History and Perspective

Introduction

This Leveraged Momentum History and Perspective page examines phases in recent market history and in the investments indicated by the Leveraged Momentum investing system using backtesting since October 2002 (the newsletter was launched in 2015). The objective of this page is to provide perspective on the phases Leveraged Momentum investing and the market go through to help establish appropriate expectations and the intestinal fortitude needed to react appropriately to inevitable gyrations and volatility.

Referring to long-term charts which show that the stock market has grown substantially over time can be reassuring. Likewise, substantial declines of 50% or more can be easier to stomach when comparing those declines with previous similar occurrences. While history does not repeat itself, it often rhymes (Mark Twain), and substantial recoveries have always followed substantial declines.

Leveraged Momentum is a proprietary investing system that seeks to beat the market over the long term by buying assets that seem likely to increase substantially in the near future and selling and avoiding assets that seem less likely to increase in the near future. By doing so, the system also seeks to recover quickly from the inevitable corrections*, bear markets*, black swan events, and other declines that will occur.

The following chart provides some perspective on the performance and volatility of the investments indicated by the Leveraged Momentum investing system since October 2002.

chart showing return on investment for Leveraged Momentum Optimum Mix versus the S&P 500 from October 29, 2002, through January 4, 2024
This chart compares the growth of $10,000 invested in the S&P 500 from October 29, 2002, through January 4, 2024, with the growth of $10,000 invested using the Optimum Mix during that same period. The blue S&P 500 line hugs the bottom X axis line because its value rises to less than $60,000.

October 2002 – October 2007: Recovery After the Bursting of the Dot Com Bubble

During the relatively short history of stock investing in the United States (the New York Stock Exchange was established in 1792 and the Dow Jones Industrial Average was created in 1896) substantial recoveries have always followed substantial declines. One of those substantial recoveries followed the bursting of the Dot Com Bubble. The bubble developed in the late 1990s when the Nasdaq Composite stock market index rose over 500% due to speculative investment in a wide variety of companies including many internet start-ups. In the 30-month recession which followed, the Nasdaq Composite fell 78% and gave back all it had gained during the bubble.

Like most recessions, the bursting of the Dot Com Bubble proved to be a Darwinian event with many weaker companies failing the test and many stronger companies surviving and finding themselves in position to thrive during the bull market* which followed (October 2002 – October 2007).

This chart compares the growth of $10,000 invested in the S&P 500 from October 29, 2002, through November 1, 2007, with the growth of $10,000 invested using the Optimum Mix during that same period.

The market as represented by the S&P 500 rose 73.6% during the 2002-2007 bull market which eventually ended in October 2007. In its hypothetical backtest for the same period, the Optimum Mix rose 1,367% (see image above) by investing in high-momentum large cap stocks and in leveraged equity ETFs which would not be launched until 2009 or later (so the backtest for this period relies on hypothetical data).

The strategic takeaway for bull markets is to “buy often and cover your assets.” Maximizing returns by selling high is difficult if not impossible. The market has tended to go up over time for the past few decades with only temporary setbacks so the optimum strategy has been to be in the market as much as possible (unless it seems likely to decline) and to focus on the Optimum Mix of assets. Instead of trying to “buy low and sell high” investors should think “buy often and cover your assets” using algorithms with manual stop loss orders and black swan indicators so that when a bull market finally ends (and they all end eventually) the algorithms cause the necessary actions to be indicated and taken.

November 2007 – March 2009: The Great Recession (Global Financial Crisis)

All bull markets eventually come to an end. The causes and triggers for each ending are as varied as human emotions and behavior but they usually seem obvious in hindsight. Books have been written on the causes of “The Great Recession” which began in November 2007. Many of us who were investing at that time would like to believe we saw it coming. The returns on our portfolios during that time tend to say otherwise.

This chart compares the loss in value of $10,000 invested in the S&P 500 from November 1, 2007, through March 10, 2009, with the loss in value of $10,000 invested using the Optimum Mix during that same period.

The market as represented by the S&P 500 fell 56% during the recession which ended in March 2009. In our hypothetical backtest, the Optimum Mix fell 37% during that same period (see image above) by continuing to invest in high-momentum large cap stocks and by switching a portion of the portfolio from leveraged equity ETFs to a leveraged bond ETF as directed by the algorithm and then back into leveraged equity ETFs after the end of the recession. The leveraged ETFs would not be launched until 2009 or later so the backtest for this period relies on hypothetical data. While the Optimum Mix showed better performance by the end of the recession, it would have declined twice as quickly during the initial months of the recession due to its investment in stocks and leveraged ETFs.

The strategic takeaway for this period and other speed bumps, corrections, and bear markets is to “cover your assets.” The time to develop an action plan for the inevitable temporary setbacks is before they happen. Using an investing algorithm should enable an investor to be dispassionate, systematic, and evidence-driven. Severe bear markets and rare black swan events with rapid substantial declines can be mitigated to some degree by systems which incorporate algorithms with manual stop loss orders and black swan indicators that indicate when to exchange stocks and leveraged equity ETFs for cash or leveraged bond ETFs. Those algorithms also need to provide clear calls to action when it is time to switch back into stocks and leveraged equity ETFs. Developing appropriate expectations and trust in an algorithm will enable an investor to take the necessary actions at the necessary times.

March 2009 – December 2021: The 2009-2021 Bull Market

As mentioned above, substantial recoveries have always followed substantial declines during the relatively short history of stock investing (the New York Stock Exchange was established in 1792 and the Dow Jones Industrial Average was created in 1896). Another one of those substantial recoveries started after the Great Recession ended in March 2009 and developed into the bull market which continued through 2021 with three obvious speed bumps along the way (which will be discussed below).

This chart compares the growth of $10,000 invested in the S&P 500 from March 10, 2009, through January 4, 2022, with the growth of $10,000 invested using the Optimum Mix during that same period.

The market as represented by the S&P 500 rose 607% from March 2009 through the end of 2021 which is the period of the bull market* which followed the Great Recession.

In our hypothetical backtest, the Optimum Mix rose 32,281% during that same period by investing in high-momentum large cap stocks and in leveraged equity ETFs which launched in 2009 or later (results prior to ETF launch dates are hypothetical since they are based on hypothetical data).

As mentioned above, the strategic takeaway for bull markets is to “buy often and cover your assets.” Maximizing returns by selling high is difficult if not impossible. The market has tended to go up over time for the past few decades with only temporary setbacks so the optimum strategy has been to be in the market as much as possible (unless it seems likely to decline) and to focus on the Optimum Mix of assets. Instead of trying to “buy low and sell high” investors should think “buy often and cover your assets” using algorithms with manual stop loss orders and black swan indicators so that when a bull market finally ends (and they all end eventually) the algorithms cause the necessary actions to be indicated and taken.

July-October 2011: The Debt Ceiling Crisis

As mentioned above, the bull market which followed the Great Recession continued through 2021 with three obvious speed bumps along the way.

The causes and triggers for such speed bumps are as varied as human emotions and behavior but they usually seem obvious and relatively rational in hindsight. Investor and market behavior can usually be explained by fear and greed (or fear of missing out FOMO). Speed bumps tend to develop around black swan events (unexpected events with severe impact) which create fear and uncertainty and tend to cause consumers to buy less and investors to sell stocks and equity funds. Eventually the issue is resolved and consumers and investors resume their normal behavior.

The first of three obvious speed bumps experienced during the 2009-2021 bull market happened during July-October 2011 and has become known as the Debt Ceiling Crisis. Markets reacted negatively when the credit rating for United States sovereign debt was downgraded by Standard & Poor’s for the first time in history.

This chart compares the loss in value of $10,000 invested in the S&P 500 from July 26, 2011, through October 4, 2011, with the loss in value and then growth of $10,000 invested using the Optimum Mix during that same period.

The market as represented by the S&P 500 fell 17.94% from July 26 to October 4 in 2011.

In our hypothetical backtest, the Optimum Mix actually grew 1.48% during that same period by continuing to invest in high-momentum large cap stocks and by switching a portion of the portfolio from leveraged equity ETFs to a leveraged bond ETF as directed by our black swan event indicator and then back into leveraged equity ETFs after the end of the black swan event. Those tactics helped the Optimum Mix recover quickly and go on to also substantially outperform the market in the months following the crisis.

While the Optimum Mix showed better performance by the end of the crisis, the leveraged equity ETFs caused the Optimum Mix to fall more quickly than the S&P 500 during the initial weeks of the crisis before those leveraged equity ETFs were exchanged for the leveraged bond ETF.

As mentioned above, the strategic takeaway for this period and other speed bumps, corrections, and bear markets is to “cover your assets.” The time to develop an action plan for the inevitable temporary setbacks is before they happen. Using an investing algorithm should enable an investor to be dispassionate, systematic, and evidence-driven. Severe bear markets and rare black swan events with rapid substantial declines can be mitigated to some degree by systems which incorporate algorithms with manual stop loss orders and black swan indicators that indicate when to exchange stocks and leveraged equity ETFs for cash or leveraged bond ETFs. Those algorithms also need to provide clear calls to action when it is time to switch back into stocks and leveraged equity ETFs. Developing appropriate expectations and trust in an algorithm will enable an investor to take the necessary actions at the necessary times.

July 2015 – February 2016: International Turbulence

The second of three obvious speed bumps we experienced during the 2009-2021 bull market happened during July 2015-February 2016 when a series of events created uncertainty and market turbulence for several months. Events included the ending of a phase of quantitative easing by the U.S. Federal Reserve, slower than expected GDP growth in China, a substantial decline of the Chinese stock market, the devaluation of China’s currency, a substantial fall in petroleum prices, the Greek debt default, a sharp rise in bond yields in early 2016, and the announcement in February 2016 that the UK would hold a referendum on whether to remain in the European Union (which eventually led to their infamous Brexit).

This chart compares the loss in value of $10,000 invested in the S&P 500 from July 22, 2015, through February 12, 2016, with the loss in value of $10,000 invested using the Optimum Mix during that same period.

The market as represented by the S&P 500 struggled to gain a foothold and was down nearly 14% during the eight months from July 2015 through February 2016.

The Optimum Mix fell 25.4% during that same period as it continued to invest in high-momentum large cap stocks while also switching a portion of the portfolio from leveraged equity ETFs to a leveraged bond ETF as directed by the black swan event indicator. The Optimum Mix later switched that portion from the leveraged bond ETF back into leveraged equity ETFs after the end of the black swan event. Doing so helped the Optimum Mix recover quickly and go on to substantially outperform the market in the months following the turbulence.

The Leveraged Momentum Update newsletter launched in January 2015 so the returns since that time are no longer based on hypothetical backtest data.

As mentioned repeatedly above, the strategic takeaway for this period and other speed bumps, corrections, and bear markets is to “cover your assets.” The time to develop an action plan for the inevitable temporary setbacks is before they happen. Using an investing algorithm should enable an investor to be dispassionate, systematic, and evidence-driven. Severe bear markets and rare black swan events with rapid substantial declines can be mitigated to some degree by systems which incorporate algorithms with manual stop loss orders and black swan indicators that indicate when to exchange stocks and leveraged equity ETFs for cash or leveraged bond ETFs. Those algorithms also need to provide clear calls to action when it is time to switch back into stocks and leveraged equity ETFs. Developing appropriate expectations and trust in an algorithm will enable an investor to take the necessary actions at the necessary times.

February-March 2020: Pandemic Panic

The third of three obvious speed bumps we experienced during the 2009-2021 bull market happened during February-March 2020 when the initial phase of the COVID-19 pandemic created uncertainty and panic. While the number and rate of job losses were unprecedented and a short-lived recession and bear market resulted, the impacts varied dramatically among different demographic groups. Relatively quick action by banking authorities and governments around the world eventually led to countermeasures and stimulus packages which calmed market panic and spurred a quick recovery.

This chart compares the loss in value of $10,000 invested in the S&P 500 from February 21, 2020, through March 23, 2020, with the loss in value of $10,000 invested using the Optimum Mix during that same period.

The market as represented by the S&P 500 was down nearly 32% from mid-February through mid-March of 2020 which is technically a bear market. Due to its short duration, many consider it to be a correction caused by a black swan event. After a quick recovery, the market picked up where it left off and went on to new highs through the end of 2021.

The Optimum Mix fell 42% during the same February-March period as it continued to invest in high-momentum large cap stocks while also switching a portion of the portfolio from leveraged equity ETFs to a leveraged bond ETF as directed by the black swan event indicator. The Optimum Mix later switched that portion from the leveraged bond ETF back into leveraged equity ETFs after the end of the black swan event. Doing so helped the Optimum Mix recover quickly and go on to substantially outperform the market in the months which followed.

As mentioned repeatedly above, the strategic takeaway for this period and other speed bumps, corrections, and bear markets is to “cover your assets.” The time to develop an action plan for the inevitable temporary setbacks is before they happen. Using an investing algorithm should enable an investor to be dispassionate, systematic, and evidence-driven. Severe bear markets and rare black swan events with rapid substantial declines can be mitigated to some degree by systems which incorporate algorithms with manual stop loss orders and black swan indicators that indicate when to exchange stocks and leveraged equity ETFs for cash or leveraged bond ETFs. Those algorithms also need to provide clear calls to action when it is time to switch back into stocks and leveraged equity ETFs. Developing appropriate expectations and trust in an algorithm will enable an investor to take the necessary actions at the necessary times.

March 2020 – January 2022: Post Pandemic Panic Recovery

As mentioned repeatedly above, substantial market recoveries have always followed substantial declines during the relatively short history of stock investing (the New York Stock Exchange was established in 1792 and the Dow Jones Industrial Average was created in 1896). One of those substantial recoveries followed the panic caused by the initial phase of the COVID-19 pandemic.

Relatively quick action by banking authorities and governments around the world eventually led to countermeasures and stimulus packages which caused the market panic to subside in March 2020 and spurred a quick recovery and a strong bull market which continued through 2021.

Like most recessions, the one triggered by the COVID-19 pandemic proved to be another Darwinian event with many weaker companies failing the test and many stronger companies surviving and finding themselves in position to thrive during the bull market which followed.

This chart compares the growth of $10,000 invested in the S&P 500 from March 24, 2020, through January 4, 2022, with the growth of $10,000 invested using the Optimum Mix during that same period.

The market as represented by the S&P 500 rose 104.82% from March 24, 2020, through January 4, 2022.

The Optimum Mix rose 662.95% during the same period by continuing to invest in high-momentum large cap stocks and leveraged equity ETFs.

As mentioned repeatedly above, the strategic takeaway for bull markets is to “buy often and cover your assets.” Maximizing returns by selling high is difficult if not impossible. The market has tended to go up over time for the past few decades with only temporary setbacks so the optimum strategy has been to be in the market as much as possible (unless it seems likely to decline) and to focus on the Optimum Mix of assets. Instead of trying to “buy low and sell high” investors should think “buy often and cover your assets” using algorithms with manual stop loss orders and black swan indicators so that when a bull market finally ends (and they all end eventually) the algorithms cause the necessary actions to be indicated and taken.

2022-2023: Bear Market and Recovery

As this section is being updated in January of 2024, we have fully recovered from the market downturn which began in January 2022 caused by events and circumstances which can be attributed to some combination of inflation, rising interest rates, falling consumer spending, and war in Ukraine, all of which contributed to the usual uncertainty and turbulence which tend to cause market downturns.

The Optimum Mix fell substantially during the first few months of 2022 as it continued to invest in high-momentum large cap stocks and leveraged equity ETFs until it slowed those losses in June by switching a portion of the portfolio from those leveraged equity ETFs to cash as indicated by the algorithms. Eventually the indicators caused the Optimum Mix to shift back into leveraged equity ETFs, and performance has once again been substantially better than the S&P 500.

chart showing return on investment for Leveraged Momentum Optimum Mix versus the S&P 500 from January 5, 2022, through December 15, 2023
This chart compares the change in value of $10,000 invested in the S&P 500 from January 5, 2022, through December 15, 2023, with the change in value of $10,000 invested using the Optimum Mix during that same period.

We were able to determine the ending date of the 2022 bear market* (which was also the starting date of the recovery portion of a new bull market) on January 19, 2024, when the S&P 500 closed at 4,839.81 which was above its previous all-time high closing price of 4,796.56 hit on January 3, 2022. The ending date of the 2022 bear market and the starting date of the recovery portion of the new bull market was then back-dated to the lowest closing price since that previous all-time high closing price. That lowest closing price was 3,577.03 on October 12, 2022, which is when the bear market ended and the recovery portion of the new bull market began. Achieving the new all-time high closing price on January 19, 2024, also indicated the end of the recovery phase of the new bull market and the beginning of the expansion phase on that date.

As mentioned repeatedly above, the strategic takeaway for this period and other speed bumps, corrections, and bear markets is to “cover your assets.” The time to develop an action plan for the inevitable temporary setbacks is before they happen. Using an investing algorithm should enable an investor to be dispassionate, systematic, and evidence-driven. Severe bear markets and rare black swan events with rapid substantial declines can be mitigated to some degree by systems which incorporate algorithms with manual stop loss orders and black swan indicators that indicate when to exchange stocks and leveraged equity ETFs for cash or leveraged bond ETFs. Those algorithms also need to provide clear calls to action when it is time to switch back into stocks and leveraged equity ETFs. Developing appropriate expectations and trust in an algorithm will enable an investor to take the necessary actions at the necessary times.

*For purposes of the discussion on this page, a bear market begins on the date of the S&P 500’s peak (all-time high closing price) at the end of the preceding bull market and is recognized only in hindsight based on a decline of 20% or more from that all-time high closing price and the lack of a new all-time high closing price for at least two months after that prior high. A correction is defined as a temporary downturn during a bull market, begins at a S&P 500 peak, and is recognized only in hindsight based on a decline of 10% or more from that all-time high closing price followed by a new high within two months of that prior high. A bull market begins on the date of the S&P 500’s lowest closing price at the end of the preceding bear market and is recognized only in hindsight when the market achieves a new all-time high closing price. The recovery portion of a bull market is the portion from the date of the lowest closing price at the end of the preceding bear market to the date when a new all-time high closing price is achieved. When that new all-time high closing price is achieved then the ending date of the bear market and the beginning and ending dates of the recovery portion of the new bull market can be determined in hindsight. The recovery portion ends and the expansion phase of the new bull market begins on the date of the new all-time high closing price after the preceding bear market. The expansion phase ends when the bull market ends which is also the date when the next bear market begins.

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