Toews began the quarter with a partial (1/3) allocation to US Stocks, with all other asset classes fully invested. We completed our exit out of US stocks in Mid-April. During the quarter, small cap stocks initially suffered losses while the S&P remained relatively steady. Stocks began to rebound and our system re-entered in late May. We finished the quarter fully invested across all asset classes.
Our Dynamic Fixed Income models that invest in High Yield and Aggregate Bonds remained fully invested, as both categories continued to advance through the quarter.
Toews Views Market Highs as Opportunities
As we pointed out in our last commentary, the S&P has advanced over 200% from its low in 2009(i). Furthermore, the S&P 500 has gone over 1,000 calendar days without a 10% or greater drop in the index, the 5th longest stretch without a double-digit pullback in the last 50 years(ii). As the market pushes higher, the probability that we will have a correction or an even bigger downturn increases.
After prolonged advances, recency bias sets in. Investors assume that because markets have been moving higher, they will continue higher. Yet, a look at the markets over the last century illustrates that there were no decades that were immune to significant declines. On average we’ve experienced two bear markets during each decade(iii), with an average decline of 37%. While investors are unlikely to tolerate another significant portfolio decline after the harrowing losses produced during the financial crisis, the above table makes it appear inevitable that it is only a matter of time.
When markets do turn lower, Toews’ sell signals will prompt a move out of stocks (and/or bonds) and into money market instruments. If the downturn has a short duration, and the percentage decline is insignificant, Toews will likely buy back into stocks near the exit level, without adding any significant value.
If, however, the market decline has a long duration (1 month or longer) and moves lower by 10% or more, there is an increased probability that Toews will re-enter at levels lower than those at which it sold. In the case of significant declines realized during the recent financial crisis, Toews was able to re-enter stocks at prices vastly lower than its sale prices. That produces the dual benefit that investors will both avoid a decline, but will potentially participate in the market rebound.
Investors are naturally fearful about market losses and the effect that they can have on their portfolios. However, Toews views these market losses as an opportunity to buy stocks at bargain prices, and you should too.
The path to navigate these markets and address possible significant declines is straightforward but requires constant vigilance: 1) stay committed to equity markets, historically the best performing asset class to help protect against inflation and 2) hedge your portfolios against losses. Both are pillars on which the Toews system is built.
Source: Stock Traders Almanac.com All rights reserved.
Prior performance is no guarantee of future results. There can be no assurance, and individuals should not assume, that future performance of any of the portfolios referenced will be comparable to past performance. There can be no assurance that Toews will achieve its performance objectives.
This commentary may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.
This commentary is intended to provide general information only and should not be construed as an offer of specifically-tailored individualized advice. Please contact your investment adviser, accountant, and/or attorney for advice appropriate to your specific situation.
This document refers to the performance of the majority of Toews portfolios to illustrate the effect of Toews management on US and intl. stocks and high yield bonds. Performance of individual accounts varied based on the client’s investment risk profile and their specific investment funds. For your individual account performance, please refer to the enclosed quarterly statement or the quarterly statement recently sent to you. In addition, not all model portfolios were referenced in this letter. It is not, nor is it intended to be, a comprehensive accounting of Toews asset management. There are other portfolios that Toews manages that performed differently than what is referenced in this letter. For a complete list of GIPS firm composites, their performance results and their descriptions, as well as additional information regarding policies for calculating and reporting returns, please go to www.toewscorp.com. Toews Corporation acts as the investment advisor that implements the asset allocation and models for each of the portfolios. Investors cannot invest directly in an index.
i) Source: Bloomberg
ii) Source: BTN Research
iii) Source: Stock traders Almanac