When he's not clothing the naked natives of Bantu Besh with the pygmy pullover Jay Peterman might be taking defensive action in his portfolio.But in case he isn't I am. I increased the double short yesterday with about 83 seconds left in the trading session. The trade added 30% to the existing position.
I am convinced that the market has started to turn down into a bear. One thing is clear the action thus far in the market has been a rolling over. The variable of course is whether this really is the start of a bear or just a run of the mill dip.
I've spelled out my logic before; inverted curves lead to recessions most of the time, the decline in the dollar is a sign of something being wrong, the mortgage/liquidity/credit crunch is a big bad event with serious repercussions, the market being below its 200 DMA is something that I view as a signal that demand for stocks is weak and if this has been a cyclical bull it has been very long by historical standards.
If this thinking turns out to be correct then the decline will take several months and it will make sense to look progressively less like the index.
Over the last few months I have made a few tweaks in this direction, and blogged about them as I went, which have created the desired effect of pulling away from the benchmark.
If this thinking turns out to be wrong and the market rockets higher I would expect to lag but still participate. Given where I am now I don't view this as a real problem. Every time I disclose this sort of action I always say that lagging a huge move up is not a problem but missing one is which is why I move in such small steps.
27 comments:
A post like this usually leads to one or two folks telling us about how they're in cash or selling short. I always ask this question after the fact, but let me ask in real time. Now that you've raised cash or gone short, let's say the market bolts up 3, 4, 500 points next week. Where is your new entry point? In other words, you've successfully mapped your exit, what's your plan for entry?
if you are asking me?
my cash position is generically 15%. the % of the SDS position is generically 3.5%, this works out to net long 79%, generically speaking.
the short answer is to think about making a chnage when SPX goes back above its 200 DMA.
how I would make a change depends on what the market gives. I could reduce SDS but I also have several names that I could buy as well.
since I don't know what the market will do I don't have an exact answer but based on how I am positioned I don't need an exact answer today.
I believe i would merely lag and not miss a monster rally.
No, not in particular, I was asking in general, but do appreciate the response. I think I have a pretty good handle on your approach.
But I do have one question.
the short answer is to think about making a chnage when SPX goes back above its 200 DMA.
If the market "breaks out" next week and there's a substantial move up. Do you take that into consideration or is this binary. if market price > sma200, buy, buy, buy else sell, sell, sell?
maybe more like
tweak....tweak....tweak
A few months ago you mentioned having a position in Irish stocks either for yourself or clients.The Irish market is down 35%(In Euro terms) for it's high. Do you still have a position?
It looks overdone to me. Maybe the bear market is almost over there before it really gets started here.
still own one irish bank. it is down quite a bit obviously. while doing something about it a few months ago would in hindsight have been a good idea, it was at most 3% and is now a smaller fraction.
Roger, I have a large cash position built up over the past year with the intention of increasing my fixed income allocation fron 10% to 40% in my IRA over the next couple years. First question, is this a good time to buy short and intermediate term bonds? Here is my current thinking.
diversify between 4 ETF's,25% in each. TIP, AGG, IEI, LQD. I am also considering BWX for foreign exposure, maybe 10% and reduce LQD to 15%
bond yields are very low so obviously prices are high.
if rates normalize then prices should fall. this could impact ETFs-even medium duration products.
where possible i'd rather have short term paper than a product WRT to domestic.
foreign i see as less of a problem because i think the dollar will be lower in the future but the same possibility exists.
remember there is no par value for a fund to come back to.
Roger
I wonder if you might comment on using SDS as your hedging vehicle.
When the double short instruments came out I thought they were a great idea. But after thinking about the math behind them I was less impressed. They have a built in negative tracking error, i.e. they will systematically underperform over time.
Goal is to give 200% of daily index move. So if e.g. SPX up 10.00% and then back down to where it started (requires down 9.09%) a 2x tracking ETF should go up 20.00% and down 18.18%. That would result in SPX index breakeven but SDS down just over 1.8%. Hopefully I got the math right on that.
The point is seems like a good short term trading tool, but buy and hold will enable volatility to to cause position to systematically underperform the index. So maybe not ideal for use as a long term hedge. Or am I missing something?
Michael
i think you have isolated that it is not perfect. to my way of thinking not perfect doesn't have to mean not effective.
while "effective" is subjective to be sure i find that it has helped me smooth out the ride-tracking errors and the like notwithstanding.
just becuase the flaws are not a problem from where i sit does not mean anyone else should use this concept.
more double short?
does that mean the gutless heckler will call you a fool the first day the market is up, like he did two days AFTER you sold rio?
I'm still holding my RIO credit spread which is now showing a maximum loss. He needs to heckle me now, and then Roger when it goes back up :)
It's like the missus watching CNBC when they show something that went up 20, 30, 50% in a day. Missus asks "why didn't you buy some of that?". She asks this with a straight face!
Found in Mark Hulbert's column at Market Watch:
Corporate insiders' recent behavior suggests that recent weakness is a mere correction within an ongoing bull market and not the beginning of a major bear market.
John
i struggle with insider buying as being predictive but i'd be thrilled if he's right
Roger, I didn't understand this "where possible i'd rather have short term paper than a product WRT to domestic." What is WRT? I also would consider some individual bonds. Corporates AAA maturity? As for short term, CD's maybe for now or SHY? Even the money market. What should I look for when a better time to go intermediate 3-7 and 7-10 year ETF's?
i would suggest that the market is getting oversold here. If anything i am going to be covering some shorts today and Friday.
After next week's rally, when everybody starts saying the correction is over i will go back to net short in my trading account.
If you do not want to "time" the market, the easiest way to play the ensuing economic cycle is to go long XLP and short XLY.
It is too late to jump on the "short financials and real-estate" bandwagon but the retail and discretionary sectors are just starting their down cycle.
WRT = with regard to
Roger, thanks for the thoughts, and just a few ?'s
1. What do you think of the new commodity ETN's
DJP and JJG from iPath? One is total commodity market and the second is grains. MOO and COW
are also interesting. More people eating means more
food needed, etc., and the greatest profits are at the
unprocessed end, I believe. So...good defensive bets?
2. Why not split between SDS and TWM since small caps usually fall faster than large ones in a bear?
3. Why no bond exposure? As far as dividends,
SHY, LSBRX, TLT are all paying 4-6% and beating
the Dow and S&P by big margins ytd?
4. How about the canned goods? Are you buying
Coke, Pepsi, PG, Kraft, etc. now?
Thanks again and happy Thanksgiving.
Since my Ducks are now lame Ducks I will
root for ASU I guess.
Scoot
i wrote about the new commodity ETNs for TSCM. you can do a ticker search.
hedge with small cap? maybe i should. i have an avg market cap in the low $40's (billion) so small cap is not a great fit plus managing the extra beta and the changes in the extra beta become relatively complex.
my comments about bonds pertained to right here as an entry point per the question.
i just bought 2 year UK paper for some account but that is not product. i pick up more yield and i think a favorable currency trend.
i have been overweight staples underweight discretionary for months as these are textbook moves if the economy turns down. some defensive moves can be done in advance and some during.
Well, I see that GH still faithfully obsesses over the blog every day. First thing in the morning too.
Bill. Funny stuff about the Missus & GH.
As for my entry point, no one can predict the bottom in a bear market. I would set a percentage that I like such as down 12-15% depending on the general consensus on the doom attitude prevailing over the market and buy back in half my cash position at that point. If the market goes up or down from there I would buy back in the other half and hold.
I remember something Jim Cramer said about his ex-wife the so-called "trading goddess". Jim wanted to buy back in during a bear market and she said not yet. She explained that when a bear market is front page news in the financial section it has not hit bottom. But when it's front page news in the news paper then the market has hit bottom. She was right that time. I will buy back in two weeks after that news article hits the papers. This kind of news usually gets a load of suckers to sell out of their mutual funds out of fear at exactly the wrong time. That will be the bottom of the market IMHO.
As for bonds, why take the risk with bond prices so high and the dollar so weak that the Fed will be hard pressed to lower already low interest rates? And for returns that are barely 1 1/2% better than good safe MM funds like VUSXX? Bond funds can go down. MM funds in tips will not. Why take on the risk for such small possible return?
Jacks
Jacks,
Good point. I noticed something yesterday that hit me. I went to lunch with a group of friends and for the first time in probably 4 years, someone started talking about their 401K (why is it a topic when the 401K is doing bad and not when it's doing well?). People are starting to take notice. This was the topic of conversation of almost every lunch during the great bear.
roger,
Is it possible that paulson wants the dollar dramatically lower...and this is already historic lows?
As a tomk wanna be tactical asset allocator it really does work. It makes sense to me to have x% set aside to only invest in defensive positions, but I agree with the view that longterm holds of the ultrashorts have a worrisome drag factor. At this time my group of defensive positions include all proshare ultrashorts oefs with etf standins, a longterm bond fund that is a proxy for the etf/tip, MM, and a shortterm bond fund without trading restrictions. I use software to make mechanical weekly trades which are not that often. I would like to increase the defensive choices but a requirement is that it have an etf equivalent and at least three years of historical data. Suggestions welcome. I'll list past 1plus years signals. Annualized returns are 40% with 66% wins. jasper
Current Holdings
Name Symbol Buy Date Last NAV Shares %Change
Amer Cent Tgt 2025 Inv BTTRX 8/20/07 9.42%
Trade History
Name Symbol Buy Date Sell Date Shares %Change
ProFunds UltraShort OTC Inv USPIX 4/10/06 7/31/06 30.66%
Amer Cent Tgt 2025 Inv BTTRX 7/31/06 10/16/06 3.96%
ProFunds UltraSht Emrg Mark UVPIX 10/16/06 11/13/06 -5.90%
ProFunds UltraShort SmallCap UCPIX 11/13/06 2/5/07 -7.98%
ProFunds UltraShort OTC Inv USPIX 2/5/07 3/19/07 4.67%
ProFunds Ultra MidCap Inv UMPIX 3/19/07 5/7/07 14.12%
ProFunds UltraShort SmallCap UCPIX 5/7/07 7/16/07 -3.46%
ProFunds UltraBear Inv URPIX 7/16/07 8/20/07 14.26%
Roger commented:
" am convinced that the market has started to turn down into a bear. One thing is clear the action thus far in the market has been a rolling over. The variable of course is whether this really is the start of a bear or just a run of the mill dip.
I've spelled out my logic before; inverted curves lead to recessions most of the time, the decline in the dollar is a sign of something being wrong, the mortgage/liquidity/credit crunch is a big bad event with serious repercussions, the market being below its 200 DMA is something that I view as a signal that demand for stocks is weak and if this has been a cyclical bull it has been very long by historical standards."
Others agree.
http://tinyurl.com/2x5c8a
But Hulbert seems to be personally bullish:
MARK HULBERT
Insiders send bullish signals with stock sales
Commentary: Cutback wouldn't occur if they thought bear market loomed
Is that 2nd ave who posted the prior Hulbertlink?
No it was me, JackS.
Who is "2nd Ave"?
No, Hulbert is personally bearish! Just a few hours after Market Watch ran Mark's first article, along came this:
http://tinyurl.com/2x5c8a
All on the same day. You've got to move fast, to keep up with Mark!
hey jack s...just a wild speculation because 2nd ave at another web site often gives quotes of the host and refers to mark hulbert.
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