Past Performance Eventually Guarantees Future Results

By Chris Ebert

I could not help chuckling a little when I opened my mailbox last week to find a large envelope containing a prospectus for one of my mutual fund investments. It was amusing because I am a trader, not an investor. I would gladly sell all my shares in the fund if the insurance policy containing them offered a better alternative. It was also amusing because of the sheer size of the prospectus, the undoubtedly high printing and mailing costs, and the fact that the information arriving at my home in May was dated to last December.

Perhaps the most humorous part of the prospectus was the clever wording that seemed to covey the sense of how proud the fund managers were that they had only slightly underperformed their benchmarks. I guess I should take some comfort in the fact that as poorly as the fund has performed, past performance does not guarantee future results.

These days I prefer trading methods where past performance does guarantee future results, at least eventually. Any method of technical analysis which is correct more often than not, or if not, is accurate when it counts, will eventually lead to greater profits and smaller losses. The Long Call/Married Put Index (LCMPI) is one such method. The Index, which measures the strength of a bull market, switched back to “non-bullish” more than a week ago.

The LCMPI is intended to warn traders in advance of changes in emotions that are likely to influence trading patterns. Recent selloffs, widening trading ranges, higher volatility, and odd candlestick patterns, such as the Doji on Tuesday, May 22 are likely to remain commonplace now. Since the Index is in a similar pattern to what it was in late 2011, the behavior of the market is likely to mimic that time period as well. In short, those who were not comfortable trading late last year will probably find themselves in uncomfortable positions if they continue trading now. While many traders are able to adjust to such markets, some even enjoying the opportunities, those who prefer more predictable markets are probably better off waiting for the LCMPI to return to “bullish”.

The preceding is a post by Christopher Ebert, who uses his engineering background to mix and match options as a means of preserving portfolio wealth while outpacing inflation. He studies options daily, trades options almost exclusively, and enjoys sharing his experiences. He recently co-published the book “Show Me Your Options”.