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The Equitymaster Research Digest

An Indicator that Warns of a Stock Market Tsunami
Feb 8, 2017

Paul Tudor Jones, one of the world's richest investors, was flat at the top of 1987 crash. This is commendable because the crash destroyed a lot of careers and US$500 billion in wealth. It was the biggest one-day crash in the history of US stocks. Jones, though, returned a mind boggling 200% and took home US$100 million.

It wasn't luck that saved Paul Tudor Jones. Instead, it was an indicator that he considers his trading lifeblood...

  • My metric for everything I look at is the 200-day moving average of closing prices. I've seen too many things go to zero, stocks and commodities. The whole trick in investing is: 'How do I keep from losing everything?' If you use the 200-day moving average rule, then you get out. You play defense, and you get out.

During the 1987 crash, it was the 200-day moving average that alerted him to the train wreck ahead. Jones follows this indicator to this day. The moment anything goes below the 200-day moving average, he plays defense and he gets out. No questions asked.

There's no denying there's great merit in this approach.

As a trend follower or a momentum investor, you have to be with the predominant trend - whatever it is. But once that trend loses steam, you have to get out. You have to survive to fight another day.

Our 'Tudor Jones' Indicator

When we were looking at our momentum backtesting returns, we knew we'd have to incorporate a Tudor Jones-kind of indicator, but we weren't sure which one. It isn't as if our strategy did badly. It outperformed the benchmark index by a factor of 5:1. However, did lose a whopping 73% in 2008.

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