What Wall Street Won’t Tell You

Does “buy and hold” always work?

The buy and hold mantra of Wall Street tells you that it’s in your best interest to be in the market all the time. If you’re not in the market all the time, the mantra says, you’ll miss the best trading days. Wall Street wants you to buy and hold… So, they can collect as many fees as possible. The argument is usually that you will miss out on the “best days” if you don’t buy and hold like they recommend.

What Wall Street won’t tell you though, is that most of the time, the “best days” are followed by a bear market with ugly declines. The biggest bounces are usually seen in bear markets. But this is where the biggest drops and most painful declines are as well.

Therefore, if you try to capture Wall Streets “best days”, the days with the biggest upside, you will end up in the midst of harsh bear market trends. This means you will probably catch the worst days too. That tends to defeat the point.

Richard Smith of TradeStops wanted to confirm this idea and took a deeper look back at history. He is using their TradeStops Volatility Quotient, or VQ, a measure of volatility over a 12 to 36-month period. He asked a question: “What happens to the Dow after it moves higher by at least ½ VQ in a week’s time?” (Statistically, that is a huge upside move.)

Going all the way back to 1900, this has happened 129 separate times. Of those 129 instances, 97 of them the move happened when the Dow was in the SSI Red Zone.

Red SSI Up MovesNot Red SSI Up Moves
97 times32 times

Provided below are charts that break the past 118 years of Dow history into three different periods, so all of the “big upmoves” can be seen more clearly. The charts show all the big upmoves that happened when the TradeStops SSI was in the Red Zone. Bear market periods are highlighted in blue shading.

What we can see from 1900 to 1936, is that more than 50% of the big upmoves were so-called “dead cat bounces”. This is a sharp rebound followed by a painful decline.

It does not get any better from 1936 to 1972, where more than two-thirds of the big upmoves were followed by painful declines (dead cat bounces).

The story is the same for 1972-2018. In SSI Red Zones, upmoves are usually “dead cat bounces” followed by a decline, which certainly defeats the point of buying and holding. As mentioned, Wall Street won’t tell you this, as their main concern is collecting fees. Therefore, we can conclude that investors are better off not trying to catch the “best days” and staying out of the Red Zone.

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