Articles on investing and capital management, with a quantitative focus.

#bigpicture - Big picture thoughts

Mild TSX Correction So Far


Would it surprise you to hear that this has been a mild stock correction so far? For Canada's benchmark index, this current selloff has been one of the mildest in recent years. It's not a big drop, yet.

The figure I look at is the "drawdown", the drop from a local high to local low. You can easily see this using charts from, for example this XIC chart since 2014.

Time period Drawdown
2015 to 2016 22%
Late 2018 16%
Current 2020 10%

Although it's been accompanied by frightening news, and has happened very quickly, the current 10% selloff is milder than previous corrections. It's not much of a decline.

One should remember that stocks fall sharply every once in a while. Stocks could go a lot lower, even if they just match the % drawdown of recent corrections. It might be helpful to mentally prepare for a larger decline so that it doesn't come as a big shock.

Of course, we have no way of knowing whether markets will go higher or lower from this point.

Timing the market

I will now contradict my above statement and start talking about timing the market.

At this web site, I describe a number of investment strategies I use. My #prp is the main one; this is how I position myself overall.

However, I also deploy some money in far more experimental strategies. The #bullsignals strategy is a software-based market timing algorithm. My software tells me when it thinks I should buy or sell the index.

If you are familiar with passive investing or 'couch potato' investment, you will know that timing the market is generally a bad idea. For this reason, I only use #bullsignals for a small amount of my equities; currently 17%.

The #bullsignals software just told me to sell the index, so I sold 17% of my stocks (S&P 500 index) and went to cash. My software thinks there is a high probability of sharp declines coming.

However, what makes this market timing tricky is that the software might also tell me to buy again at any moment. I have gotten good results since 2005 with this software, but every signal (buy and sell) must be obeyed. This sometimes results in frequent trades, and you can't pick and choose which you want to follow.

For all I know, some time this week my algorithm might tell me to buy the index again.

What about asset allocation?

My #prp allocation normally is 30% stocks. However, with this market-timing, my stock exposure is currently down to 25% of the overall total.

Jem Berkes