Type 2A Bull Bear Retirement Trainer

I am continuing to improve my Type 2 Bull Bear Retirement Trainer. It does a great job in Bear Markets. It doesn’t do a good job in Bull Markets. It fails to reach high valuations.

I examined a variety of alternatives. The simplest solution is best. Don’t use separate Bull Market equations. Use the standard (Neutral Market) equations except during Bear Markets.

Rejected Alternatives

In Type 3 Experimental Retirement Trainer, I required all sequences to fit within the inner confidence limits at Years 10, 20 and 30. Since the inner confidence limits cover 60% of probable outcomes, this requires us to generate four to five times as many sequences as usual.

P/E10 failed to reach 20 four times out of eight in a Bull Market starting from P/E10=8.

P/E10 failed to fall below 10 four times out of eight in a Bear Market starting from P/E10=27.3.

In Type 4 Experimental Retirement Trainer, I required Mean Reversion with a vengeance. I required each acceptable sequence to stay outside of the inner confidence limits at Year 10 or Year 20 but not both. I required all sequences to remain within the outer confidence limits at Year 10, Year 20 and Year 30.

P/E10 failed to reach 20 five times out of eight in a Bull Market starting from P/E10=8.

P/E10 failed to fall below 10 two times out of eight in a Bear Market starting from P/E10=27.3.

I have generated a new set of equations, based on market valuation P/E10 peaks in 1901, 1929, 1966 and 2000, eliminating one Bull Market-Bear Market pair. The new equations offer a modest improvement. They don’t solve the problem.

My Chosen Alternative

While collecting the new set of equations, I noticed that the original Neutral Market equations are much more bullish than any of my Bull Market equations.

I collected a set of Neutral Market sequences starting from P/E10=8. Seven out of eight sequences rose above P/E10=20. The other sequence reached 19.9.

In the Type 2A Bull Bear Retirement Trainer, I have eliminated the separate Bull Market equations. I have left section Z10 through AL16 in place. I replaced the Bull Market equations with a copy of the standard (Neutral Market) equations from Z1 through AL8.

Have fun.

John Walter Russell
September 14, 2006