The Participant 8/26/15: Stock Market Calm

by Jason Kelly

Wednesday, August 26, 2015



Stay Calm With 3Sig

I was pleased to discover in the recent stock-market rout that converts to “The 3% Signal” remained calm, with many expressing relief that they didn’t suffer the stress they had in past market turbulence. This is excellent news. One of the primary benefits of the plan is achieving market-beating performance with a much lower level of stress overall — and no stress whatsoever from indecision.

A chief nail-biter caused by stock volatility is not knowing whether now is the right time to buy or sell. The pundits were out in force on both sides of that advice at the end of last week and beginning of this one. Some urged scooping up emerging-market stocks on the cheap, some pushed energy stocks. On the other side were those warning that a bear market had arrived and it was time to sell. One such sell note you’ll read below, sent by Ken Moraif.

The beauty of The 3% Signal is that it doesn’t care what stock prices do, and neither do the investors following it. The plan is built from the ground up to withstand and, in fact, benefit from volatility. The only certainty in the stock market is that prices will fluctuate. Doesn’t it make sense to enter the fray knowing so, with a plan that not only expects price movement but is prepared to react intelligently to it? Of course it does, and this is The 3% Signal’s reason for being. Its market-beating pedigree is important, but I find it even more gratifying to see people loving their newfound way to participate in stocks without stress for the first time.

Reader Nikki sent the following last night: “I work in medicine, with educated people, and it was amazing how they were lamenting and being so pessimistic yesterday about their shrinking retirement funds. Meanwhile, I’m looking forward to the weekend when I’ll have time to review how much I have in bonds and my cash fund, waiting to go shopping.”

Ann said: “The reason the plan works is that price dips draw in more buying power, and price rises skim profits. I knew this, and wanted it, so it was amusing to me when financial media went nuts about prices going down. ‘Yeah,’ I thought, ‘and why is that bad, again?'”

Tamar remembered panicking in 2008, calling it “stupid” in retrospect. Now, he wrote, “I am NOT experiencing stress. … I feel comfortable with the bond fund and being able to buy …”

This is the right attitude. Stocks go up, stocks go down. Nobody knows in advance when or why or by how much, so the best we can do is set a mathematical definition for how much we want out of them in a time frame of our choosing. In The 3% Signal, these parameters are set as wanting 3% per quarter, hence the name. If stocks drop below that amount of growth, the plan uses capital from its attendant bond fund to buy the shortfall. If stocks rise above that growth amount, the plan sells the surplus and puts it in the bond fund for safekeeping.

This automated to and fro between the only two funds involved in the plan, removes worries about whether interest rates will harm bond-fund prices, whether China is signaling a global recession, what the latest out of Greece means, and so on. It all filters out to just the gentle background sound of the market, which gurgles up and gurgles down, with the plan guiding its capital to flow appropriately in response.

Stress? Leave that to the experts.



From Note 30 sent to subscribers last Sunday morning, with data as of Friday, August 21:

Stock markets around the world hit the skids for a litany of reasons last week, including: faltering growth in China, the devaluation of the yuan, turbulence in Chinese stocks, collapsing oil prices, the Federal Reserve’s apparent indecision around whether to raise interest rates next month, and yet another snap election in Greece. A gloom is settling across once high-growth markets like China, Brazil, and Russia.

Our approach thrives on this kind of uncertainty, which is good because markets are always uncertain. Now and then the volume goes up, but really it’s the same song playing over and over again. Teaching our capital how to dance to that song is the key to low-stress prosperity. …

It’s not obvious the market will keep falling. From last September 18 to October 15, the S&P 500 fell 7.4% and the punditry said the bull market was finally over. The index then rose 12.3% by December 29. Last week’s drop of 5.8% took the S&P 500 down 7.4% from its July 20 peak at 2128. The odds for a snapback are as good as the ones for a meltdown, and I reiterate my view that now is a fine time to get a signal system started if you haven’t yet, or stick with one if you have. …

I’ve been monitoring the Apple Watch in the market, and I think it’s a flop. The company hasn’t said so, nor have analysts, and data are unclear, but I’ve observed the energy in various Apple stores in the United States and Japan, and the Watch area has been a ghost town everywhere so far. This makes sense to me. Why would anybody want a remote control for something already in their other hand? As far as I can tell, that’s basically what the Watch is: a remote control for the user’s iPhone.

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The Kelly Letter is emailed to subscribers every Sunday morning. It costs $19.97 per month or $236.97 per year. See a two-minute video about its distinctive approach to investing at:



The following is from an email sent by Ken Moraif last Friday.

“Well, I actually didn’t think it was possible to reach our sell trigger today but we did. Therefore, it is now time to sell. …

“Our strategy is not perfect and those of you that have been following me for a long time know that our strategy predicts bear markets but it also predicts bear markets that don’t happen. It is certainly possible that the market will bounce back from here and that this is not the beginning of a bear market. However, now that we have hit our trigger point the odds are very high that this is the bear market that we have been expecting. …

“The 2008 bear market wiped out 12 years of gains in just 17 months. If this is the beginning of the global crisis that I have been calling for, the bear market of 2015 and 16 could be of the same magnitude. Can you afford to go through that again? I think not.”

To see this call in The Z-val Zone, please visit:

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Background: The term “z-val” is a shorthand introduced in the book, “The 3% Signal,” for “zero-validity forecasters” and “zero-validity environment.” The latter phrase was coined by Nobel Prize winner Daniel Kahneman in his book, “Thinking, Fast and Slow,” where he wrote that “stock pickers and political scientists who make long-term forecasts operate in a zero-validity environment. Their failures reflect the basic unpredictability of the events that they try to forecast.” This is why stock market forecasters are proven to sport an accuracy rate of about 50%, same as a coin toss, yet they continue forecasting.

You can peruse the growing collection of tracked forecasts in The Z-val Zone at:

Seen a forecast I should track? Send me the link in a reply to this note.



Here’s a quick health tip: Don’t eat a lot late at night.

It’s not a new idea, but fresh studies are confirming it. According to an update from the Washington Post, “when food is consumed late at night — anywhere from after dinner to outside a person’s typical sleep/wake cycle — the body is more likely to store those calories as fat and gain weight rather than burn it as energy, says Kelly Allison of the University of Pennsylvania School of Medicine’s Center for Weight and Eating Disorders.”

A study of 420 overweight or obese people found that those who ate their main meal after 3pm lost less weight during a 20-week weight-loss program than those who ate that meal before 3pm — even when total calories consumed, time slept, and exercise level were identical.

Suggestions include keeping junk food out of the house so you’re not tempted; eating your main meal earlier in the day, perhaps for lunch; and easing your way from the habit of eating late, rather than trying to quit cold turkey.

Yours very truly,
Jason Kelly

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