Beat the markets with fact-based analysis instead of faith-based “analysis”

Are you sick and tired of financial media, investment research firms, and traders that have “predicted” 10 out of the past 2 bear markets and recessions?

So am I.

Following their advice and conventional strategies leaves investors and traders worse off than “dumb” buy and hold! The “market crashes” that they successfully predict don’t even make up for the market rallies that they miss!

Conventional trading and investment strategies rely on too much dogma and faith-based “analysis”, such as “a breakdown below the 200 daily moving average must be bearish for stocks!”

How much of this dogma is actually true?

Reality: a lot of it is false.

Most of what Wall Street and the media promotes as “analysis” is just random guessing (we have the data to prove it). In the words of Warren Buffett, no better than a monkey throwing darts at a chart.

That’s why over the past 10 years, most professional traders and hedge funds have consistently underperformed buy and hold. Their faith-based “analysis” is no better than a coin toss. They believe in conventional trading strategies and conventional “wisdom” just because everyone else believes in it. Monkey see, monkey do.

We think differently

We don’t use financial dogma to “guess” where the market will go next. We let data, facts, and trading models tell us where the market will most likely go next (from a probability perspective). 

Trading and investing is about probability. Use probability to your advantage. The market usually (but not always) goes according to its most-probable direction. Over the long run:

  1. Those who consistently trade with probability on their side will outperform.
  2. Those who consistently trade against probability will underperform.

My journey

I’m Troy Bombardia, founder and head trader at Fundamental Capital, the investment strategy and research firm behind Bull Markets.

I worked in my family’s hedge fund for almost 10 years (from 2008-2017). We increased our capital by 40x during those 10 years, which is an average annual return of 44%. We primarily traded gold and silver.

By 2014, I noticed a very interesting pattern in the U.S. stock market:

  1. The average professional trader and hedge fund underperformed buy and hold for 10 years in a row. The random probability of someone underperforming 10 years in a row is 0.09% (0.5^10 = 0.0009). In other words, there is no way this should be happening if conventional trading strategies and “wisdom” actually worked!
  2. Investment research firms only highlighted their accurate market calls. But when you look at the number of times they were wrong, they’re no better than a 50-50 coin toss!
  3. Most research consisted of charts. Meanwhile, no better bothered to backtest exactly how useful those charts were for predicting tops and bottoms!

What were they doing wrong in the U.S. stock market? After a lot of research, I realised:

  1. Traders and investors who combine fundamental analysis with technical analysis outperform traders who only use technical analysis.
  2. Proper fundamental analysis is not hard! Most people are just doing it the wrong way. The financial industry’s conventional belief about “what is fundamental analysis” is wrong.
  3. Simple, quantitative trading models allow traders to backtest their strategies and know EXACTLY how well a strategy works. No more “guessing”.

With this insight, I developed the Medium-Long Term Model and other trading models, which generate 20-30% a year trading the U.S. stock market.

Here’s why my quantitative trading models are so successful.

Focus on the medium-long term

The stock market’s short term is harder to predict because there is a lot of randomness in the short term movements. The stock market’s medium-long term is much easier to predict because it follows the fundamentals of the stock market (i.e. the economy).

On any random day, the U.S. stock market’s short term outlook is mostly a 50-50 bet. But as time goes on, the stock market has a higher and higher chance of going up.

The U.S. stock market’s medium-long term direction follows the U.S. economy.

The U.S. stock market and the U.S. economy (macro fundamentals) move in the same direction in the medium-long term. This is inherently logical. The economy drives corporate earnings, which drives stock prices in the medium-long term.

This chart demonstrates that the stock market (S&P 500) rarely makes big declines (bear markets, which are 40%+ declines) outside of recessions.

*Recessions are in grey, bear markets are in orange. This is a log scale chart.

Some people say that “the stock market leads the economy”, while others say that “the economy leads the stock market”. Both of these camps are right, but each camp is only telling you half of the story.

The stock market leads the “economy”, as defined by GDP. As you can see in the above picture, the stock market tops (bear markets start) before recessions begin. However, GDP is a lagging economic indicator.

  1. Certain LEADING economic indicators (e.g. Initial Claims, Housing Starts, Heavy Truck Sales) lead both the stock market and the economy.
  2. The chain of events look like this. Leading economic indicators start to deteriorate. Then the stock market tops. Then GDP turns negative, resulting in a recession.

That’s why we use leading economic indicators to predict the stock market’s medium-long term direction. The leading economic indicators will start to change directions before the stock market makes long term tops and long term bottoms.

Economic expansions and equity bull markets DO NOT die of old age. As you can see from the following chart, the U.S.’ economic expansions over the past 150+ years have lasted longer and longer. There is no such thing as “an economic expansion MUST end after X number of years”.

Temporary deviations between the stock market and economy are technical in nature. Our trading models can predict some of these deviations.

But if the stock market and economy start to move in opposite directions, the stock market will eventually move in the same direction as the economy.

Our quantitative models for trading the stock market

I developed quantitative trading models for trading the U.S. stock market. None of these models are very complex. “Simplicity is the ultimate sophistication”.

The Medium-Long Term Model is my most complicated model and generates an average of:

  1. 14.7% a year when traded with SPY (suitable for your retirement portfolio)
  2. 30% a year when traded with SSO (suitable for regular traders)
  3. 43% a year when traded with UPRO (suitable for aggressive traders)

I have other shorter term trading models that generate 20%+ per year. These simple models clearly outperform the S&P 500 in the long run, which generates an average of 7-8% per year.

Armed with my models, an investor or trader can easily and significantly outperform in the long run. 

Why you should trade index ETFs instead of individual stocks

Trading the index (e.g. S&P 500) via ETFs (e.g. $SPY, $SSO, $UPRO) is much easier than trading individual stocks.

  1. Traders who trade individual stocks have to care about what the broad stock market index is doing. What the index is doing has a massive impact on what an individual stock will do. This is called systematic risk.
  2. Traders who trade the index don’t have to care about what individual stocks do. No single stock is big enough to have a significant impact on the broad index in the medium-long term.

Why you should trade leveraged ETFs

Leveraged ETFs amplify the underlying market’s returns. For example, a 2x leveraged ETF for the S&P 500 ($SSO) will amplify the S&P 500’s daily returns by 2x.

  1. If the S&P rises +1%, the 2x leveraged ETF will rise +2%
  2. If the S&P falls -1%, the 2x leveraged ETF will fall -2%

In essence, leveraged ETFs amplify your profits when the market goes up and amplify your losses when the market goes down.

My trading models help you sidestep the stock market’s large declines. Trading leveraged ETFs with my models:

  1. Helps you increase your gains when the stock market goes up.
  2. Sidestep periods when the stock market goes down, thereby reducing your drawdowns.

That’s how you easily outperform in the long run.