There have been a couple of comments lately implying that a lot of people are sitting out this rally we are having, more than in past rallies. I'm not sure there is a great way to quantify this and it seems to me that ten years ago, or whenever, there were fewer people expressing themselves so freely due to where the Internet had evolved to at that point. Even in 2003 there were fewer people interacting on the web the way they do now.
The point is that there may not be more people sitting out, there could be fewer people sitting out.
The momentum of the market seems very good for now. It will stop at some point and the next bear market/correction will start and of course a couple of people will be exactly right about when.
If you buy into the idea that the bull market is long in the tooth but don't want jump out just yet it makes sense to increase the market cap of your portfolio. I did this in January when I added Altria for most clients. It is up a little since I bought, probably trailing the market but I think that if leadership continues to narrow and move up the cap scale, which is what happens when bull markets start to end, I think it will participate.
While I have been expecting the market to turn we have seen this run go on a long time and it may continue for a long time yet. The mega caps lead the market for several years at the end of the tech bubble. I have been unambiguously wrong about the market going down, a point I have made numerous times, but have not missed anything because I did not make any big bets, only small ones, anticipating a turn.
The reason to repeat this sort of thing is to show consistency in my thought process as the weeks pass. This sort of consistency helps me manage volatility and expectations. I was visiting with a client the other day and was asked about the market crashing. I explained why I assign a low probability to a crash but if it happened that we would sell the double short fund because it would be up a lot and mentioned a couple of other possible things we could do.
I have thought about a crash and have a plan if there is a crash and made the plan when the market was doing just fine. While I am quite certain I would not react emotionally to a crash all I would need to do is just stick to my plan. This is important for crashes, bear markets and bull markets too. Not enough people plan this way including professionals.
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22 comments:
roger, I read your blog regularly and want to disagree with you regularly. But then again I do the same within my own stream of consciousness. My critical voice says, "how can roger be a one man show that successfully performs as good or better than a staff with people that have specialties in quantative analysis, modern portfolio theory, hedging strategies, or time to visit management, or do nothing but study global economics, etc?" My reply, "All or most organizations are so ineffective that any dream team is just that, and common sense gets lost when there are so many moving parts that get over studied , i kind of like this simple curious guy even if there are smarter shmucks (subvocal only) that I probably couldn't understand." If you can accept my lift handed complement i sure would be interested in performance findings, though i realize that this blog is about process. Speaking of which, is your crisis plan the same for a sudden and gradual drawdown? Where is line in the sand(% correction from high,or whatever) for getting more defensive?
T:
I can recall you, i think you, having an interest in the defense sector. Has this company crossed your scope: symbol AVAV. Personally, love the concept. The company produces unmanned inexpensive aerial assets. After the ipo looked stable I bought a position. Chart wise, it's a better buy now, i think. The sector, as a whole, PPA/etf, holds up pretty good and volume indicates active and growing interest. I've had a position in PPA since early march and expect to hold it for a while. Ala, kind of, roger I like to pair an etf with a stock.
Roger, I also have been reading your excellent blog regularly. I find it difficult to understand the idea to be sitting out the market. I am always in the market for over ten years; the experts tell us to be fully invested; to be honest I am not sure what that means.
My point is simple for a growth and income investor, whose portfolio changes only marginally from year to year. It is important to remain in the market, not jump around incurring charges, looking for momentum, but riding both the highs and the lows for the next ten to fifteen years or more
7:03 anon;
not fully following you. but what I do follow...
some things I know about and some I don't. knowing how to reduce and increase beta via hedges is something I know a little about. As far as visiting management, I have noted many times being a sucker for a story so I submit spending time away from what I know to be enchanted with a story would detract from my strengths--its fine for others not me.
I talk about performance once a quarter, at the end of a quarter in a video--you can check the last two or three quarters. The video as opposed to writing is consistent with our perception of compliance.
Further, when I do place trades for clients i post details of those trades and you can glean something from those posts I think.
I do have an interest in defense stocks. I don't know the name you mention. I go a little larger cap. Part of the equation is that if there ever is another terror attack I want to own something I "know" will go up. Tough to feel like I know with a very small cap.
Bernie, I hear you. You no doubt know that people predict more crashes than actually come and the fear of loss--which is a reasonable emotion-- motivates some bad sales.
People sitting out...
There are a lot of folks with their wealth tied up in real estate from the last mania. I don't expect the general public to be heavily invested when this uptrend breaks. Some in 401K and IRAs.
http://bp0.blogger.com/_2fuk3iGxQxM/Rkyv_ZvdTKI/AAAAAAAAAhk/2OUFw4BRPps/s400/equity2.JPG
Leisa called my attention to SRS taking off. Took long enough. Hope XHB gets crushed enough to boost my June puts. SRPIX fund is moving nicely as well. RE junkies haven't seen anything yet IMHO.
Maybe this is short enough:
http://suddendebt.blogspot.com/2007/05/household-equity-ownership-direct-vs.html
In response to the AVAV inquiry. I am reluctant to use Roger's blog space, but, if he permits, here is my opinion:
I called a USAF contact with knowledge of the type(s)of programs AVAV has a stake in. The view is that we are just beginning to scratch the surface with AVAV products, and that only a significant decrease in DOD/Homeland Security spending (or an Iraq surrender) may derail the stock.This company makes products that are in high demand for a number of military and border patrol activities, amongst their other production items.
Aerovironment is a stock I have not followed with diligence (likewise with FRPT - my bad).
I maintain that in Aero Defense, individual stock selection is wiser than funds in that sector long term due to the vagaries of military budget priorities (political) and the selectivity of technology being considered to counter threats from abroad which are well known to the military.
IMO, stocks like AVAV may be ripe for a buyout by a larger DOD provider (like AH recently).
The decine in the AVAV stock price may just be a correction of an overbought stock. I would not be in a rush to load up. Use a a hook, not a net, at this juncture.
Plays on unmanned aerial vehicles:
UIC (a lil late)
RGUS (rotary diesel)
I'll pass. But I would like to find a stock tied to nuclear bunker busters and radiation cleanup.
In my car racing days, a "crash box" was a transmission with every other tooth ground off the synchros.
Here's another version of the term with relevance:
http://www.wwfn.com/crashupdate.html
Rodger,i recently came acrosss your blog by accident;actually you are the first blogger that i have ever read ,strange as that may be.however,could you possibly mention the name of the double short vehicle you mentioned in todays blog as i feel like we are walking on a tight rope with this day after day climbing market.thanks for your great insights into this interesting market.
you are a moron and typical loser asianphile
When everybody is looking for a crash....well, you know.
And Roger, you with a DOUBLE SHORT fund?
Look at price of SP500 in 1999.
Look at the earnings in 1999.
Now look at price at end of 2006.
Now..look at earnings of it end of 2006.
ALL these people with double short funds now, were in double long funds in 1999.
IMHO, the trend is your friend.
Wow, Roger you may have to do away with anonymous comments soon too, eh? What's with all the hubris? I always want to see that on the other side of the trade from me, all you anonymous bulls with your gloating self-confidence. Best contrarian indicator I'm seeing right now. I don't think the majority of these wild-assed bulls really appreciate the fury or understand the intricacies of markets and risk. I'll bet against you chumps all day, every day.
Rick C, Roger may not be willing to mention the double inverse tickers for fear that he's giving you investment advice. I however have no such qualms.
DXD
SDS
QID
MZZ
TWM
Sliced and diced however you want. Be careful, they're sharp, and cut deeply. When they work, they work beautifully.
Hey Roger, I would entirely agree with you if it weren't for the amount of convincing data I've seen. Bespoke did that piece earlier this week, and I've been doing work on the number of NYSE odd-lot buys that really does show a statistically significantly lower number of odd-lot purchases in this last two months (even compared to summer doldrums).
There are some distinction to be made however. If investors are already in the market, just looking at purchases doesn't help. The Bespoke analysis IMO is flawed in that E*T now offers a much larger variety of financial products (e.g. checking accounts, mortgages, credit cards), so client assets are now much more than just brokerage accounts. What about baby boomers breaking out those 401K's as well? I imagine that could have some long-term negative pressure on the major indexes and brokerages that could turn otherwise tame days to the red.
-Michael Bommarito
the double short ETF i use is SDS. the current weight is now quite small.
i have a thought about odd lot indicators that i'll post later.
Hey Roger...wouldn't the SDD (ultra short small cap) be a better play than the SDS (ultra short S&P)....since even if you are a bit early on the trade, the small caps should underperform the large caps at the end of this bull run?
Don't forget to focus on the sitting ducks:
SRS - real estate
SKF - Financials who are holding the bag for the above.
Can probably own SRS for a decade.
DXD last to go. Rode MDD down end of Feb for quite a pop. Bought back a 6-pack of these, like a holiday beer sampler.
student...
i think that depends on what the intention is. if you are looking for a hedge and you benchmark to the russell 2000 then yes for sure.
from there is gets a little fuzzier.
I will say i hadn't thought of your idea b4. it is also possible that because of the higher beta a $10000 position might hedge more than $20000.
Hey Momo...your post, and Rogers, proves my opposite side of the trade. You shot yourself in the foot.
This is what is going on, read this latest commentary:
http://hedgefundmgr.blogspot.com/
>>
Hey Momo...your post, and Rogers, proves my opposite side of the trade.
<<
Whoa, posting as anonymous really removes the context for any debate. Actually I should have couched myself by saying that it's more than just Roger's blog where I see the hubris flowing from anonymous posters. However, Mr. anon you were trying to say something about the sucker at the table?
>>
You shot yourself in the foot.
<<
How so? Color me puzzled.
'This is what's going on' is a hella way to win an argument. Nice link, but can you quote exactly which point in that text is the *what* that is going on. It didn't just jump out and smack me in the face.
Roger, I would like to ask why you picked SDS? S&P seems least likely to catch downside alpha. IMHO the Dow is most extended from its mean (hence why I own DXD), and either Nazzy100 or R2k will lead the way down. Those double inverse funds should not be much more than a trade, regardless of whether a hedge or not. Trade may last months, but I think of them as an insurance policy. Much like leap puts on XLF. If they ever deliver big, cash in your winnings and pick up the pieces elsewhere.
It's funny that you brought up Russell 2000 as a benchmark Roger. I was going to ask a question about that. Maybe I was going to toot my own horn. YTD my portfolio performance is almost exactly inline with R2K. I actually consider this a small miracle. Last year I eclipsed that benchmark by greater than 10x.
I am as heavily weighted bearish as I have been in 10 years in the market. My current asset allocation is 28% cash, 9% bonds, 48% long equities (heavily energy and infrastructure), 15% market hedges (DXD, QID). I use the margin this affords me as leverage via short sales and options (sell calls, buy puts) to get roughly 200% short the market. At the end of Feb, begin of March my portfolio was kicking off double an inverse of the market. I gave some of those gains back, but have basically been treading water since then.
I don't know if it's a classic long:short portfolio or not. Haven't read much about it, just something I've come up with. Still tweaking. If I was more nimble with my trades I could far eclipse the benchmark. I swing trade, weeks-months timeframe mostly. Try to avoid intraday, and even intraweek.
The way I figure it, if I can meet a decent benchmark but get a double inverse return on the market in downswings ... I'm way ahead of the game at this momoment in history. This requires a certain degree of nimbleness and dispassion that I often lack. Every day is a new learning experience with the market, and I try to treat it as the surfer treats his waves -- with appropriate respect and awe.
"i think that depends on what the intention is. if you are looking for a hedge and you benchmark to the russell 2000 then yes for sure."
For sure the SDD would be a good play in the scenario you describe above....but just as Icelandic equities and other positions unrelated to the S&P benchmark provide diversity, hedging to a degree and opportunities for Alpha gain....wouldn't something like SDD (or any of the other sector ultra short ETF's) be a candidate even for an S&P benchmarked (or other non Russell benchmarked fund) investment fund?
Regardless of my benchmark, if I want to hedge against a (sharp?) broad market pullback, and I think small caps will be the first to fall if that happens....wouldn't the SDD be a viable trade regardless...or would an S&P benchmarked fund feel more obligated to start with an S&P short ETF ?
Momo and student,
you both make correct points and obviously I do not have every answer. Using your similar lines of thought would double short RUT create more of a drag?
I chose double short S&P 500 because it seems appropriate to hedge with the index I benchmark. I am trying to add value versus the S&P 500 but maybe I need to revisit this.
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