Today there was a Twitter fight between Nassim Taleb (@nntaleb) and Joe Weisenthal (@thestalwart) that as best as I can tell was started by Joe asking how much money has been wasted insuring against black swan events that never happened. For anyone new, a black swan is something that can't be reasonably predicted by people. Often you will see articles that warn of various black swans that threaten the market, those aren't black swans those are plainly visible threats. Like now, there is risk that the FOMC makes some sort of mistake with interest rate policy, it is a clear and obvious threat which may or may not ever become a problem but is definitely not a black swan.
Here is what I think was the key point made;
Taleb's second tweet is instructive and and reiterates a point I've made in the past. Bear markets have the tendency to roll over slowly taking several months to decline modestly before going on to large declines. One early-ish phenomenon you will see is that broad indexes, like the S&P 500 will go below their 200 day moving averages. A break of the 200 DMA signals that there is a problem with demand for equities. It may turn out to be a serious problem or not so serious and to the tweet sequence above you may know what the problem is or you may not, that doesn't matter, what matters is that if you have a process for defensive action you stick to it when it is triggered realizing there may be some false positives along the way. The potential for a false positive is why I move slowly to take defensive action.
Back in May, believing that the two percent rule had been invoked I bought AGFiQ US Market Neutral Anti-Beta ETF (BTAL). BTAL shorts high beta stocks and goes long low beta stocks. From its inception seven years ago, it spend most of its time going down which implies that higher beta was outperforming lower beta which is not shocking for a bull market. This year though it is up about the same as the S&P 500 per Yahoo Finance as charted below.
One way or another the 2% rule trigger was wrong. Either I was wrong in thinking it triggered, despite the modest rise in April the S&P 500 had an average 2% decline for three months in a row or it was a false positive either way the call looks wrong but as I indicated then, I chose BTAL thinking it would have the least possible portfolio drag in case I was wrong.
The chart itself is fascinating. BTAL appears to have a negative correlation on route to the same return, ETFReplay.com confirms a negative correlation. That BTAL has generally been going up implies that now low beta is outperforming high beta which might be a warning that the market is turning. I am not going to change the way I do anything based on that, it is merely an observation that may or may not be significant.
Before the last bear market I wrote constantly about the 200 DMA, a yield curve inversion, the two percent rule and a disproportionately large weighting of a sector in the S&P 500 as being warnings of a bear market. They all came into play in 2007 and into 2008 and I blogged about it along the way. I kind of called the bear market in December of 2007 but clearly I did not know the full impact of what was going to happen. To Taleb's tweet above it wasn't necessary that I understood what was coming, I was concerned about protecting against the effect not diagnosing the cause.
I believe that all of those indicators mentioned above that will warn of the next bear market because those are normal market manifestations, there's nothing clever about it, that's how markets tend to work.
I'm not sure if the Twitter fight ended yet but is was entertaining and more importantly it was a useful reminder of what is and is not important.