The “Most Hated Bull Market” of all time is also proving to be one of the most resilient. It just keeps rubbing salt in the wounds of the bears, and every time the exuberance starts looking irrational, the market puts in another run up. Josh Brown has a great piece summing up just how much sheer wonder is wrapped up in this moment, but we were a bit puzzled by the inclusion of the following statement:
The Black Swans we’d been guessing at have had their necks broken one by one, their heads bashed in. Blood and feathers, a smear on the wall.”
Right off the bat – things that we’re guessing are going to happen aren’t really Black Swans, per Nassim Taleb’s description. A true Black Swan is something that is such an outlier that it can only be rationalized in hindsight… in other words, if cable news personalities chatter about an issue on a daily basis, it’s not a Black Swan (take the Eurozone, for example).
But that quibble aside, what he’s really highlighting is the futility of top-guessing. No one in their right mind, no matter how bullish, is expecting a perfectly smooth upward curve to Dow 30,000 and then on into infinity. The bears are not wrong in saying that a pullback is coming, they are wrong in the conceit that they know exactly when it will strike. Jon Boorman gets it right:
There’s a big difference between expecting a pullback, and predicting or looking for one. I’m not going to change a single thing. I will still let my winners run, and cut my losers. I will continue to ride every uptrend until it’s over, but I am getting to the point where I am expecting to have that definition of when a trend is invalidated put to the test.
This is why a good trend following component is so valuable for investors. It’s not going to be the shining star of your portfolio when times are good. That’s not what it’s there for. But managed futures can still prosper when stocks are on fire (the Newedge CTA Index is up 4.68% so far this year, compared to 16.31% for the S&P 500. Disclaimer: past performance is not necessarily indicative of future results). And when the next market decline hits – whether it’s a Black Swan or a run of the mill pull back – we’re guessing you’ll be glad you diversified.
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