Ecoinometrics - Rate hike cycles and turning points

How does the Fed Funds rate influence the turning points of the stock market?

In general it is a foolish enterprise to try timing the market. I don’t recommend focusing on that.

But could it be that in some circumstances we can get close enough to estimating if the bottom is in? 

Given that the Federal Reserve is running the show and everyone cares only about the monetary policy we might be in one of those situations. Maybe.

Let’s see what the historical corrections have to say about that.

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Rate hike cycles and turning points

In normal circumstances I would say don't bother spending too much time on "timing the bottom". 

Having a long term investment horizon, trying to make asymmetric bets and handling your risk so that you do not get wiped out, those are the basics every investor should focus on.

Now that's not to say that it wouldn't be nice to actually be able to time the bottom. Or at least to get close enough.

If we are talking about getting a performance boost it sure would be great. 

Just to make this concrete let's do a side by side comparison. Take the major drawdowns of Bitcoin and the SP500. Compare two different positions in each drawdown:

• One position is the result of dollar cost averaging during the whole drawdown.

• The other position is the result of buying exactly the bottom.

At the end of each drawdown we compare the returns of these two strategies. 

Obviously buying the bottom will outperform, but by how much?

On the charts below each red dot represents the return (horizontal axis) from buying the bottom. Each blue dot represents the return from dollar cost averaging. Those points are grouped by the date associated to each drawdown (vertical axis).

Pay attention to the distance between the pairs of blue dots (DCA) and red dots (buy the bottom). The larger the distance the more buying the bottom outperforms.