Hi N, Thank you for your comments. As I mentioned here in a previous post, the Low Risk periods of the past have usually lasted many weeks. I imagine it will this time, too. It's been the longest and most interesting slide that I've yet seen since collecting data. Then again, it was the longest and most peculiar bubble that I'd seen just prior to the slide!
As AIMers, we have been willing to let the math of AIM guide us, not as a predictive model but as a reflective device. It looks at what's happened and then makes a measured response. Although most have not been able to buy all the way to the very bottom (whenever it occurs) they have done significant downward averaging which will help whenever the market does start to recover.
The Idiot Wave started out as a curiosity and hobby. I'd noticed the Value Line Best/Worst information way back in the mid-'80s and started to collect it. It showed promise as a confirmatory signal. Since then I've added the other three components. It wasn't until 1995 that I actually started using the IW as anything more than just a guide. It showed very good signals, but hadn't been really tested in either a bubble or a significant bear market. Now, as we are approaching a true low risk area for starting new investments and after watching the IW perform in the expansion of the Bubble I'm feeling much more confidence in it.
It wasn't designed as a timing device but as a confirmatory indicator. Its scale was designed to mimic the Cash Reserve levels that AIM would presumably generate through typical market cycles. With the most recent history behind us it appears that it may be used for more than just confirmation. I've had some correspondence with people who have spent time with the data and have given it high regard for timing.
Years ago my brother and I worked to create a "switch" which would turn AIM either on or off depending upon market conditions. We searched all the Guru databases for someone who had done at least a 60% range call. We figured if we missed the top and bottom 20% of the range we'd still be sitting pretty. We'd let AIM take care of all trades until one of the switches was tripped. Part of the effort in creating the Idiot Wave was to come up with that Switch device as we'd never found a reliable call for the market. When my brother died in 1995, I guess I quit looking outside and started to use the rather large pile of data that I'd already accumulated. Knowing just how to use it is the trick.
High risk periods can last quite a long time. During the time the IW has been at high risk we've seen the NASDAQ Comp. rise quite a bit as well. So, it becomes a question of how much of a rising market is one willing to miss as "insurance" against the next fall. Going back to our quest for the ultimate guru, maybe being willing to sacrifice the last 20% of a rise would be a good goal. Certainly giving up the last 1000 points of the NASDAQ Bubble and being in cash would have saved significant paper losses in the trashing the NASDAQ has taken since.
The next part comes in as a switch point to restart AIM. Should it be only when we see a Low Risk signal? That's only been 5 times since 1982. That's probably too severe. How about the middle of the Average Risk range? After all, that's about as "average" as one can get. Wherever it appears, it's going to be good for some markets and not as good for others. In this decline, we crossed back through the mid-average risk point sooner that would have been prudent to reinvest. Although if we'd waited to re-start AIM until that point, our cash reserves would certainly have been used to better advantage.
A year ago I added the 1982 to 2000 data for the four IW components and the entire history of the IW itself to the web site. I see that occasionally some people d/l that data. I've planned to update it to include the last year's data but since I now have switched the Treasury data to the 13 week item, it requires me going back and doing it uniformly all the way back. That's going to take some time.
Your idea of stopping the 'vealie' activity during High Risk events is a good one. I've been considering that myself. The policy would be to do all AIM selling requested during High Risk events, no matter how high the Cash Reserves rose. Assuming we were using the 'vealie' properly all the way to that point, we should be nearly at 50% Cash anyway. Selling all that AIM asked after that could potentially push it quite a bit higher.
I'm certain we'll have plenty of time between now and the next Bubble to decide on a good plan as how to handle these rare and peculiar market conditions. In the mean time, AIM does a very nice job of controlling risk in more moderate times.
Finally, yes, we'll be seeing a couple of quarters of poor reports coming from most businesses. Please remember that the markets also lead business statistics by almost that same amount. In other words, the market usually anticipates the end of bad news before it actually occurs. The IW will tell us when we're at Low Risk to start new investments and also when most of our current investments should have bottomed. The Oscillator will tell us when the market statistics are starting to show a change in direction and, most likely, a start of the recovery. Value Line's data shows about a two week lag between events and reporting in their statistics. The Divergence and Zeal values are essentially as up to date as possible. Because of the uncertainty of this time in history I don't know whether the IW will fall and stay in Low Risk as it has in the past or whether it will float in and out over a protracted time frame. This time around we have the usual economic issues that are being addressed overlaid with the high stress of an uncertain daily environment because of the hoodlums perpetrating acts of violence for their own glorification and egos. This is being done while the entire Middle East exists with one of the smallest middle classes of the 21st century compared to their nations' total wealth. Opulence and poverty have a hard time co-existing. Why these hoodlums have targeted external countries for their internal wealth distribution problems is beyond me. It may be that our freedoms just make us an easier target than their own. Or maybe it's just jealousy of our general affluence and success. Until such time as some reasonable control is gained the uncertainty will continue to haunt Wall Street.
Best regards, Tom |
