12-21-2020: Trusting the Process

Year-to-Date Strategy Stats as of today:

+ 49.30% : Turner Quant Advantage (TQA)

+ 18.61% : Tactical Growth (TG)

+ 5.22% : Diversified Income (DIS)

+ 31.51% : Leveraged Index (LI)

+ 14.37% : S&P 500

I encountered a conundrum today that I want to share with you.

If you are an avid reader of my weekly Client Letter (and I wouldn't blame you if you are), then you know that I have been warning you for the past few weeks that the market is getting (if not already there) significantly overbought. Further, I have been elaborating that OB markets tend to correct; sometimes severely.

But, I am afraid that all I did was worry you that a correction could ensue at any moment and then this morning with the futures down 700+ points, some of you (and you know who you are) began to panic. Indeed, I suspect some of you thought about calling me to tell me to move you immediately to cash.

What I failed to do, over the past few weeks, is to explain how it does not matter what the market 'might' do... What matters is, what it 'does' do. If the market tanks, we always have a fallback (stop losses) in place to handle the sell off. Stops on each holding are extremely tight (because of the overbought condition of the market), so if/when the market moves lower, we will simply sell the positions that trigger their stops.

But, even more importantly, I may have not conveyed an extremely valuable component of quantitative analysis. While the market 'may' be overbought, we won't simply sell everything under the assumption that the market has topped out. Being overbought is just one of several data points that determine when to sell... it is not the ONLY data point. But... when I have been extoling the likelihood of a correction for the last few weeks AND the market drops over 700 points in the early Monday morning pre-market, I can't you blame for thinking, "This is it... this is the big one... this the big-time correction that Mike has been forecasting!"

Here at Turner Capital, we saw the market tanking early Monday morning, but we did not change our rules... we didn't panic... we didn't call the TD trade-desk and plead with them to take us to cash. What we did is what we always do. We simply confirmed that our stops had been properly adjusted based on this past Friday's closing prices. We were using very tight stops that were 0.25 em's (expected moves... aka one standard deviation of normal volatility of each holding) below Friday's closing prices.

As it so happened, the market opened just below the stop loss settings on all of our holdings in the Leveraged Index model; and by rule, that means the model went to 100% cash at the open. This was not done in haste or due to any 'guess' that the market was about the crash into the next correction or bear market. This happened by rule and by plan.

Indeed, most (not all) holdings triggered stops and we booked a lot of profits as the stops moved our models toward cash. There are still open positions in the TQA, TG and DIS models, at this writing. If the market opens lower in the morning, those positions may also stop out... but, the market 'could' get back on its bullish track. The odds continue to favor a move lower, but probability odds are not facts. Speaking of facts, the market (the Dow) recovered from its 700-point deficit to end the day on the plus side.

Today's market action serves as a great illustration of why a quantitative trading analysis provides a clear, decisive course of action, regardless of what the market does or does not do.

We have now locked in huge profits for 2020 and with very little invested in the market, we can afford to sit mostly on the sidelines and see what the market does next. You no longer have to worry about the market being overbought and, in truth, you should not have been worrying about the potential of a market correction anyway... at least not for the capital that we are managing for you.