SuttonWatch.Net: U.S. Stock Market - Do Trading Systems Matter?

In the latest Barron's Magazine, published yesterday, there is an excellent interview with Joel Tillinghast, the top-rated portfolio manager of the Fidelity Low-Priced Stock Fund with more than $40 billion under management. Since its inception in late 1989, Mr. Tillinghast has posted a 13.8% compounded annual rate of return for his fund as compared to a 9.7% compounded annual return in the S&P 500 Index and a 10.2% compounded annual return for the Russell 2000 Index. His "out-performance" against both the benchmark S&P 500 and Russell 2000 Indexes is nothing less than spectacular, and his interview with Barron's Magazine is well worth a read by all investors, traders, and portfolio managers.

One part of Mr. Tillinghast's interview really struck home with me personally. He told Barron's that in his younger days while an analyst at Drexel, he tried to develop his own stock market timing system, using his own money to test it. Tillinghast said that he "failed miserably" in this effort.

This begs the question, should we all abandon any efforts to "time" the markets as many financial advisers suggest? Or should we follow Mr. Tillinghast's lead and focus all our efforts on stock picking using "value" as our guiding principal? Or should we give up all together on any market timing systems and/or ANY stock picking efforts given the plethora of empirical evidence of poor historical results for both investment approaches (Tillinghast being an exception, of course)? Should we just follow the growing herd into "passive" investment approaches that rely almost exclusively on index funds as primary choices? The answers here are more complicated than many financial advisers would lead us to believe!

I will admit that for many (even most) investors, "passive" fund investing is the best option, albeit with careful asset allocation and diversification according to each individual's short term and long term financial needs. As for Mr. Tillinghast and his extraordinary record of out-performance, I think that small-cap value stocks will under-perform the S&P 500 Index over the next several years mostly due to current relative overvaluations here, but maybe Mr. Tillinghast will be able to use his stock picking expertise to overcome this projected disadvantage for his special sector ahead.

For me, I have spent the last 40 years developing my own stock market timing system, and I am totally confident in its forecasting strengths. Right now, my computer trading system is just about as negative on the U.S. stock market as I have ever seen! Weekly chart signals are the strongest and most reliable part of my trading system, and last week marked a major bearish turning point according to my computer algorithm in this time frame.

At Friday's close, August 11th, weekly chart sell signals were triggered in the following major benchmark indexes:

Dow Jones Industrial Average (see chart below)

New York Composite Index (see chart below)

S&P 500 Index (see chart below)

S&P 100 Index

Philadelphia Bank Index (symbol BKX) (see chart below)

The compelling case for a bear market ahead is made even stronger by an official monthly chart sell signal already triggered in my system on June 30th, 2017 in the Nasdaq Composite Index (see chart below).

Market leaders like Priceline (PCLN) and Nvidia (NVDA) lost more than 10% from their intra-week all-time highs last week (see charts of both stocks below).

In the interest of full disclosure, my accounts under management are now effectively 100% short the U.S. stock market using double-short SDS and TWM ETF's in the S&P 500 Index and Russell 2000 Index, respectively.

Bottom line: My computer-based trading system is indicating that a major stock market correction is now underway!