Out In The Blogosphere

Bill Cara has an interesting post up called Surviving A Market Meltdown in which he says he expects the Dow to drop by 20% in the next couple of months and he also gives some specific idea about how to position your account during this move he is expecting.

I know that Bill is good at getting the direction right, I do not know his track record for being right on magnitude (not saying good or bad, I'm saying I don't know).

Here is the list of what he says to do (I used fewer words);

• Buy index puts on up days
• Sell popular stocks with high RSI and relatively high p/e ratios
• Sell stocks with visibility for bad earnings
• Scale back core holdings on up moves
• Don't write puts unless you really want to own the stock
• Avoid emerging markets now, be ready to buy soon
• Increase precious metals exposure on pull backs
• Buy junior mining stocks that meet very specific criteria
• Buy high yield bonds of "solid" corporations
• Buy high quality income trusts
• Buy a short term ladder of CDs
• Hedge the dollar with the loonie

There's a lot there. The one about buying high yield bonds of solid companies doesn't seem correct. There is plenty of very low-risk yield to be had in the mid fives. If he is correct about the magnitude, he is talking about a 20% decline in just a couple of months after all, I would be inclined to think spreads would widen (meaning treasury prices go up, prices of other fixed income products go down or some combo of the two).

I may not want to do all of the others he suggests but the points made are good ones. The reason why I am writing about this at all is to show there are different approaches that should be explored and understood.

I write about taking process from different sources to create your own process.

My process for trying to game something like this would be to continue as I have been writing about, I have reduced exposure, I have talked about adding a double short fund and next week I will be adding a currency ETF for clients before the ZIRP news next Thursday ( I will write about that next week when I do the trade) all with the hope of missing a big chunk of a big decline.

At this point I don't think a 20% drop from here is in the cards (not that I have to be right). There is a fair bit of concern out there. In the current environment I think that big of a drop so soon could come from an external shock (which is always possible) or after a move higher from here that causes amnesia about all of the problems that confront the market these days.

I am on board with caution and a poor market climate but for now I don't see 20% down. To be clear my ego is not such that I will go down with the ship. I don't care about being right, the best thing for clients, IMO, is if I can miss a chunk of a big drop.

I think Bill's time frame is shorter than mine which makes for a different process and approach. Neither is better than the other. The answer for you might be in the middle.