Edition

IFTA JOURNAL
2017 EDITION
Wrestling With a Grizzly Bear: An Argument
Against Pure Buy and Hold Investing
By David M. Tonaszuck, CMT, MFTA
David Tonaszuck
David.Tonaszuck@lpl.com
LPL Financial, LLC
75 State Street
Boston, MA 02110
(617) 897-4288
Abstract
This paper investigated the feasibility of using a trend-trading
model on U.S. equities over the time period of 1929–2009 to
manage risk and aid in investment decisions. To do so, three
secular bear and two secular bull markets were analyzed, and
a strategy, based on a weekly Relative Strength Index (RSI)
indicator, is applied.
The backtest results provide evidence that using the RSI
(14) indicator as a trend-trading strategy helps accomplish the
following: 1) Generates profits in excess of a simple buy and hold
strategy during a secular bear market; 2) Reduces downside risk
versus buy and hold caused by bear market cyclical drawdown
periods; and 3) Underperforms buy and hold during a secular
bull market.
Introduction
The strategy used in this study consists of two moving
averages of the RSI, and the usual crossover rules are
applied. A long indication from the indicator translates into a
position consisting of a total investment. A short indication
is interpreted as a period where no investments are held. The
results are compared to a buy and hold strategy.
The research herein has provided an argument against pure
buy and hold investing, especially during a secular bear market.
Historically, buy and hold tends to merely produce the flat-tolower
returns associated with the overall markets during these
turbulent time periods. Employing a buy and hold strategy
during a secular bear market is like wrestling with a grizzly
bear; it can be potentially lethal, especially to a portfolio.
Trend Trading in Bull and Bear
Markets
Technical analysts have relied on the assumption that there
lies the ability to predict market returns by identifying patterns
and characteristics of past stock market prices. One method
of identifying price patterns is by understanding the price
trend within various “bull” and “bear” markets and applying
a technical trend-trading strategy for buy and sell decisions.
Historically, trend-trading strategies have been applied to
commodities, futures, and currency markets; they seek to enter
the market in the direction of an existing trend and to exit when
the trend reverses. 1 Over the past decade, limited research has
been published regarding trend-trading strategies as applied
to U.S. equities markets. In their book The Ivy Portfolio: How to
Invest Like the Top Endowments and Avoid Bear Markets, Faber
and Richardson provide evidence that a moving average–based,
trend-trading strategy applied within U.S. equities can generate
profitable outcomes. 2
Most investors associate the application of a trend-trading
strategy to take advantage of price momentum generated in a bull
market; however, another important application of trend trading is
the protection of assets during a painful bear market drawdown.
Secular Market Trends
According to Martin Pring, 3 a secular trend is a long-term trend
constructed from a number of primary or cyclical trends and
secondary trends. A secular trend typically lasts 10 to 25 years in
duration. For example, a secular bear market comprises smaller
magnitude bull markets and larger bear markets, and a secular bull
market comprises larger bull markets and smaller bear markets.
For the purposes of this paper the following terms are
further clarified: Bull and bear markets are defined as upward
and downward market trends, respectively. Using technical
analysis, a bull market can be represented on a line chart as
the price generally moving higher, exhibiting characteristics of
higher-highs and higher-lows. Conversely, a bear market can be
represented directionally as the price generally moving lower
(and in some cases sideways), exhibiting characteristics of
lower-highs and lower-lows.
The period from 1929–2009 for U.S. equities can be divided
into three secular bear and two secular bull markets. The secular
bear markets lasted for 13 (1929–1942), 12 (1966–1978), and 9
(2000–2009) years, respectively. The secular bull markets lasted
for 24 (1942–1966) and 22 (1978–2000) years, respectively.
Please note that the timeframe of 1966–1978 reflects the secular
bear trend on the S&P 500; for the Dow Jones Industrial Average,
it did not finish its secular bear trend until four years later in
1982. For the scope of this research, it is assumed that the March
6, 2009, bottom on the S&P 500 Index constitutes an end to the
most recent secular bear market (Figure 1).
Figure 1. The S&P 500 secular markets from 1929–2009
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