I mentioned that I would get around to reading Financial Armageddon while we were here; I've knocked out a little more than half and my thoughts so far are holy cow!As I was reading today I had a thought about sector weightings and when to cut back.
I thought of Tom Lydon's rule of thumb about using the 200 DMA as a point to get out; for clarification I use the 200 DMA of the broad market as a catalyst to start taking defensive action.
I then realized that I haven't made too many sector weight changes in the last couple of years; this does make some sense as the market has only been up a little. The two that come to mind have been with energy and emerging markets (I realize emerging markets is not really sector but you get the idea).
Reducing exposure in both sectors was done during past times of giddiness not weakness. These segments had grown larger than I thought they should be, combined with glee surrounding these segments (new readers can go to the April 2006 archives and look on or about April 24 and 25, there have been a couple of other instances too but the April 2006 posts cover the idea).
I am not sure if Tom would sell out completely from a sector that went below its 200 DMA but this is not what I would do. Zero percent is a big bet. I think part of top down analysis/portfolio construction is being out in front of when changes, good or bad, might be coming for a given sector. The expectation of course is that you will not be right 100% of the time which is all more reason not to go zero, and again I don't know if that is what Tom has in mind or not.
A comment came in asking about reducing sector exposure on Seeking Alpha and I replied that it is not an exact science for me. It is easy to envision a sector needing to be cut back at times of strength and weakness both.
If a sector can have good and bad times then sticking with just one rigid sell criteria would seem to be less than ideal.
No video this week, I didn't even ask if I could bring it--a key to our long marriage has been choosing your battles. Joellyn understands why I had to bring the laptop, but the webcam....
The picture is from sunrise this morning.
14 comments:
I think you're right about taking a look at rebalancing your portfolio and taking a look at the risk:reward while your near the top (giddy phase) being ahead of the curve. There are many excesses still in the market coming out of the 18 years of growth from 1982-2000. I've written a book "The Case For Cash - Hidden Secrets Your 401(k) Provider Doesn't Want You To Know" that I'd be glad to forward you a copy that explains this more fully. Just send me your email. I think it presents a compelling case to challenge the long held beliefs of the market pundits. It's also available for purchase on my web site at www.crashprep.com .
One problem most investors deal with is determining how giddy is too giddy. Most sectors can make significant upward progress after they reach a high level of giddiness. I've also found tops (in both markets and sectors) are a lot harder to spot than bottoms.
I have no quarrel with using a 200 dma as a timing trigger, but if you're going to reduce exposure to a sector when it is overly giddy, you're adding a whole new level of complexity to your timing methodology.
I've come to the realization that using your gut to determine when a sector or market is too giddy/too dour is a bad idea. Read through old Hulbert Financial Digests, newsletters, Barron's, etc. and you'll see case after case where pundits made completely rational arguments as to why a particular sector/market is "too giddy". And all too often, that sector/market continued higher, often for years.
Here are two things I've learned that work:
1) don't rely on your gut, use quantitative ways to measure giddyness and use it consistently.
2) don't try to be a hero by picking tops. Have patience and wait for your giddiness indicators to show signs of reversal. This is really important imo - sectors can perform well at high levels of giddiness for a long time. You don't have to be the first person to leave the party.
Tom K, you make a great point but I would place more emphasis on some sort of fundamental analysis for a sector.
Further shaving down some exposure, which is the context here after a big move up doesn't really compromise things much and again that is the context. The energy sale i referred to from April 2006 worked out to selling 1/4 or so of the exposure to Statoil and 1/3 to 1/2 of a Chinese major. Both had huge runs, oil closed at $75 for the first time and everyone seemed to be saying $80 was a chip shot.
Just an example.
If the group had gone up another 20% from where I would have sold I would hvae been delighted as I still had most of the positions.
Hope you enjoy your time in beautiful Hawaii. Say,I have experimented the past year (steep learning curve) with several strategies from market timers, stock pickers, buy and holders, and my previous advisor who held a basket of no load mutual funds by client risk category.
My current belief is that picking the "hot hands", those top three or four in a quarter, and buying a combo of MF's, ETF,s and Top Stocks in those sectors is a pretty reasonable approach after backtesting several quarters.
For example, just take some of the hottest sectors two quarters ago, like energy, Far-East ex-Japan, and industrial metals and steel, they continue to be on fire. If one would have picked, say, XLE, OIH, XME, and DNH or related funds then, and put in 8% stops (IBD rule) they would be sitting pretty right now. As far as profit-taking, taking profit anywhere above 8% protects any potential loss. What am I missing here? Remember, I am a very amateur investor, who is trying to learn from pro's like you all. Thanks, Scoot.
Why worry about picking tops etc.? Just set you asset allocation and rebalance when it's coast effective. Seems to work for Swenson.
Why worry about picking tops etc.? Just set your asset allocation and rebalance when it's cost effective. Seems to work for Swenson.
Hi Roger! I've been a big fan of yours for a long time. After hearing your decision not to bring the video camera (to do your webcast from Hawaii) my wife loves you too.
We look at the 200-day average this way: a) It provides a specific stop loss point that's easy to follow...no bottom picking, top picking or predictions necessary. b) It takes the emotions out of investing. c) You are going to get whipsaws from time to time. This means we might sell and have to buy back in at a later date at slightly higher levels. Big deal. d) You don't have to buy a asset class, sector or global region just because its above its 200-day average. The fundamentals have to line up too.
We just finishing up a week of skiing in Tamarack, Idaho with the kids. I've been limited to 60 minutes a day on the lap top. At least you and I both know who the boss is.
Keep up the strong work!
Tom Lydon
Models this week:
Timing Model = 5.5
100% long
Global Allocation of long positions
MSCI EAFE Index 30%
MCCI Emerging Markets Index 30%
Russell 3000 Index - U.S. 40%
Top Ranked U.S. Sectors
U.S. Basic Materials 5.5
Mid Cap Value 4.5
U.S. Real Estate 4.0
U.S. Telecommunications 4.5
Precious Metals 3.0
U.S. Leisure Goods 3.0
U.S. Oil & Gas 3.0
U.S. Pharmaceuticals 3.0
Top Ranked International ETFs
MSCI Malaysia Index Fund 3
MSCI Singapore Index Fund 3
MSCI Australia Index Fund 3
MSCI Germany Index Fund 3
MSCI Mexico Index Fund 3
MSCI Pacific ex-Japan Index Fund 3
S&P Latin America 40 Index Fund 3
MSCI Sweden Index Fund 3
MSCI Austria Index Fund 3
MSCI Brazil Index Fund 3
Top Ranked regions, asset classes, styles
MSCI Pacific Free ex-Japan Index 4.0
S&P Latin America 40 Index 4.0
FTSE/Xinhua China 25 Index 4.0
MSCI European Monetary Union Index 4.0
MSCI Emerging Markets Index 3.0
Not much new to report this week. Pharma has move into a top rank from out of nowhere and Utilities fell out of the top tier because they're OB short term.
From a big picture perspective Emerging is leading both the U.S. and developed markets.
Every few years, we have a "case" for something: gold, silver, stocks,Swiss railroad transport credits, dried foods, guns, a sancturary in the mountains (not a bad idea for any scenario, but I digress), Swiss francs, Japan, oil, real estate, etc. With media propulsion since the mid-1990s, we can receive horror outlooks in a much more compressed time frame, packaged neat, clean and politically correct.
All have a WOW factor when proposed by experts, especially if they can express themselves eloquently in a book and/or have the authoritative voice and look.
Willing followers of someone proclaiming they possess truth and a crystal ball and then provide a can't miss logical strategy for surviving the coming financial holocaust belong in the same camp as followers of another learned and written world figure, Karl Marks.
In Stalin's words,"useful idiots".
Relax, practice diversifcation in areas other than solely stocks and bonds in modest proportion and laugh, as I do, reading older books and magazines predicting things such as global cooling and the demise stocks. Now,that Swiss railroad car leasing scheme.....hmmm
Scoot, what you are describing doesn't sound, off the top, like a diversified portfolio, do I have that wrong? It also sounds difficult.
Tom Lydon, thanks for stopping by, so can I ask would you ever go zero weight a sector or style or cap size? If so when do you reestablish a position? Back above the 200 DMA?
T, becareful with the Swiss railroad car leasing, sure it sounds great but my buddy, Jay Reamenschneider (Seinfeld reference) got burned badly lol.
Tom K said, “I've also found tops (in both markets and sectors) are a lot harder to spot than bottoms.”
I wrote a comment about this on February 5th of this year. I said then:
“I have to (half) disagree about the notion that tops and bottoms cannot be called. Tops are impossible to call. I have nothing in my tool kit that would catch a bear, either before or soon after a market inflection point occurs. As for bottoms, bulls are easier to spot, I’ll give you one example. Back in August of 1982, up volume swamped down volume, one day, by 42 to one. The market did very well after that. It’s not all that impossible to come in early after a bull market begins.”
I’d like to add a philosophical point. Markets are psychologically easy to get out of and difficult to come back into. Technically and unemotionally, markets are easy to move into (near to bottoms) and tough to get out of (close to tops). There seems to be a balance here. Is it the “invisible hand” of the markets, perhaps?
Anon 9:00, I remember your post and agree. I don't believe in predicting the future, especially predicting the future of markets - but it seems a whole lot easier to find periods of very low risk (bottoms)vs. areas of high risk (tops).
I remember 10/20/87 like it was yesterday and it felt at the time like it was a tremendous buying opportunity. You have to remember the time - I was definitely in the minority. You can call BS on me if you'd like, but I also remember 10/9/02 and was even tempted to post on iHub "this is the bottom!", but I didn't. I just hate the idea of making predictions, but 10/9/02 had all the hallmarks of a selling climax. At the time nobody, and I mean nobody thought the market was finished falling. But if you took a sober look at all the indicators, you just had to say to yourself "geez, the downside is really slim here".
(ment to post earlier)
woke up saturday morning, the usual, i'm idling around the computer.... not much happening... the misses says, whats wrong no random roger.... i say "nope no cast this week, he's in hawaii..." a quick reply: "who's watching the dogs...." so... who's watching the dogs :)
lol, my mother in law is doing the heavy lifting and we have some friends coning by to walk the dogs.
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