An experiment

[MustacheAndaHalf]

Sometimes I feel a combination of media and markets are in denial, and I want to prove them wrong.  It's not that I start by wanting to make money - it's that I first get annoyed at how the data differs from expectations, and I want to put some of my money where my mouth is (or my typing fingers :).

So I have a market timing plan that involves 3 stages, and about 1/14 th of my portfolio:
(1) Sell 7% of equities and move those into 6% long-term bonds and 1% gold.
(2) I predict 10k cases of COVID-19 in the U.S., probably within a week.  I predict a new panic over 10,000 cases.  During that market panic, I will sell 3% of long-term bonds, 0.5% of gold, and an additional 1% of my existing bonds.  I will then buy 4.5% equities.
(3) When long-term bonds spike upwards, or I see 100% pure panic before/after the 10k cases, I'll sell the other chunk: 3% long-term bonds, 0.5% gold, and 1% of existing bonds.  I will move that 4.5% into equities.

Essentially, I'm market timing for a few weeks in order to demonstrate the markets have it wrong: Monday's panic wasn't deep enough.  My primarily goal isn't profit, it's proving the markets / media wrong.

I watched the situation in China closely.  In another thread, I predicted 10,000 cases in China several days before the media broke the story.  The markets dropped right on prediction.  Then on Feb 28th, the markets were in a panic mode so pure, I knew it was exaggerated, so I bought.  That was the lowest point of that week and the week after... but now there's new information, and the market still isn't getting it, in my view.

Here's how I see the U.S. right now: in denial, about to get scared.  As of March 6th, "fewer than 2,000 people have been tested for Covid-19 in the US" according to a Vox article.  I saw another figure of 2,500 tests used.  Those numbers are insanely low - and that was 3 days ago.  From the news I read, the U.S. is very far behind in testing for the virus.

In China, once enough tests were being used, cases increased +50% per day.  That probably represents both testing being in a "catch up" mode, and the virus continuing to spread.  That's where I think the U.S. will find itself once tens of thousands of people are being tested every day.

"It’s likely that at some point, widespread transmission of COVID-19 in the United States will occur."
https://www.cdc.gov/coronavirus/2019-ncov/summary.html#anchor_1582494216224

[MustacheAndaHalf]

I wound up doing limit orders at the market open, which ultimately resulted in a sale price +0.85% better than the market close.  A small win.  But I purchased Vanguard Extended Duration ETF at a high premium, and SGOL gold ETF.  The purchases were -4.6% by market close, compared to where I bought them.

Best time to buy yesterday was after the market pause, when US and international recovered slightly to under a -6% loss.

[Bettersafe]

Quite interesting plan! Not in the USA but PTF.

Good luck with your plan, hope it will work out for you!

[AdrianC]

Here's how I see the U.S. right now: in denial, about to get scared.  As of March 6th, "fewer than 2,000 people have been tested for Covid-19 in the US" according to a Vox article.  I saw another figure of 2,500 tests used.  Those numbers are insanely low - and that was 3 days ago.  From the news I read, the U.S. is very far behind in testing for the virus.

In China, once enough tests were being used, cases increased +50% per day.  That probably represents both testing being in a "catch up" mode, and the virus continuing to spread.  That's where I think the U.S. will find itself once tens of thousands of people are being tested every day.

"It’s likely that at some point, widespread transmission of COVID-19 in the United States will occur."
https://www.cdc.gov/coronavirus/2019-ncov/summary.html#anchor_1582494216224

I agree. We've not been testing quickly enough, either through mistakes, or our "leaders" hiding their heads in the sand, maybe a bit of both. People don't quite get exponential growth. It's going to be a shocker.

That said, I have no confidence in my own ability to time the market. I bought some Berkshire yesterday because it looks cheap at $195/b share (1.12x last known book value). I sold some BND to do it.

I was surprised to see you were market timing again. Be interesting to see how your experiment works out.

[MustacheAndaHalf]

This experiment now involves 1/10th of my portfolio, while my "momentum experiment" involved less than 1%.  I wasn't searching for market timing - I just got annoyed markets weren't reacting enough.

Because the market offered a better price today, I actually moved down to 64% equities (from 66% yesterday).  I sold off 2% equities, and bought 1% gold and 1% bonds.  So I'm currently 64% equities, 34% bonds, and 2% gold.

There's a variety of ways I can be wrong.  South Korea's new cases keep dropping, which is a significant success against the virus.  If the U.S. can replicate that, it could get control of things much faster than I expect.  In South Korea, most cases were related to a secretive church which opened up about their membership, and the government tracked them down and tested them.  They had recently visited Wuhan.  In the U.S., it's not as centralized, so I expect it will be harder to track down.

The oil price war could come to a sudden close, and markets could react strongly upwards while I hold bonds / gold.

China plans to start letting people go back to work, and that could turn out to be successful, and bring production back online - and maybe consumption.  Emerging markets could head upwards, and U.S. companies could benefit.

[MustacheAndaHalf]

Mon VTI was down -8%  (VXUS -8%)
Tue VTI was up +5%  (VXUS +3.9%)

Maybe I'll succeed, or maybe not, but I've already (re-)learned some things:

(1) I'm reminded of Buffet's quote that investing is like baseball, where you don't have to swing unless you like the pitch.  Instead of putting my thesis to the test during a market panic, I could skip this pitch, and wait for something better.

(2) It's very rare for a large drop to happen all at once.  The market is volatile.  If I still want to invest near a panic, it's better to see what happens the next day or two.  The pitch might be better, like it was Tuesday this week (Mar 10).

(3) I'm the only one who is certain I put 9% of my portfolio behind the thesis.  I can just as easily put 0-1%, and make the same predictions.

[AdrianC]

I couldn't figure out what yesterday was about. Payroll tax cut? That's not going to help the virus problem. It would save companies some money short-term.

Today looks more sensible. Down a few % so far.

I'm short-term pessimistic, long-term optimistic. I think we're in for some pain, and we'll come out of it stronger with better prospects for future good market returns.

I'm feeling like moving some out of VXUS in taxable - I'm showing a cap loss on purchases from 3 years ago (!) - that'll help a bit with our ACA PTC. It's only 5% of port. Hmmm.

EDIT: I sold half the VXUS at $45.57

[magnet18]

Ptf

Your experiment forgot the market panic today from the pandemic announcement, take any advantage of that?

[ChpBstrd]

The pandemic was the match. Extreme valuations were the gunpowder.

That said, the bottom always occurs when things look their worst. The cost of getting back into stocks a little bit late can exceed the costs of exiting stocks too late. Ask someone who sold in early 2009 and bought in 2011.

Similarly, the media’s rationale for a correction can evaporate into thin air. The December 2018 correction of 20% was allegedly a response to Trump’s renewed emphasis on economically damaging tariffs. But then those losses were erased within weeks even as the tariff war became a reality. Could stocks rally even as the pandemic spreads? Ask someone who exited the market when HIV became a pandemic!

[MustacheAndaHalf]

I couldn't figure out what yesterday was about. Payroll tax cut?

Saudi Arabia started a price war with Russia, which was reflected in energy stocks on Monday.  Then on Tuesday, oil stocks regained most (not all) of their losses, and the market swung upwards.  If you look at energy company stock performance Monday and Tuesday, the situation will probably make more sense.

Your experiment forgot the market panic today from the pandemic announcement, take any advantage of that?

I sold stocks on Monday and Tuesday, but now I'm waiting.  I'd rather wait at 64% stocks than go any lower, in case my predictions are wrong.

...
Similarly, the media’s rationale for a correction can evaporate into thin air. The December 2018 correction of 20% was allegedly a response to Trump’s renewed emphasis on economically damaging tariffs. But then those losses were erased within weeks even as the tariff war became a reality. Could stocks rally even as the pandemic spreads? Ask someone who exited the market when HIV became a pandemic!

The media disseminates new information, which then gets incorporated into the stock market as price changes.  The media doesn't control the markets, and doesn't even control information: these days they try to react as fast as possible, so they aren't scooped by Twitter users.  My thesis does rely on the media:

(1) The media can't resist publishing big numbers as a headline.  If something scary happens, they want people to know.

My theory is they get more viewers when they scare people.  And people, in turn, can be shocked when a problem has reached a new scale, like 10,000 cases.  So I think 10,000 cases is interesting, and likely to create headlines.

(2) The media does not predict the number of COVID-19 cases in advance.

It's extremely rare to have a story involving exponential growth, so maybe the media isn't prepared for it.  Even people who discuss market moves are careful, and trying not to spread fear and panic.  I suppose they have their reasons, but the net result is that I can estimate future cases, and the media refuses to do so.


When I combine these two theories, I get "project 10,000 cases in the U.S." and wait for the media to spread the news, which then panics markets.  One missing piece of my theory is why seasoned investors aren't making projections.  Maybe they are, but they include a level of uncertainty that I'm ignoring - my chance of being wrong.  I suspect the answer is somewhere between my extreme view, and the market's.  I have a chance to be wrong, but a greater chance to be right.  But that's an extremely pessimistic view.

Are there any other threads talking about extreme valuations?  I'm ignoring that right now, and just focused on market shocks driven by exponential growth in corona virus cases.

[MustacheAndaHalf]

I sold investments on Monday (Mar 9) and Tuesday (Mar 10) of this week to prepare for future market drops driven by the spread of COVID-19.  Here's the market performance so far:

Mar 9,   VTI was down -8%  (VXUS -8%)
Mar 10, VTI was up    +5%  (VXUS +4%)
Mar 11, VTI was down -5%  (VXUS -5%)

In the U.S., there were 1,010 cases of COVID-19 as of Tuesday, March 10.  In Korea and Italy, one week after hitting 1,000 cases they hit 5,000 cases.  That would suggest the U.S. hits 5,000 cases on March 17.

I'm very tentatively guessing March 20-23 will see 10,000 cases in the U.S.  I predict the media will then make that the headlines, and stocks will react badly to the news.  At that point, I will sell non-equity assets of 5.5% and buy stocks, bringing my stock allocation to 69.5%.  I'm playing the other 5.5% "by ear", watching for bond price spikes or a day that feels like Feb 28th (a local low point for the surrounding two weeks - good enough for me).

[MustacheAndaHalf]

I think it's more accurate to track my actual sell/buy prices to calculate gains and losses.
I mostly "sold short" VTI and VEU.  I sold them Mon/Tues, and will buy them back later.  So my "profit" is the fall in price.
I used the proceeds to mostly buy EDV and SGOL, which I hold long.  Here's my average sell/buy prices:

VTI sold at 140.00 (limit sale at market open) "short" - I will buy it back later.
VEU sold at 45.10 (blend of sales on Mon/Tues) "short" - I will buy it back later.

EDV bought at 185.19 (held long)
SGOL bought at 16.03 (held long)

As of 3/11 market close, I have the following prices:

VTI at 138.01, short profit of +1.4%
VEU at 43.76, short profit of +3.0%

EDV at 168.38, loss of -9.1%
SGOL at 15.76, loss if -1.7%

Buying 20-30 year Treasuries at peak panic isn't looking good at the moment, while switching from stocks to gold is already profitable.

I need to track headlines, not yesterday's data, so I won't be using the slowly updated data on WHO and CDC websites.  I'll be checking worldnews.info data, which seems to lead even CNN's reporting.  According to that source:
China 80.8k ; Italy 12.5k ;  Korea 7.9k ; France 2.3k ; Spain 2.3k ; Germany 2.0k ; USA 1.3k

[MustacheAndaHalf]

My experiment just broke even - my short positions are +10.7% and long positions -10.5%.

If you're going to be a successful contrarian investor, I suspect being a hermit is important.  Can you imagine trying to celebrate anywhere on the NYSE stock exchange today?  I'd need security.

Most of my portfolio is still down - it's just the experiment which broke even.  Here's the performance mid-day:
gold -5.4% (top performer)
VTI +8.8% (short position, anyone long lost -8.8%)
EDV -12.2% (long position, owch)
VEU +12.6% (short position)

[MustacheAndaHalf]

COVID-19 update: China 80.8  Italy 15.1  Iran 10.0  Korea 8.0  Spain 3.1  France 2.9  Germany 2.4  USA 1.7

I have roughly 75% LT Treasuries and 25% gold in this experiment, versus being short 50% VTI / 50% VEU.  After the close of markets Thursday:

ED       -14.5%    (bought long at 185.19, now
SGOL     -5.5%    (bought long at 16.03, now 15.14)
VEU    +13.4%     (sold short at 45.10, now 39.05)
VTI     +11.0%     (sold short at 140.00, now 124.59)

My profit from short positions is +12.2%, and losses from long positions -12.3%.

Now I know short-term treasuries are the thing to own in a crisis / panic.  Everything was correlated, including 20-30 year Treasuries, and all fell together.  The only thing going up is short-term U.S. Treasuries (2-5 year in particular, maybe 10 year).

[Radagast]

Ouch, heck of a bad time to move 7% to EDV. In fact, the all-time record worst time.

[MustacheAndaHalf]

Ouch, heck of a bad time to move 7% to EDV. In fact, the all-time record worst time.

I deserve it for being greedy.  Besides 6.75% in EDV, I hold 2.25% in gold (SGOL).

I bought EDV between the market open on Monday, and the trading halt minutes later.  It was already up +10%, and Treasuries are what everyone wants to own in a panic, so it made sense to buy them.  For some reason I didn't "bar bell", and buy both short-term and long-term treasuries.  Monday's panic was the only day this week where EDV went up: it's been moving in lock-step with equities since then.

[Radagast]

Ouch, heck of a bad time to move 7% to EDV. In fact, the all-time record worst time.

I deserve it for being greedy.  Besides 6.75% in EDV, I hold 2.25% in gold (SGOL).

I bought EDV between the market open on Monday, and the trading halt minutes later.  It was already up +10%, and Treasuries are what everyone wants to own in a panic, so it made sense to buy them.  For some reason I didn't "bar bell", and buy both short-term and long-term treasuries.  Monday's panic was the only day this week where EDV went up: it's been moving in lock-step with equities since then.

Of course I am a little sympathetic because I also keep a small percent in ZROZ and RING, and barely missed a rebalance on that day. Though, this has been a long term play and ZROZ is still around 50% above my cost basis, I just have had no cause to rebalance since.

[MustacheAndaHalf]

Update after Friday's +9% rise to the U.S. stock market.

VTI:  short +2.9%   (135.93 / 140.00)
VEU:  short +7.6%  (41.68 / 45.10)
EDV:  long  -15.7%  (156.07 / 185.19 )
SGOL:  long -8.5%  (14.67 / 16.03 )

Overall down -3.4% compared to the market.  Not bad considering Friday, but buying 20y/30y Treasury bonds still hurts.  Not only was it a greedy move, those treasuries became a non-safe haven asset exactly after I bought them.  And I didn't just buy them at the peak: I bought them +5% ABOVE the peak, during the most expensive 3 minutes for 20y/30y treasuries (the market open Monday, March 9).

Next week will be a huge test for my thesis.  The Fed meets this week, with market consensus being a slash of -1% to the Fed Funds rate, to a bottom range of 0%.  That could be my one chance to profit off 20y/30y treasuries...  It also looks like COVID-19 testing will ramp up in the U.S., so the number of cases will get more accurate.

The U.S. has between 1600 (CDC) and 2400 (worldometers.info) cases, and that's with inadequate testing.  Bahrain (pop 1.7M) and the U.S. (pop 331M) performed the same number of COVID-19 tests so far (data as of Mar 9).  The current U.S. cases is probably an under count.  Plus tens of millions are uninsured, and even more have meager health insurance that's expensive to use.  Congress is still fighting over free tests and making sick leave paid... this is an ideal environment for the virus to spread, countered only by local government efforts.  I get why the national state of emergency helps the situation, but a +9% jump seems excessive to me.

I'm estimating that this next week will see 10,000 COVID-19 cases in the U.S., and possibly a spike in bond prices.  So it's possible 50-100% of the experiment ends this upcoming week.

[MustacheAndaHalf]

I've devised tactics for the week ahead, during which I will be moving some money out of bonds and into stocks.

(Mon/Tue) - a severe drop could convince me to move some bonds back into stocks.
(Wed) - FOMC (the Fed) decides interest rates, probably cutting Fed Funds rate to near 0% (100 basis pt cut).  If 20y/30y treasuries rocket upwards, I'll sell half of my EDV holdings and buy stocks.
(Th/Fr) - US cases should be near 10k, and the media will be shocked, inducing some panic.  If EDV goes up while stocks drop, I'll sell the other half of EDV and buy stocks.

If the market doesn't react, and U.S. hasn't reached 10k cases, I'll move 1/3rd of the experiment from bonds to stocks.
If U.S. did reach 10k cases without a market panic, I'll move about 1/2 of the experiment from bonds to stocks.

So either way, I'll be selling bonds and buying stocks during this next week (Mar 16 - Mar 20).  Time to see if I beat the market.

[Telecaster]

People don't quite get exponential growth. It's going to be a shocker.

Indeed.  For example, there are now about 2,300 cases in the US.  About 20% of those were announced yesterday. 

[AdrianC]

I get why the national state of emergency helps the situation, but a +9% jump seems excessive to me.

I'm estimating that this next week will see 10,000 COVID-19 cases in the U.S., and possibly a spike in bond prices.

I agree with all that.

The price action on BND has surprised me. Been used to seeing only slight moves, not +/- 5%. I shall wait to see if an interest rate cut happens, and does cause a spike. If it does I think I’ll sell our BND and go to cash. Can’t see much upside from here.

[MustacheAndaHalf]

Here's a rough overview of how I'm scoring my experiment/thesis so far:

(+) I can plot exponential data, while U.S. media can't or won't.  Their incentives are to shock people, not explain math, so it's a big advantage when I can predict what happens next... and they can't.
(+) Some people might be watching CDC/WHO data, like I was.  They're far behind, at 1600 cases in the U.S., while I'm watching a source that already shows 3,000 cases (https://www.worldometers.info/coronavirus/country/us/)
(+) In multiple other countries, cases went from 1k to 5k in one week.  As countries pass 5k cases, they tend to shut down cities... then regions.. then most of the country (Italy... Spain... now France).
(-) The size of the U.S. may allow it to shut down more narrow areas of the country, and in tech/finance employees may keep working from home.
(-) I bought EDV, an ETF holding 20y/30y treasuries - which are terrible.  They drop every day, sometimes as much as stocks do, other times they drop as stocks rise.  I could make a successful prediction and still lose money!  (taxable loss?)
(+) The U.S. appears under prepared, especially with testing.  Over the past month of the worldwide outbreak, the U.S. has run 22k tests (one source, not confirmed) while Korea runs that many every day.  Congress is trying to patch a lack of sick leave, lack of free tests, etc.  Everything is happening in crisis mode, not with planning.
(+) U.S. health insurance.  Tens of millions lack it, and tens of millions more have plans that are too expensive to act on.  A significant fraction of Americans will not visit a hospital if they get sick.
(+) This story wipes all others out of the headlines, making it less likely that other events interfere with my experiment.

I feel like I should be shouting "The epidemic is coming!  The epidemic is coming!" while riding a horse and ringing a bell...  but I guess I'll just recharge by watching "The Big Short" again.

[schoenbauer]

Here's how I see the U.S. right now: in denial, about to get scared.  As of March 6th, "fewer than 2,000 people have been tested for Covid-19 in the US" according to a Vox article.  I saw another figure of 2,500 tests used.  Those numbers are insanely low - and that was 3 days ago.  From the news I read, the U.S. is very far behind in testing for the virus.

Let's stay calm, however, I couldn't agree more. I expect more panic in the US once infection cases hit 10.000. The full extent of the reality has not hit the public yet.

The mortality rate due to Corona seems much higher in the US - which is not due to a more aggressive virus, but due to a high number of not-yet-detected infections. A great (and admittedly long) read:

https://medium.com/@tomaspueyo/coronavirus-act-today-or-people-will-die-f4d3d9cd99ca

PS, Greetings from a European country in lock-down. Practise social distancing today! ;)

[MustacheAndaHalf]

Yes, people need to take precautions rather than panic.  But markets should be down more, and I expect markets to have at least one more panic this upcoming week (Mar 16-20).

The source of your medium article is Tomas Pueyo, who appears to be a marketing person with an MBA?

I prefer infectious disease expert Mochael Osterholm who was interviewed for 1.5 hours less than a week ago:
https://www.youtube.com/watch?v=E3URhJx0NSw

His view is more pessimistic than mine - the virus could go on for 6+ months, and re-infect countries like China a second time or more.  It makes sense - if 99% of Wuhan didn't catch the virus, they have no protection from it (and there's even debate if people can catch it twice).  His credentials are rock solid, so it's worth a look.

I think people need some time to process unthinkable ideas like "Italy is closed... Spain is closed... France is closed".  Large chunks of the developed world are shutting down, and taking consumption, workers and production with it.  And the markets aren't reflecting the magnitude of the impact - very strange.

Early this week, I expect Germany to enter lock down.  And I'm guessing the U.S. will get more serious at 5,000 cases (I'm predicting Tuesday) and then start to freak out when the cases double in 3 days (predicting Friday) to 10,000.  At some point the U.S. tries to contain the virus, and then my ability to predict goes way down.

I expect to close out most of my experiment this upcoming week.

[Ready2Save27]

I’ve officially joined the market-timing club. I think that in the next two weeks, the US cases will increase significantly and more public closings will start. I don’t think the public has grasped the severity of the virus (I thought it was nothing a few weeks ago). I plan to jump back in within 2-4 weeks. In worst case, I get a lesson in market-timing for a few thousand dollars. In best case I make a few thousand dollars. I don’t see how the market can go up in the next few weeks as Americans start to understand this crisis.

[MustacheAndaHalf]

Is your market timing plan more specific than "jump back in within 2-4 weeks"?

In the U.S., I'm predicting 5,000 cases Tuesday followed by 10,000 cases maybe on Friday.  It's possible because the U.S. is larger, more time passes before cities and regions begin shutting down... maybe 30,000 cases?  But that shut down has a huge economic impact, and will hit markets.

The FOMC (the Fed) meets Tue/Wed, but surprisingly made an announcement hours ago dropping rates to 0%.  So predictions were right, but the timing was a few days early.  Now I'll be watching 20y/30y U.S. Treasuries to see what happens.  When yields drop, existing bonds are more valuable, so I expect existing treasuries to go up in price.
https://www.federalreserve.gov/newsevents/pressreleases/monetary20200315a.htm

[Ready2Save27]

My plan is to buy back in if the federal government close non-essential businesses everywhere, or if the markets are up 10% after two weeks (I will just accept the loss in that case). If after 4 weeks this has not been announced, I’ll evaluate the situation and either buy back in if I’m unsure of the future or stay out a little longer if I’m confident things with the virus will get a lot worse still. If at any time in these 4 weeks if the market is down by 30% I would buy back in. If it’s down by 20% I would strongly consider buying back in. I’m selling about $45k of VTSAX (not my entire portfolio). I’ll try to remember to post an update in 2-4 weeks or when I buy back in to see if it was worth it or not.

It’s not the most well defined plan, but I’ll try to remember to post so we can see if it was worth it.

[MustacheAndaHalf]

After the Fed cut rates to zero, the futures market predicted a -5% drop in the stock market before trading was halted.  A -5% drop is the maximum allowed before trading halts.

The U.S. has 3,800 cases now, which looks on track for my prediction of 5,000 cases on Tuesday.  Still waiting for the markets to realize how much of an impact this will have.

[Blueberries]

After the Fed cut rates to zero, the futures market predicted a -5% drop in the stock market before trading was halted.  A -5% drop is the maximum allowed before trading halts.

The U.S. has 3,800 cases now, which looks on track for my prediction of 5,000 cases on Tuesday.  Still waiting for the markets to realize how much of an impact this will have.

Now showing an expected -9% drop this morning.

Until the US has adequate testing, the numbers will continue to be lower than they actually are.

[MustacheAndaHalf]

U.S. testing has been minimal - as of last week 8k.  The CDC's latest figure is a total of 22.6k tests performed in the U.S.:
https://www.cdc.gov/coronavirus/2019-ncov/cases-updates/testing-in-us.html

[MustacheAndaHalf]

"Wu Han Organization" (WHO.int), your data on U.S. cases is way out of date!  Here's U.S. cases, in thousands from various sources... see if you can spot the one that looks different. 

worldometers 4718    CBS news 4500+    CDC 3487    WHO 1678

According to the "World Health Organization" (WHO), there were zero new cases on March 16...  while U.S. stocks plunged -11.5% during a panic set off by the spread of COVID-19 in the U.S.  They state "2 days since last reported case" in their data!  You just can't make this stuff up, here's the link to their data:
https://www.who.int/docs/default-source/coronaviruse/situation-reports/20200316-sitrep-56-covid-19.pdf

I was already annoyed WHO doesn't consider Taiwan a country - it appears as "Taipei and environs" on their page of China data.  But this level of incompetent data is astounding - they need an asterisk next to these reports.

[MustacheAndaHalf]

The Fed dropped rates by -1%.  Somehow 20y/30y treasuries only went up +6% on that news, but then even the treasury markets are malfunctioning (which is why the Fed stepped into the market twice in one day, offering unlimited liquidity).  Here's where the experiment sits as of the closing bell Monday:

VTI:  short +14.0%   (120.46 / 140.00)
VEU:  short +18.1%  (36.95  / 45.10)
EDV:  long  -10.6%  (165.50 / 185.19 )
SGOL:  long -9.1%  (14.67 / 16.03 )

Average loss is -10.2% while average gain is +16.1%.  Before rounding, my experiment is beating the market by +5.8%.

[MustacheAndaHalf]

According to Vanguard's data, Extended Duration Treasury ETF (EDV) has a duration of 24.5 years.
According to the U.S. Treasury, yields on 30 year Treasuries were 1.56 last Friday and 1.34 on Monday, a drop of 0.22%

Multiplying: 0.22 x -1 x 24.5 = +5.39%
Markets seem to be reflecting a 0.25% drop (.25 x -1 x 24.5 = +6.1%).
Because of the Fed's action, I expect further drops in treasury yield, and further gains in EDV.

Markets are very volatile, so I might sell international on Friday (after +6%) and then buy it on Monday (after -10%).  Regulation T states you can't "free ride" by selling, and then before the trade settles, buying it again.  So I cannot buy VEU right now, and elected to start buying IXUS instead.

VEU closed at 36.95 while IXUS closed at 42.12.  I'm going to assume FTSE and MSCI are the same, which isn't 100% true but is very close.  So to translate from IXUS price to VEU price, I would divide by 1.14.

During yesterday's panic, I began buying.  I sold a small allocation of EDV (at $165.745) and bought IXUS (at $42.56).  Translating IXUS to VEU price: 42.56 / 1.14 = $37.33.  On average, I paid 185.19 for EDV and sold VEU short at 45.10.  So I took a short-term loss of -10.5% on EDV, but avoided a -17.2% drop in VEU, for a net profit of about +4.9%.

Outside the experiment, my portfolio was driven down to 58.5% by the market panic, so I began selling bonds and buying stocks, which brings me back up to 64% stocks.

[dougules]

Wow.  It's amazing how quickly everybody turned into an expert once the market started tanking.  I'm so surprised at the hubris on this forum. 

[MustacheAndaHalf]

I'm tracking an experiment here.  If you're not interested, please don't hijack the thread.

[AdrianC]

During yesterday's panic, I began buying.

Confused. This is outside the experiment? 5,072 cases as I write. 10k on Friday is my guess.

[MustacheAndaHalf]

During yesterday's panic, I began buying.

Confused. This is outside the experiment? 5,072 cases as I write. 10k on Friday is my guess.

If you look up above, this was according to my plan for this week:
"(Mon/Tue) - a severe drop could convince me to move some bonds back into stocks."

I ended roughly 1/16th of the experiment, selling long-term treasuries and buying total international.  That part of the experiment is ended, and beat the market by +4.9%.

[AdrianC]

During yesterday's panic, I began buying.

Confused. This is outside the experiment? 5,072 cases as I write. 10k on Friday is my guess.

If you look up above, this was according to my plan for this week:
"(Mon/Tue) - a severe drop could convince me to move some bonds back into stocks."

Ah. Last Friday’s plan. Thanks. Feels like months ago :-)

[MustacheAndaHalf]

World stock markets gained +5% as governments offered substantial economic assistance.

VTI:  short +9.6%   (126.50 / 140.00)
VEU:  short +13.8%  (36.95  / 45.10)
EDV:  long  -16.8%  (165.50 / 185.19 )
SGOL:  long -8.2%  (14.67 / 16.03 )

Average loss -14.7% versus average gain +11.7% using (3 EDV to 1 SGOL) and (1 VTI to 1 VEU).  The proportions are slightly off, because I've sold some EDV.

[AdrianC]

United States  8,775

Looks like we'll be at 10k by the morning. Another down day? Already baked in? Who knows...

[ender]

World stock markets gained +5% as governments offered substantial economic assistance.

VTI:  short +9.6%   (126.50 / 140.00)
VEU:  short +13.8%  (36.95  / 45.10)
EDV:  long  -16.8%  (165.50 / 185.19 )
SGOL:  long -8.2%  (14.67 / 16.03 )

Average loss -14.7% versus average gain +11.7% using (3 EDV to 1 SGOL) and (1 VTI to 1 VEU).  The proportions are slightly off, because I've sold some EDV.

Something to keep in mind is a 10% drop is more than a 10% gain.

[MustacheAndaHalf]

The U.S. has 9458 cases according to worldometers, so the 10k mark might arrive a day early (Thursday).

World stock markets gained +5% as governments offered substantial economic assistance.

VTI:  short +9.6%   (126.50 / 140.00)
VEU:  short +13.8%  (36.95  / 45.10)
EDV:  long  -16.8%  (165.50 / 185.19 )
SGOL:  long -8.2%  (14.67 / 16.03 )

Average loss -14.7% versus average gain +11.7% using (3 EDV to 1 SGOL) and (1 VTI to 1 VEU).  The proportions are slightly off, because I've sold some EDV.

Something to keep in mind is a 10% drop is more than a 10% gain.

From the same starting point, they are the same.  I agree -20% and then +20% is a net loss (0.80 x 1.20 = 0.96), but this is a different situation, where both are losses.

When I sold VTI, I avoided any losses after that point.  When I bought EDV, I take any losses while I hold it.   From my above data, VTI dropped -9.6% while EDV dropped -16.8%.  Since EDV raced ahead of VTI, it was actually better to stay in VTI.  It's just comparing two losses, to see which one is greater.

[MustacheAndaHalf]

It really sucks that my thesis seems to be right, but my execution is terrible.  I'll leave the detailed post mortem for later, but "cash is King in a crisis" will probably be etched into my thinking for a very long time.

VTI:  short +14.9%   (119.21 / 140.00)
VEU:  short +17.2%  (37.33 / 45.10)
EDV:  long  -21.1%  (146.00 / 185.19 )
SGOL:  long -10.3%  (14.38 / 16.03 )

I sold some EDV averaging $150.81 during the market drop, and some SGOL averaging $14.43.  I need to take a closer look at which gold was sold in the experiment, and which was sold to bolster other parts of my portfolio.  Overall, I'm holding 75% of the original EDV and about half of the original SGOL.  So the original 3:1 ratio.... 12:4... now looks more like 9:2.

SHORT gains of +16.1% and treasuries/gold (9:2) losses of -19.1%.  I successfully predicted a -16% drop and avoided it... by purchasing treasuries that fell -21%.  Cash is king in a crash.

A market bottom isn't when things are at their worst, it's when things become certain.  I predicted 10k U.S. cases and it's going to happen in a matter of hours, early Thursday morning, before the market opens.

[MustacheAndaHalf]

On the way to 10,000 cases in the U.S., every day had a crisis or major shift in events.  There just doesn't seem to be much room for "10,000 cases" claiming headlines.  So I took advantage of yesterday and today's (by 11am) prices, and bought mostly back in.  I'm left with half the 20y/30y treasuries I started with - I've sold all the gold.

muni bonds.. stocks... treasuries... gold... all of it lost money in the past 10 days.  In the book version of "The Big Short", I think it's Mark Baum who talked about a mean review he once made as an analyst.. he said someone had found the perfect hedge - an investment that loses money in all environments.  Well, for the last 10 days, that's how I felt about 20 year and 30 year treasuries... stocks drop, they drop... stocks rise... treasuries drop.  Stunning... I didn't do my research, which was sloppy.  I just grabbed something with high duration, assuming that was most profitable while I waited outside of stocks.

For future reference, cash is king in a crash.  You can own short-term treasuries, which amount to the same thing.  But a true liquidity crunch involves selling everything.  Everything but cash.  So I think ultimately I may have a correct prediction that could have beat the market, but then doomed it by picking a high risk investment to wait it out.

So I've sold all the gold, and half the long-term treasuries, and I'm just going to wait and see what happens with treasury yields.  Most likely, I'm falling for "anchoring bias", where an investor remembers the price they bought something, and feels that price has to be seen again - "breaking even" seems likely.  Well, I don't know if that's likely.

During the market panic, the treasury market malfunctioned.  The Fed recognized the problem, and stepped in to start buying treasuries in a market where buyers were lacking.  That was last week, during which treasuries lost a lot.  This week, the crisis continued, and the yield curve started growing wider.  The Fed rate is at 0%, and 30 year treasuries are getting higher and higher yields.  I can't explain what's going on.

I expect markets to eventually drop below historically high volatility.  To calm down.  And then maybe less uncertainty will bring down treasury yields.  If that goes on, my treasury bonds should go up in value - perhaps dramatically.

So maybe I'm showing an "anchor bias", or maybe I'm waiting for calm markets and falling treasury yields.  I think I'm gong to end the active part of this experiment, and monitor the market less often as I wait for a better sale price for EDV (20y/30y treasuries).  So the experiment will slow down, and I don't know when it will end...

[AdrianC]

On the way to 10,000 cases in the U.S., every day had a crisis or major shift in events.  There just doesn't seem to be much room for "10,000 cases" claiming headlines.  So I took advantage of yesterday and today's (by 11am) prices, and bought mostly back in.  I'm left with half the 20y/30y treasuries I started with - I've sold all the gold.

I think that's right. 10k is baked in already. Worldometers is showing 10,816.

I don't understand the price action on bonds. I bought BND as "dry powder". Though I've done OK with it, lesson learned - in times of stress cash is king. I should have learned that from my hero Buffet.

Thanks for posting the experiment. It has been interesting.

[MustacheAndaHalf]

The experiment was conducted with a limited part of my portfolio, but I thought I'd also mention changes I made to my portfolio overall, that aren't included in the experiment.

Before markets opened March 9, I held 73% equities.  I calculated the panic was too small, and sold down to 64%.  Later in the week I sold some more, to about 61-62%.  The market was also dropping, so I hit 58.5% equities at some point.

I had a detailed plan for market timing this week.  When the Fed drops rates, if treasuries go up, I sell them.  If there's a Mon/Tue crisis, I begin buying back in.  The Fed dropped rates early, on March 15 (Sun), and markets were in such a deep state of panic that treasury yields went up!  The treasury market malfunctioned, and the Fed had to step in with unlimited liquidity.  It was annoying and surprising to see the Fed rate drop -1% while 30 year treasury rates went up.  Oh well.

I now suspect we're at a market bottom.  The people in charge are emphasizing testing, and it's ramping up exponentially.  That's not an exaggeration - I mean exponentially.  Last week it ramped up roughly 3x.  Based on thinking over what the head of the COVID-19 response team said, I think it's gone up another 7x this week.  And will keep ramping up through Sunday, according to those in charge of the COVID-19 response.

Most people will probably protect themselves and go out less - practice social distancing.  That slows the growth rate of the virus.  Meanwhile, I believe testing is growing at exponential speeds even greater than the virus.  They're doing upgrades and sending them into the field.  Supposedly testing will reach millions per day.

Now picture next week.  If Dr Birx is right, testing will be ramped up by Sunday, March 22.  So next week, they can afford to test everyone.  You remember Trump saying "everyone who wants to be tested can get tested"?  He's trying to get reality to bend to that, and if he succeeds, you better believe he's going to repeat it next week.  And Dr Birx could very well agree with him, and next week say something about the explosion in testing ability now means anyone can be tested... let's reserve it for those with close contacts to known cases, etc... but testing will be at full speed.

People can still keep the virus spreading, like by going on Spring Break in Florida (a real story) and then spreading the virus to all their friends and family when they return - putting some of them in the hospital.  Avoid those people - the danger isn't over because lots of tests can be performed.  But it would remove much of the uncertainty and panic on the stock markets, if testing is now enough for all needs.  So that's why I went all the way up to 78% equities yesterday (March 19).  I still hold half of the original 30 yr treasuries, and am waiting to see if calmer markets will make those profitable (calmer meaning lower yields, meaning profits for those holding existing treasuries).  We'll see...

[rab-bit]

On the way to 10,000 cases in the U.S., every day had a crisis or major shift in events.  There just doesn't seem to be much room for "10,000 cases" claiming headlines.  So I took advantage of yesterday and today's (by 11am) prices, and bought mostly back in.  I'm left with half the 20y/30y treasuries I started with - I've sold all the gold.

I think that's right. 10k is baked in already. Worldometers is showing 10,816.

I don't understand the price action on bonds. I bought BND as "dry powder". Though I've done OK with it, lesson learned - in times of stress cash is king. I should have learned that from my hero Buffet.

Thanks for posting the experiment. It has been interesting.

Interesting discussion. I think one factor in the rising bond yields is the ~1 trillion dollar fiscal stimulus being negotiated by Congress and the White House. Eventually this will have to be paid for and helped to drive yields higher, especially at the long end (will probably be financed mostly using longer-term debt).

[MustacheAndaHalf]

I think people might have just been selling long-term treasuries at an insane pace.  If nobody buys, you need to make the yield more attractive until someone buys... so that drives up the yield, and drives down the value.

That's also reinforced by the Fed stepping into the market - a rare action - in order to provide liquidity.  They bought up treasuries because nobody else was.  It's extremely rare for the treasury market to lack liquidity, and is why the Fed had to step in.

Once that panic settles, I think yields drop quickly.

[MustacheAndaHalf]

I originally planned to follow the experiment's assets through selling stocks... buying gold or bonds.. and then buying stocks again.  Unfortunately non-experiment assets co-mingled making that impossible, and requiring another approach.  Instead I will track each asset separately, reporting their buy vs sale price.  Some will be portfolio purchases, others from the experiment.

Another difficulty is comparing different index funds to each other.  Although "SPTM" holds 1500 stocks to "VTI"'s 3500+, they match 99.9% most days.  But not Wed, where SPTM was overpriced by +0.8%.  Same Thurs, but only +0.4%.  I heard about ETFs experiencing problems, but I didn't know it extended to SPTM (2.7B assets).

Instead of using one multiplier that tracks 99.9% most days, I'll need to calculate it separately each day.  So for SPTM, I'll take any SPTM purchase and multiply it by closing prices (VTI divided by SPTM) to get a "VTI equivalent" price.  And do the same for number of shares.  This is ultimately becoming more difficult than doing taxes!

But here's the partial results so far, for my long positions in gold and long-term treasuries:

(SGOL) bought from 3/9 to 3/13 and sold 3/17 to 3/19 for a loss of -6.9%
(EDV) bought from 3/9 to 3/10 and half sold from 3/16 to 3/19 for a loss of -18.5%

[MustacheAndaHalf]

Treasuries went up during the initial day of panic (3/9), but fell every day after that.  A perfect hedge - losing money regardless of conditions.  I believe that was part of the treasury market malfunction which the Fed stepped in to fix.  That still leaves panic and uncertainty driving up treasury yields, which hurts the value of EDV.

I believe COVID-19 testing will drive uncertainty out of the stock market, and replace fear with a more rational analysis.  Treasury yields should fall, increasing the value of EDV as they do so.  I can compare yields from the day of my largest purchases (3/9) and sale (3/19) to show how far yields moved against me:
(3/9)  0.87 and 0.99   for 20y / 30y, average 0.93
(3/19) 1.56 and 1.78 for 20y / 30y, average 1.67

Which changes the value of EDV by: (1.67 - 0.93 = 0.74), and 0.74 x -1 x 24.5 = -18.1%  (very close to my -18.5% loss)

With my remaining EDV shares, I plan to wait.  COVID-19 testing may scare people initially, but gradually should provide certainty.  And when the market feels calmer and more certain, treasury yields should fall, reducing the expected losses.  That has already started to happen today:
(3/20) 1.35 and 1.55, for an average of 1.45
(1.45 - 1.67 = -0.22), so -0.22 x -1 x 24.5 = +5.4%,  which is a bit low compared to Friday's gain of +7.1% for EDV.