From Monday’s TrendCompass report: On 23 October, Yale economics professor, Robert Schiller gave a speech to a gathering of investors in Los Angeles. “I see bubbles everywhere…,” said the nobel laureate and author of “Irrational Exuberance.” Dr. Schiller famously predicted the bursting of the dotcom bubble in 2000 and the crash of the housing market in 2007, so investors rightly take his warnings very seriously.
The only problem here is that Dr. Schiller delivered his speech on 23 October of 2019, just over two years ago! That day, the S&P 500 closed almost exactly at 3,000. It has surged by more than 50% since then.
Not that Robert Schiller was wrong: the bubbles were indeed everywhere and two years later, they still are. As I’ve repeated here many times, large-scale price events unfold as trends that can span many months and years, and even if we call those trends bubbles, this does not imply that they can’t continue to inflate. Neither experts like Robert Schiller nor ordinary market participants can predict how long or how high asset prices might advance.
The most reliable way to navigate the uncertainty is through systematic trend following. The chart below shows how a typical I-System strategy navigated the last boom-bust cycle:
Note, with trend following you would have neither sold at the top in 2007, nor bought at the bear market’s bottom in 2009. However, you would have captured a significant windfall through both bull and bear cycles. In 2008, the large majority of traders and investors sustained very substantial losses. Thanks to systematic trend following and the I-System, the portfolio I was managing at the time returned a 27% positive result to investors (net of fees). Near the peak of today’s bubble, I believe that investors’ best bet might be again to rely on systematic trend following. Here’s why:
- Economic forecasting is a waste of time
- Trend following is the only valid answer to the problem of uncertainty
- Market trends are far and away the most powerful drivers of investment performance
TrendCompass reports provide real-time CTA intel and dependable systematic trend following signals to help traders, investors and hedgers navigate over 200 financial and commodities markets. To request a free 1-month test-drive, please check out the I-System TrendCompass page.
Alex Krainer – @NakedHedgie has worked as a market analyst, researcher, trader and hedge fund manager for over 25 years. He is the creator of I-System Trend Following, publisher of TrendCompass reports and contributing editor at ZeroHedge based in Monaco. His views and opinions are not always for polite society but they are always expressed in sincere pursuit of true knowledge and clear understanding of stuff that matters.