A Primer On Whipsaws and Reactive Indicators

A Primer On Whipsaws and Reactive Indicators

September 22, 2022

From the desk of Vance Howard:

I was asked the other day if I thought the HCM-BuyLine® has done its job in this bear market and my answer, with no hesitation, was a resounding YES. In this week’s Wealth Watch I’m going to do a postmortem of the last 9 months and review the last 20 years of the HCM-BuyLine®, so buckle up.

Like everyone else, we experienced a sharp drop in the first 19 trading days of 2022. We were long growth and tech, which was exactly were we should have been considering they were clearly the strongest sectors going into 2022. In the first 19 days, growth and tech dropped almost 15% in that short window. The HCM-BuyLine® fired off a signal to reduce exposure to equities on January 21st, which we did. Remember, and this is important, the HCM-BuyLine® is a reactive indicator, not a predictive indicator. I only know one manager who had a successful predictive indicator, and that was Bernie Madoff, and he is no longer trading. No one can predict what will happen in the markets. They can guess, but that is not a reliable system. Guessing is like someone telling you they know what the weather will be on March 26th, 2023, at 9:46 am. Good luck with that.

The HCM-BuyLine® is a trend indicator and it is a reactive indicator, meaning the market must move in one direction or the other for a period of time before it will adjust. It has two settings, one which is slow to activate and tell us when to exit the market. Why is it slow to turn negative? Because most markets like to trend higher, and we want to stay invested as long as we can to catch as much of the uptrend as possible. This also helps reduce the whipsaw effect. What is a whipsaw?  It’s a fast process that begins with the market moving higher and creating a buy signal on the HCM-BuyLine®. Then, buys are placed, only for the market to roll over and stop us out because the trend did not hold and turned back down. As much as I hate being whipsawed, it is part of the game. No matter how hard you try to eliminate them, they will happen. And it has happened to us twice this year, which I have identified in the chart.

The second setting is designed to provide a much faster signal to re-enter the market with as much gun power as we have, which is our cash buildup. Why? Because we are trying to catch as much of the early stages of new bull markets as possible. We do not try to catch the bottom, but we do try to get as close as possible. In starting to re-enter a beginning phase it can produce a whipsaw effect from time to time, but when the market does turn back up and a new bull market has begun, you can bet we will have moved back in as close as we could to the beginning of new uptrend, and hopefully a prolonged bull market.  

I have included additional charts of actual trends the HCM-BuyLine® has identified and the results it has produced. From 1-1-2011 to now, we had five HCM-BuyLine® calls to reduce exposure to equities and you can see the change in trend on the chart. I have also highlighted the pandemic trade where the HCM-BuyLine® was a very productive indicator during this almost insane period. You can see the trend turned down in early March and pushed us to reduce exposure to equities, as well as a new uptrend emerging about 4 weeks later causing us to move back into equities. Was this comfortable?  NO! It was a very uncomfortable trade, especially when the Imperial College was saying half of the people on the planet were going to die. But, this is why a non-emotional indicator like the HCM-BuyLine® can be so important. Again, the HCM-BuyLine® never called a top or bottom. It simply cannot do that because it is a reactive indicator.

Also, playing the all or non-game of 100% in cash and out of the markets is a fool’s errand. The only time we will go that far to cash is if the banking system is imploding like 2008 in which we were 100% in cash. And that move is documented. There is no dinner bell saying it’s all clear to invest.

What can you expect going forward with the HCM-BuyLine® being negative? The markets could fall even further, possibly retesting the 3600 area on the S&P 500. We are sitting on more cash than any other Wall Street firm of our size that I know of, and when the HCM-BuyLine® does turn positive there will be a lot of bargains to be had. The beginning phase of a new bull market is usually very powerful and the recapture of the drawdown we are experiencing is usually made back up at an expedited pace. With the very large cash buildup we have, this creates a lot of opportunity for all of us.

I wish bear markets never happened, but they do, and drawdowns and volatility are part of investing. Not just for us, but for everyone.

Vance Howard

This communication is issued by Howard Capital Management, Inc. It is for informational purposes and is not an official confirmation of terms. It is not guaranteed as to accuracy, nor is it a complete statement of the financial products or markets referred to. Opinions expressed are subject to change without notice. Howard Capital Management, Inc. may maintain long or short positions in the financial instruments referred to and may transact in them as principal or agent. Unless stated specifically otherwise, this is not a recommendation, offer or solicitation to buy or sell and any prices or quotations contained herein are indicative only. To the extent permitted by law, Howard Capital Management, Inc. does not accept any liability arising from the use of this communication. Howard Capital Management is an SEC-registered investment advisor which only does business where it is properly registered or is otherwise exempt from registration. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the advisor has attained a particular level of skill or ability. Past performance is no guarantee of future results.HCM-011222.01

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