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Just the Facts!

If you are old enough, you probably remember the television series, "Dragnet". One of the phrases that Sergeant JoeFriday used to say when questioning a witness was, "Just the

If you are old enough, you probably remember the television series, "Dragnet". One of the phrases that Sergeant JoeFriday used to say when questioning a witness was, "Just the facts, Ma'am." This past week, I received an email from a friend of mine who asked my opinion on how to interpret the forecast charts in light of the Fed's on-again-off-again tapering of its "Quantitative Easing" strategy. This question spurred an interesting discussion here in the office. I'll share some of that conversation with you as I believe it to be worthwhile in this current Fed-influenced economy and stock market.

Quote worth Quoting Again

"Welfare's purpose should be to eliminate, as far as possible, the need for its own existence"… Ronald Reagan

The discussion centered around the following question: "How much of the current market value is due only to the US Federal Reserve and its monetary policy?" The answer could range from very little to significant. Another way to ask the same question is, "How much of the market's movement (up or down) is directly (only) tied to the Fed and how much is tied to real economics?" If the answer is, "A substantial portion of the market's current valuation is directly tied to the Fed's $80 billion a month bond buy-back program.", then one could easily draw the conclusion that the equity market is in an artificially contrived bubble that will go away once the Fed stops the trillion-dollar-a-year monetization program. Could this be why the market is so skittish about the so-called "Bernanke Taper" program that could start this year? One might easily draw the conclusion that the truth to these questions could have a lot to do with how you trade and/or invest in this market. One could certainly be thought to be reasonable and prudent to give a lot of serious thought to these questions. But, I am not so sure it is worth the time or effort and I am not so sure it matters that much, one way or the other… read on to see why…

You could argue that almost every major market trend for the past 5 years has been directly tied to the Fed's monetary policy. You could also argue that the steepness of these trends is directly tied to how much money the Fed is dumping into big banks through its Quantitative Easing monetary policy. You could also wonder if the Fed's actions have really done anything with regard to the real economy. Except for the movement in the stock market, one 'could' argue that the Fed's monetary policy has been a colossal failure with regard to job creation and helping facilitate a growing economy. For example, there are 6 million fewer people working today than 5 years ago and far fewer middle-income or higher paying jobs. GDP is anemic and could go negative this past quarter. Unemployment is chronically high and according to the Fed, "under reported". But, "Are those the facts, ma'am… or is this nothing more than speculation and opinion?"

During this discussion about the Fed, which had animated opinions from multiple viewpoints, our CTO (Will Turner), who was in this discussion, pointed out the following facts:

  • Over the past 3 years, using the CycleProphet Equity Analyzer's buy/sell signals, 99.5% of every stock and ETF in the CycleProphet database (nearly 6,000 in all), had net positive gains. We know for a fact that this was not due solely to a raging bull market. How do we know that? Look at the next bullet-point…
  • If you relied on a buy-and-hold strategy, where you invested an equal amount of money in each of these 6,000 equities, you would have seen that only 77.5% of these securities generated a 3-year profit. That means 22.5% of these tickers lost money in spite of the raging bull market, whether Fed-induced or not; whereas, using CycleProphet, 99.5% of those same tickers generated a profit.
  • Then, he said, "Let's compare the 3-year results of profit generated per trade…" Following CycleProphet, theaverage net gain across the entire database of tickers, was over 200%. This compares to a buy-and-hold strategy that resulted in just a little over 60% average gain in that same 3-years. Certainly, an average of 60% over 3 years is incredibly good. But, an average of over 200% for those same tickers over that same time-period, using CycleProphet, is staggeringly good.
  • One more fact (and this is so very important to making money in the stock market): If you followed CycleProphet for the past 3 years, you would have experienced 62.5% more winning trades (on average) than losing trades and each winning trade was more than twice the size of each losing trade.

Will's point, which is very hard to argue with, is regardless of what the Fed has or hasn't done over the past 3 years, following CycleProphet's buy/sell strategies has proven to be phenomenally profitable. And, regardless of whether we recognize the Fed's actions, the Current Administration's actions, the truth or fiction regarding China's growth rate, the out-of-control Federal deficit, the total inability of Europe to get its fiscal house in order, the monetary shenanigans of Japan, or any one of a dozen major global economic machinations… the fact is, using CycleProphet's rules, tools and trading strategies has outperformed a raging four year+ bull market by nearly 4-to-1. His point was very simple… "Who cares what the Fed is going to do or not going to do… What is far more important, is to buy when CycleProphet says buy and sell when CycleProphet says sell and ignore the talking heads, Bernanke, global economies, who's in the White House, or any one of dozens of exogenous events that could (and likely will) skew the market. It is far better to follow a disciplined approach to trading, follow a well-defined set of rules and incorporate a strong set of tools that provide fundamental, technical and forecasting analysis results of every ticker.

And… those are the facts!

As the markets put the debt ceiling debacle in the rearview mirror, more than a few issues remain open.