Recently we reported that a popular investing strategy, Mebane Faber's market timing model, suggested that you move out of U.S. stocks and into cash for the first time since 2008. The essence of the strategy is simple: Sell stocks when their momentum is flagging and buy them when it's gaining.
Faber, the chief investment officer of Cambria Investment Management, went on Bloomberg TV to explain the call.
If you're a buy-and-hold investor, long-term time horizon, ignore what I'm getting ready to say for a little bit, but if you're a tactical person who's concerned about drawdowns and losses, the bad news looking at the U.S. stock market, we look at in two ways. The first is the trend, right, so we've done historical studies not only on U.S. stocks but [on] foreign stocks, REITs, commodities, currencies, bonds, just about everything, and when markets are up-trending, that's when you want to be in. It's simple. Use something like a 200-day moving average, we used a 10 month moving average when we published this paper back in 2006. But what it shows is that when the market is downtrending and you move to the safety of cash or, say, 10-year bonds, you avoid a lot of the volatility. You avoid a lot of the big drawdowns, meaning the peak-to-trough loss in markets. … Until right now, for the first time in a really long time we've had this incredible six-year run, U.S. stocks are finally below trend, and we've told a lot of people for the trend following side, it's a good time to move to the safety of cash or bonds.
Being a chart guy, Faber came equipped with a few of them to explain this reasoning.
First up was U.S. stocks. Until very recently, the S&P 500 had been in a nice up-trend.
Now that has changed, and so has Faber's recommendations to clients.
What about real estate?
That has been a great place to invest in many areas of the country since the housing collapse, but Faber's model shows that could be changing as well as the momentum of so-called real estate investment trusts, or REITs, begins to deteriorate.
U.S. Treasuries are also frequently seen as a safe-haven alternative to cash, but they too have seen momentum decline.
Lastly, you might look at commodities, since many of them (such as oil) have been hammered lately.
Faber says you should think again. There's no sign of the trend letting up.