One term I hate is "making a list." In various interviews the person being interviewed might be asked about making a shopping list of names to buy for when things get cheaper.
While I am being overly critical it seems that many do-it-yourselfers are in to whatever extent they want to be in and so buying some stock when it gets cheaper probably means selling out of something else that might also have gotten cheaper.
"That being said, I do have some thoughts" (that was Austin Powers' line to Stephen Spielberg at the start of the movie Gold Member).
I have been clear that I think the odds now of a bear market are very high, if I am right it would have already started but who knows? If that turns out to be correct that means the bear market will last however long it lasts, I believe 18 months is the norm, and then it will end.
For anyone who is inclined to make any changes ever to their portfolio, the transition from bear to bull would be one of the times to make some changes. I've probably picked out seven names so far to rotate in to the mix which would probably change the overall characteristics of the portfolio by a noticeable amount.
At this part of the cycle reducing volatility (for me that mean more cash, some double short and a larger cap bias) makes sense. Coming out of a bear I would think it makes sense to increase volatility (so I would have less cash, no double short and have a smaller cap bias).
The next question becomes when does it makes sense to make these changes? There are a couple of easy answers but I doubt it will end up being so simple. My hunch about this bear market (assumes for the time being I am correct) is that it will be normal. Normal is 25-30% and we are already down 9-ish%. At down 20% I might make a first, small step to reduce the defense, maybe a little more at down 25% and maybe a touch more at down 30% if we ever got there.
Another simple idea would be to make changes when the market takes back its 200 DMA after a bear market decline. This is a little trickier because I will be wary of any move higher if this does not devolve into a bear so in a way we'll have to see what the market gives. To be clear this is something that, if I am right, would play out over more than a year.
Since there is no way to know what the market will do or when it will do it I think it makes sense to explore and be ready with a couple of different paths you might take, this is if you do any of this.
I mentioned I have about seven stocks picked out for now, the seven may change and I expect there will be more in the next few months. The names don't matter as that is not the focus of this site. I would say is that I am trying to go sector by sector and exploring ways to add beta for whenever the next cycle starts.
26 comments:
Great blog, Roger. This is off topic, though. I suscribe to the blog through Outlook RSS. Only problem is that every entry comes up with the date 12/31/2006 or 1/1/2007. Makes it difficult as all get out to keep the entries chronologically. Any thoughts?
i don't really have an answer, maybe another reader can tell you or me what to do.
It seems that some S&P sectors are already well on their way to bear market territory, while others may never get down a lot. I'm wondering if relying on "the" S&P to define a bear market and identify the turning point back to bull masks better entry points into individual stocks. I know that no one ever catchs the bottom exactly, but I guess my point is that there are many sector bottoms that make up the S&P bottom and they don't all occur at the same time. Hope that makes sense...it's early!
Here's what I am looking at (mostly Large-Caps):
Siemens, Key Energy, Gold Corp, Exxon, Allegheny Energy, Freeport-McMoran, Conoco Phillips, NYSE Euronet, Schering-Plough, Liberty Global, Southern Copper, Apache, Pfizer, Northern Gruman, Hansen Natural and a 2007 Red Sox WS cap.
That's pretty funny since SDS is up for 30, 60, 90, and 180 day periods. Oh well.
Roger,
First you are correct in the short run TMW tracks the S&P 500 rather well. But if you look at a max chart on yahoo for TMW it finally looks like there is a noticeable difference.
Unfortunately, the Max chart only adds a few years and I suspect dividends are likely to close that gap. So I guess I wrote all this to concede you are correct, but I still prefer TMW as a proxy for the market.
Also if you look at stockcharts.com the point and figure chart would have indicated the market has been in a down trend for a while now.
I guess my point is we get to focussed on the Dow and S&P 500. We would all be much better off looking at the big picture.
Roger, could you point me to the post that contains your magnificent seven stock picks to own for the next 300 years please.
**kidding about the 300 years part but not about wanting to know the post I can find em.
"A friendly suggestion: Bail out of those double short purchases and call it a day. At this point you've probably only lost about 10% on the position. A month from now you will be looking at a much larger loss on that position."
It is not that you are rude, it is that you are rude and stupid that bothers me.
Roger indicated these were defensive. He indicated he hoped he was wrong and the portfolio continued to increase.
You can not cherry pick good or bad calls in a diversified portfolio to declare someone a genius or an idiot. You have to look at the whole portfolio and judge it versus a bench mark (IMO preferably TMW).
Nobody is right all of the time. If Rogers approach beats the benchmark over time it adds value. If his approach trails the benchmark over time it is simply an interesting academic exercise (or buy the benchmark in other words).
But your comments are of no value to any one including your self (in case you have not figured that out yet)
From my point of view, if someone has 90% in equity and 3% in double negative equity index, it simply means one has 84% equity exposure. Beating on double negative exposure is like beating on your cash position, no one seems to care about that yet. FYI, I have only 60% exposure to equity by a combination of mostly international exposure, market-neutral funds and cash. My YTD is up 10%. Having cash or double negative fund does not necessarily mean poor judgement. BTW, nobody can dictate how much equity you should have in your portfolio. The same goes with what is your portfolio.
anon 6:59,
it does make sense.
To the extent to which you invest sector by sector going into a slowdown certain sectors should hold up better, coming off a low other sectors should lead.
As the cycle wears on tweaking sector exposure becomes important.
financials have lagged for a while but at some point they will lead again.
some of this is very predictable and happens for a reason and some times sector leadership happens for no reason at all. This speaks to why over and underweighting is better than going VERY heavy or zero weight.
I don't quite get the bear side at this point. The markets are up over 2% today. Does the chart of the Nasdaq not look a lot like it did after the March mini correction of this year, where you had a sharp drop off, several weeks of sideways meandering, and then another slow gradual climb?
first is you are bullish you might be right.
I've spelled out my logic a few times, it will either be right or wrong.
I will say that this type of market action in a bull to bear transition is common.
If there is a new high made the chance of the bear case being wrong goes up dramatically.
The consequecne of being wrong needs to factored in to any decision that gets made.
If you are bullish, I hope you are right.
Oh, he's making a list,
Checkin' it twice,
Gonna find out if the market is nice,
Ben Bernanke's comin' to town.
He knows the dollar's tankin',
He knows that Wall Street's first,
He knows no matter what he does,
The economy will get ever worse.
Oh, ya better not pout,
Ya better not cry,
Ya better sell off I'm tellin' ya why,
Ben Bernanke's commin' to town.
And no, I don't believe in Santa either. But is this a Santa Claus rally we're having here lately?
JackS
jacks,
you couldn't figure a way to work al Hubbard in there, lol.
DOH! Maybe he could be one of the little elves next time. :)
JackS
According to Fortune maybe Roger is right and the Grinch is coming to town as well (and he's staying for awhile):
http://tinyurl.com/yrtt2d
As for yesterday and today's good news...
"Naturally, stocks could bubble back to their old heights in the next few weeks or months. If the recent past proves anything, it's that the course of equity prices is totally unpredictable from day to day or quarter to quarter. As the economist Milton Friedman once told me, after returning my call collect, "Stock prices are rational in the long-term, but in the short-term, they're far from rational. They're full of noise.
"But don't let the Wall Street crowd fool you into thinking that the current decline is mostly noise, an irrational blip in a bull market caused by a spate of bad news. What we're probably witnessing is a massive, irreversible revaluation of stocks based on fundamentals. The repricing machine is now in motion. The smart money says it won't stop, despite feints and lurches, until stocks are a bargain again, a prospect investors haven't seen in years."
JackS
Hi Roger, thanks for all the info you provide, much better than flec and it's free. Speaking of Hubbard, i was thinking about your water theme and i don't remember if you have ever really expounded on the oil theme, by that i mean how you come down on the peak oil equation? Will technology save the day, new supplies found, $500 bbl. rough transition etc. How do you see it playing out in the next 20 years. Thanks and I'll hang up and listen.
Roger, you've characterized 'corrections" as sudden downturns...and I might add..to support for testing...followed quickly by a bounce. Now, in reverse, could da bear bounce up be characterized as the same...sudden, violent, and to resistance...which is 1490 on the .spx.?
jacks...nice excerpt...something to comfort me as I sit in 2/3s cash.
today is one of those kudlow days...don't want to miss the few days that give us the most gains...then again, not much green ytd.
Oil?
A few thoughts, i agree w/the though that there is plenty of oil in the ground but it is not easily accessed (maybe impossible?) unless oil is a lot higher and technology adavances, not to mention some of the political issues.
i don't have a developed thought on peak oil. It seems clear to me that over a period of several years demand will grow faster than supply. That being said oil doesn't have to rocket higher for oil companies to do very well.
I'd throw out the old per capita stat of China using about 1 barrel per year and India using about 0.70 barrels per capita while the US uses 25 barrels. Chindia will use more, and there is more than 2 billion people behind that demand.
Jasper, the short answer is yes. look at the last bear market on the charts, some GREAT rallies along the way. There was a 20-ish% rally in 2000 after march. there was a big rally in 2001 after 9/11.
If this is a bear rally, and maybe its not, there is nothing remarkable out it.
I wish I waited a few days before hedging my long portfolio with a huge block of puts yesterday at close. I am hurting.
Anon@3:42 - This is why I am a big believer in dollar cost averaging your way to any position, slowly accumulating exposure, and only making incremental changes on a daily or weekly basis.
I am just quite surprised by the strength of today's rally. Almost dumbfounded. Then I compare my sense of being to Roger. Just another day at the office, I imagine. Why? How? Then I'm reminded of the turtle and haire. And, I'm not the turtle, but I want to be. Problem is I want to be both. Soon, if I can get the other party to come to terms, I will be paying to share this responsibility with another party. And, I can tell you I would not want me for a client.
Bear rallies are commonly quite sharp (the better to draw the unwary into the trap) but typically fail to make new highs because the (relatively slower but inexorable) down legs typically work more like a saw-toothed blade, cutting deeper and deeper into YoY returns. If the market succeeds in making a new high as Roger notes (and does so with respectable breadth and volume) then the bear case is seriously weakened but not before.
RE: RSS: The Yahoo and Google rss readers show this site's dates correctly.
The stocks that went up most today look like the ones with the greatest short interest. Is that true?
This is a bowling ball market. Roll a bowling ball down the stairs and watch it bounce off each step.
Fred
Good analogy Fred. I hope you're right because like Jag I'm sittin' on a lot of caaasssshhhh.
JackS.
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