining a bear market as a peak-to-trough drawdown of 20% or more in the S&P 500. I'm also defining a
severe correction as a drawdown of 15% or more. Since 1/1/2009, we've experienced 3 bear markets and 3 severe corrections, as shown in the table below.
Let's consider 2 market timing strategies: MT1 and MT2. The buy and sell rules are as follows.
MT1 Market Timing StrategySell SPY only if all 3 BCCs turn bearish
Buy SPY if at least 1 BCC turns bullish
MT2 Market Timing StrategySell SPY if at least 1 BCC turns bearish
Buy SPY only all 3 BCCs turn bullish
Obviously, MT2 is for more skittish investors.
Now, let's define some success criteria. Let's assume we're retired and it's much more important to limit drawdowns than to beat the market. But what exactly does it mean to "catch" a bear market? Does it mean we want our strategy to lose 0% while everyone else is losing 20%? Nah, that's not realistic. Let's say that we consider the strategy to be a success if it limits our drawdown to 10% or less, while buy-and-hold investors are losing 15% or more.
Here's how the MT1 and MT2 strategies have done in the past 15 years.
BCCs Post Discovery (1/1/2009 through present)
MT1 MT2
Buy & hold Sell if all 3 Sell if at least 1
S&P 500 BCCs bearish BCC bearish
Max drawdowns
2009 bear market -27.0% -27.0% -5.6%
2010 correction -15.6% -15.6% -16.0%
2011 correction -18.6% -17.4% -7.6%
2018 correction -19.4% -19.4% -12.5%
2020 bear market -33.5% -33.5% -11.9%
2022 bear market -24.3% -18.3% -2.2%
Performance
CAGR 14.4% 13.9% 7.90%
SAWR 11.9% 11.3% 6.80%
LDDD3 6.0% 6.0% 5.40%
MDD -33.5% -33.5% -16.2%
$100K becomes $769,000 $717,000 $317,000
As you can see, the MT1 strategy failed to limit drawdowns in all 6 cases! During the bear markets and corrections, MT1 dragged investors into the same massive declines as the overall market. So MT1 is objectively a failure when it comes to successfully catching bear markets. I have to admit, I was surprised by this result.
MT2 does much better, but it's not perfect. MT2 did limit drawdowns to below 10% during 3 of the 6 bad periods. But it still exposed investors to a 16% drawdown in 2010, a 13% decline in 2018, and a 12% decline in 2020.
The reduction in volatility came at a cost. Investors using MT2 only had a Safe Withdrawal rate of 6.8% and a CAGR of 7.9%. Whereas their buy-and-hold friends had a SAWR of 12%, a CAGR of 14%, and ended up with more than double the amount of money at the end.
I hope this post helps you understand the tradeoffs when using these BCC strategies.
You can backtest these yourself using the gtr1 link below:
https://gtr1.net/2013/?!!QlpoMTFBWSZTWa!2BNzl4AAnJ...Set BCC > 0 to test MT1 and BCC = 7 to test MT2.
Mechinv
